Chicago is Great, but it is not Where Bay Area VCs are Opening Up Offices
Victor Gutwein, the founder and managing director of M25, recently authored a piece arguing that All Top US VC Firms Will Have Chicago Offices in 5 Years:
Right now some VCs — like August Capital, Bain Capital, NEA and Greycroft — are coming into Midwest deals more frequently and earlier. They compete with medium-sized homegrown funds like Drive Capital in Columbus, Lewis & Clark in St. Louis, HighAlpha in Indianapolis, Mercury Fund in Houston / Ann Arbor and a few others. It’s starting to heat up, so the inevitable will eventually happen if we actually operate in a capitalistic society: The big coastal firms will open offices in Chicago.
Despite being a Chicago enthusiast, I don’t actually agree with this claim. It’s not because I don’t believe in the data Victor references — I do. There will continue to be numerous strong startups raising money at attractive valuations in Chicago and across the Midwest.
While I think this article points numerous reasons why Chicago is a good place to set up shop, that is not the same thing as the venture firms being convinced of this reality.
I’m actually going to make a bold counterclaim. I think that NO top-tier VC firm will set up a new office in Chicago in the next 5 years (that don’t already have one here). That doesn’t mean they won’t invest here a little more, travel here a little more or have folks break off and start new funds here, but I frankly don’t think firms will see it in their best interest to set up a new operation in the Midwest.
After all, even if a firm makes a few investments in the region, a few in the northeast, and a few in the bay area, and one or two in the south or southeast (which I think is a reasonable geographic distribution of companies for an investor who is active across the country), any one partner in the fund may only have 1 company in any one region. So, they probably are actually better off hopping on a plane a few times a year for board meetings and big events, while staying in close contact with their network in the region.
Arguably, what a top firm in Silicon Valley really needs is some buddies in Chicago or elsewhere in the Midwest. If they are legitimately interested in making investments in the region, they should be able to travel here occasionally, share deal flow, and develop some relationships that allow them to syndicate investments led by VCs based in the region. If the shop is really a top-tier venture firm, then VCs based in the area are going to be incented to bring them into deals, so that the Midwest-based shops have an opportunity to syndicate as part of the bay area firms’ deals as well.
The same goes for keeping up good relationships with likely sources of deal flow, whether that is organizations like Clean Energy Trust, accelerator programs, angel investor groups, or the commercialization offices at certain universities.
I’ll include one caveat — if Amazon sets up shop in the Midwest, then all bets are off. After all, having that much tech and business talent in one spot means we would expect plenty of high potential startups launching in whatever city Amazon’s HQ2 calls home.
So, I disagree with the conclusion that Victor reaches in his piece, but I strongly agree with the fundamentals he lays out. There are good deals in the Midwest at attractive prices, and Chicago is a great place from which to do business, both in terms of geography (you can hit either coast in a day trip) and cost of living. While I think we’ll see increased venture activity and more great exits from the region over time, I do not expect top-tier firms with offices on the costs to open up in Chicago any time soon.
