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Chicago - Relay Foundation



Where Money Makes Ghosts

Overall Trends:

Chicago is an old city. There’s tradition in play. As such I went into the city expecting the view of social enterprise, social entrepreneurs, and impact to be likewise traditional.

I was very, very wrong. Sort of.

You see, there are a few things in play that make Chicago not really give a damn about the impact status of your startup (and I’ll jump into this in a short bit). First, non-profits and social entrepreneurs of for-profits usually work together (geographically) because of similar values. Saving the world through business is not really that different from saving the world with a nonprofit. The goal is the same; the paths are a bit different. This is why the Hub is taking off around the world; they found a way to unify people through impact.

In Chicago, you don’t really see this. Yes, you have Panzanzee, a coworking space of nonprofits and social for-profits/service providers for impact companies, and Cibola, a creative collaborative, but those companies are actually the minority of the field. What ends up happening is that the standard social for-profits, the impact investors, and the impact service-providers all move to the major co-working spaces like 1871 and TechNexus. Maybe they are going for quantity over quality, I can’t say for sure, but I can say that the strong rock of social enterprise in Chicago isn’t there and yet the impact is still being made. That’s the reason I’ve taken a while to post this.

The answer, or my answer at least, is that Chicago is a city of Impact Ghosts. They don’t say they are impact startups. They don’t look like impact startups from their financials. They just make a solid product, make good money, and happen to be making the world better at the same time. Investors in these companies also don’t call themselves Impact Investors. They’re finance-first (as opposed to impact-first) investors that happen to have a negative screening process. The reason behind this will also be talked about below.

Second, Chicago has a small collection of angels and VCs that are notoriously conservative. This includes the new ‘Invest Illinois Venture Fund‘. Now, when I say the money is conservative I am being ambiguous. If you’re in Silicon Valley conservative might mean a startup needs to work an extra week for that Seed Round. In Chicago, you don’t get investment unless you are a profitable company looking to scale. There are of course exceptions, but the trend is solid. Do not go looking to raise capital from institutional investors for your early stage startup unless the investor owes you a drink. And even then he better owe you a very nice drink.

(The drops shown in the links, from 2011-2012, do show some promise, however, in that more support was going to earlier stage companies relative to past investments.)

This conservation of finance leads to the creation of what I am going to begin calling, and I welcome you to use if you find it nifty, the ‘Starfish Investor’. Starfish are what are known as Keystone Species. In biology, a keystone species is a plant or animal that tells you the relative health of the environment in which they live. If you test starfish and they are healthy, the environment is healthy.

Now apply this to investors. In Chicago, because of the relatively few investors (not ignoring the ability of Silicon Valley or Silicon Alley [in New York] to come over to invest), there are a few key investors that can make or break a deal. For instance, say you want to have a food service startup or want to build a startup that feeds people from restaurant waste. If you don’t have Chuck (head of Impact Engine and founder of OpenTable) investing in you or consulting for you, other investors are going to assume something is wrong. This one investor is key to getting on board.

Now this doesn’t just apply to investors but to financiers overall. Social startups that don’t fit the VC model (in software this means the costs are low, the amount of money you make on each sale is low, but you sell to a massively large amount of people) still can consider this for lenders or grantors. If you are working with the environment and the Aspen Institute jumps on board to support, you can be fairly sure your startup is going to do ok. Even more, middle-tier investors focusing on Silicon Valley or Alley are looking to expand their portfolio to other cities like Chicago and they are going to get their deal flow (options for investment) from their friends in the space. So the idea of Starfish Investor is doubly true here if you want that SV or NY funding.

The lesson in these conservative waters is simple: find the money that people respect.

Pretty much, Chicago has a lack of a solid social impact space due to some startups wanting to be Impact Ghosts, and they only want that because the finance is so conservative that a social impact company would never get a standard investment anyway. Even Impact Engine, a solid accelerator that facilitates millions for their companies does it under the heading of Convertible Notes (that we spoke of previously).

The Key Lesson: the financial state of Chicago pretty much dictates everything else. And we’re going to go answer our Three Questions to learn more about how.

Popped over to Panzanzee to chat with Prosper PR. Smiles were had.

Question 1: What is Social Enterprise?

Before you win the fight you need to have the fight!

As I touched on above, the issue in Chicago is that some impact companies aren’t saying they are social enterprise. This makes it easier for those who claim to be social enterprise to dictate what social enterprise is. This has led to a sort of vacuum and confusion on what counts as a real ‘Social Enterprise’, which makes it even harder to get money because funders don’t fund what they don’t understand.  The difference between this local vacuum and the confusion on the global level is that in Chicago, there simply aren’t many voices in the conversation. If you look at the UK, everyone is fighting over what social enterprise is. Heck, the government there can provide hundreds of thousands of dollars in grants for for-profit ventures! The conversation over there is intense.

In Chicago, this debate is quieter, but the tax-exempt organizations are winning because they are the ones who can access city and state support. I try to look at it from the government’s perspective. A group of companies calling themselves social enterprise keeps coming over and asking for help. They are all tax-exempt charities. What will the government eventually start to think if no for-profits show up to ask for help, if they don’t see any organizations from the area in the news because they want to be Ghosts? I think someone would be hard-pressed to not see social enterprise as tax-exempt nonprofits.

I could go on about how a good many ventures aren’t telling their impact story because they are afraid investors might see it and pull away from future deals, and this in turn is hurting the conversation on what is genuine social enterprise, but I will just leave the point here to think about. In the rush for financing, startups that could be helping a large number of people accessing alternative financing are instead rushing towards VC and Equity financing in a manner that will either crash the company, decrease their impact, or fail to grow the social startup community because the idea of ‘Impact Through Profit’ is never mentioned.

This is my plug for a very necessary kind of schooling.

Question 2: Getting people involved.

Key Handoff: Build a pipeline, be patient, and the community will grow.

This question was answered by a bunch of people, but the man who answered it best was Terry from Tech Nexus. Tech Nexus is a support network for tech startups that range from the earliest ideas to the latest exits. They have facilitated tens and hundreds of millions of dollars for their companies, and they know what they’re talking about when it comes to the pulse of the startup space in Chicago, social or otherwise.

The reason Terry answered it best is that he has spent the last five years of his life answering the question. Terry and his team started Tech Nexus five years ago. The goal was to make enough money to sustain operations while putting the profit into growing the startup community. They were long-term thinkers.

The form that this community-support took was a technical high school that helped young people think entrepreneurially. The Chicago Tech Academy has helped over 600 students solve complex problems, stay cool under pressure, pitch, market and sell. And these kids are growing from the experience. The program sources exclusively from students that were having some issues with the ‘standard track’ for education and –name- was able to make the education we all love so much work for the students. They have over a 90% college attendance rate for their kids, most in the tech space.

But that isn’t all. Terry also worked to build out the Illinois Technical Association, a professional group for technical companies and founders to stay in touch, source best practices, and just overall make friends. The ITA is a supporter of Tech Nexus’s work and its companies, which brings the whole thing full circle. You get students getting into a high school that trains them in technical know-how and problem solving eventually getting involved with startups that will go through TechNexus, and upon leaving TechNexus to grow the company they participate in the ITA. This is a pure community pipeline that is essential to the startup community in Chicago.

Terry is brilliant because he has worked with his partners to build the full community, just like Brad Feld in Boulder. They didn’t just build a group of problem solvers or coders. They built a group of schools, businesses, and service providers, and they were inclusive about it! They understood that the more people you involve in the creation of the community, the more opportunities and early adopters you’re going to get.

As for my, ‘oh yeah, I forgot to mention!’, we have a trend seen over at University of Chicago of more students entering the social business plan competition (double digit yearly growth), and a growing support of the social enterprise sector through programming at their MBA program. The way they support competition winners, losers, and all those in between is pretty great. We have a chat with Christina, the head of the Social New Venture Challenge, when we get to India, so stay tuned!

The light display when you enter 1871. I have it here because I thought it was awesome.

Lastly, Question 3: The finance.

Key Handoff: Big firms can get in on this too!

So we talked about the conservative investors. We talked about impact’s move towards CNotes. We talked about the end of impact investors in the city. What we did not talk about, however, is what this means for large firms in the city.

After a few conversations with the leaders of the Chicago space we kept hearing a common trend. Large firms have been looking to fund local startups in order to outsource their innovation. The idea goes like this: big companies have a hard time innovating. It is expensive and they often do not have the desire to change what is currently working. Small companies love innovating, that’s the only way they can compete with big companies! In Chicago, in order to meet each of their needs, Big Firms and Small Startups have been working together. Big companies fund startups that are looking to address an obstacle the Big Firm is dealing with and the Small Startup gets funding to grow.

Terry mentioned this could lead to more acquisitions overall, but the even large win is that it could also lead to a revitalized space as private firms work to engage the local startup ecosystem for future talent and products. This is the acqui-hiring we see so much in Silicon Valley. Whether this helps the local social startup space or not has yet to be seen, but if SV is any indicator, the more successfully funded tech ventures the better. As the employees quit and start other projects, they also open up new funds for social impact. Some even decide they’ve made enough money and want to focus on social impact, like the Omidyar Network coming out of eBay.

We’ll keep you updated as we learn more about this trend in our travels.


My best,