2021 is shaping up to be Chicago tech’s best year yet.
During the first half of the year, the local tech and startup industry raised $3.8 billion in venture capital funding, which has helped spawn 11 new unicorns — startups valued at more than $1 billion.
For most tech hubs, counting unicorns is one of the most popular ways of proving a particular region's startup success and viability. Unicorns also breed bragging rights, press coverage and more investor interest.
This year’s hot streak of financings and unicorns comes amid an influx of new VC funds being closed or announced in 2021, from Valor Equity’s $1.7 billion fund to 7Wire Ventures’ $150 million fund and LongJump’s $2.2 million fund.
Since the beginning of 2021, at least 15 Chicago-based funds have been announced, collectively raising more than $4.7 billion, according to data from PitchBook and Chicago Inno. And much of this new capital is expected to be invested into the next generation of Chicago unicorns.
Where is all the money coming from?
The influx of money raised by local VC firms can be attributed to three things: Chicago’s growing group of successful and valuable startups, an improving reputation for the Windy City as a startup hub, and more wealthy individuals and institutions trying their hand at startup investing.
Despite Covid-19, Chicago saw a record amount of venture capital financing come to the Windy City last year. Many companies, like VillageMD and Tempus, raised mega-funding rounds, which helped propel them to billion-dollar valuations. The large rounds and valuations that came with them also helped attract new investors to Chicago’s VC scene, which has contributed to the number of new funds popping up in the last six months.
“It’s becoming very clear that if you’re investing in the tech and innovation space, you have to have a presence in Chicago,” said Andrea Zopp, a managing partner at Cleveland Avenue and the former CEO of World Business Chicago. “There’s a real awareness growing of Chicago as a very strong tech and innovation ecosystem.”
The massive amounts of venture capital being raised by city's startups has resulted in local VC firms stacking their portfolios with unicorns they bet on years ago. Firms like Pritzker Group Venture Capital and Chicago Ventures invested early on in rising stars, like Cameo, project44 and G2, as did Origin Ventures and Hyde Park Venture Partners, which cut early checks to Amount and Avant.
That, coupled with work done by P33, a local organization founded by Penny Pritzker and Chris Gladwin to improve Chicago’s reputation as a national tech hub, has attracted even more limited partners to Chicago-based VC firms.
Cleveland Avenue, founded by former McDonald’s CEO Don Thompson in 2017, is a VC firm focused on investing in food and beverage startups, as well as companies led by under-represented founders. Across three funds, Cleveland Avenue manages nearly $700 million, Zopp said.
Earlier this year, the firm announced the closing of its $70 million Cleveland Avenue State Treasurer Urban Success Initiative (CAST US) fund, an industry-agnostic fund to invest in companies owned by Black, Latino and women entrepreneurs.
To date, the CAST US fund has invested in eight companies, such as AYO Foods, Every Body Eat, 86 Repairs, Lift Up Enterprises, DrugViu and Gray Matter Analytics.
According to Zopp, 70% of the fund will be invested into Black and Latino founders, 50% into women-founded startups, and 70% in Chicago-based startups. The CAST US fund’s average check ranges from $500,000 to $2 million.
“It’s about growing economic opportunity for Black, Latinx and women-led companies,” Zopp said. “Our goal is not to say ‘Here’s a check. Good luck with that.’ But really work with them to make sure that when they deploy the capital, it’s going to be effective.”
Cleveland Avenue attracts some of its investors because of Thompson’s high-profile status as the former CEO of McDonald's, but the firm has also gained a reputation for placing smart bets after investing in Los Angeles-based Beyond Meat, which went public in 2019.
And Cleveland Avenue isn’t the only VC firm in Chicago raking in large returns.
VC wins
Lightbank, a VC firm founded by Groupon founders Eric Lefkofsky and Brad Keywell, announced a new $180 million fund in February, which is being used to invest in seed and Series A rounds for startups in and out of Chicago. The firm has already invested in eight companies, with average check sizes of about $1 million to $3 million, said Lightbank Principal Eric Ong.
This fund follows Lightbank’s first in 2012, which was also $180 million. With the first fund, Lightbank invested in several Chicago companies that have found lucrative exits over the last couple years.
Sprout Social, a social media management platform for businesses, provided Lightbank with its largest return when the company went public in 2019, Ong said. Other breakout Chicago startup investments from that first fund include Reverb, which was acquired by Etsy in 2019 for $275 million, and tastytrade, which was bought by IG Group in January for $1 billion.
Those successful exits, proving Lightbank can make wise investing decisions, helped the firm raise its next fund, Ong said.
“We bet on these companies that other people in [Silicon Valley] just didn’t believe in, and that’s allowed us to raise new funds,” Ong said.
The same goes for 7wireVentures, a Chicago VC firm from Glen Tullman and Lee Shapiro. The firm’s initial fund of $100 million closed in 2018. Out of that fund, the firm invested in 14 startups, the most notable being Livongo, a health care tech company founded by Tullman, which went public last year and later merged with Teladoc Health in an $18.5 billion deal. The merger resulted in returning 7wire’s fund “multiple times over,” said Partner Alyssa Jaffee.
“Fund I was incredibly successful for us,” Jaffee said. “Based on the Fund I performance, it’s one of the best-performing funds in the country from what we’ve heard from limited partners.”
Large returns and happy LPs meant 7wireVentures didn’t face many obstacles when raising its second fund as it had ample demand from limited partners, Jaffee said. In May, 7wireVentures announced it raised a $150 million fund to invest in about 14 digital health care startups. Many of 7wireVentures’ limited partners in this new fund include institutional investors like Cigna, Rush, and other insurance and pharmaceutical companies, Jaffee said.
7wireVentures has made three investments to date out of its second fund, including Transcarent, Jasper Health and Brightline. Initial checks range from $4 million to $6 million, with $10 million to $15 million invested over a startup’s life span.
“The investment pace has been quite insane,” Jaffee said.
While successful returns have an impact on a firm’s ability to raise new funds, there’s another component at work that’s helping to boost the VC industry in Chicago and elsewhere. The country’s wealthiest people saw their wealth grow during the Covid-19 pandemic amid low interest rates and successful stock market performance, which caused some of them to examine new ways to grow assets.
“The stock market has done exceptionally well during the last 12 or so months,” Jaffee said. “That has created opportunities for folks to think about the diversification of their assets, and that’s created appetite to invest in venture funds."
Funding the next generation of Chicago unicorns
It’s a good time to be an entrepreneur in Chicago right now. With the city’s influx of new capital that needs to be spent, local founders should be able to land more dollars and better terms for those funding deals, said Victor Gutwein, the founding partner of M25.
Launched in 2015, M25 is among the Midwest’s most active VC firms, according to a recent CB Insights ranking. It raised an initial fund of just $1 million and a second fund of $11 million before announcing it closed a $31.8 million fund in May.
“Our thesis is that the Midwest is a really big opportunity, especially with all these unicorns and exits,” Gutwein said. “We’ve been seizing that opportunity in Chicago.”
M25 will make about 50 investments with this new fund, mainly in software and e-commerce startups. So far, M25 has made about 25 investments, Gutwein said, including Rheaply, Cashdrop and Rentgrata. M25’s average check ranges from $250,000 to $500,000.
“People are excited to back what will be the next crop of unicorns,” Gutwein said. “People are excited to invest in the next generation of ShipBob and Cameo and FourKites, and all of the successful stories of today.”
And more money floating around Chicago means startup founders will have more options in who they choose to back their ventures, which will create more competition among the investors themselves.
In years past, Chicago founders complained that there wasn’t much local capital available to them, forcing them to head to the coasts to find deep-pocketed investors. But that trend is shifting as more local funds close, Gutwein said. Over the next couple years, startup founders in Chicago should be able to find more capital, and deals with better terms for them and their employees.
“It’s been a buyer’s market, where VCs could conceivably just sit on their hands and have all the best startups come to them, begging them for money,” Gutwein said. “That’s not the case anymore.
“It’s going to be very competitive for VCs to back the best companies,” he continued. “It’s never easy to raise money but it’s going to be the easiest it’s ever been.”
