Chicago’s Potemkin Village
Five years ago Chicago lawmakers, real estate developers, and philanthropists set out to build a technology industry to rival that of the Bay Area. We are still not registering with venture capitalists and federal grantmaking authorities. Here’s a better way.
This is a letter to my friends in Chicago’s community of entrepreneurs.
We have a problem, and conformation bias and groupthink are not helping us. If there was reason to celebrate within our community, capital investment would be flowing into Chicago startups. That’s not happening.
We need to stop viewing our innovation economy through the lens of incubators, accelerators, and coworking spaces, of which we have about 100, by my count. Rather, we should be viewing innovation as the process from which inventions emerge from the laboratory and develop into a commercial product. This community needs to have a fundamental shift in culture.
Coworking spaces in Chicago have skyrocketed, collectively forming a modern-day Potemkin Village that we exhibit to every visiting dignitary. There’s obviously a demand for the space, but building more Millennial-friendly working environments has failed to significantly grow our share of the national venture capital market and federal investment into our region to drive technology advancement.
Chicago remains mired in the second-tier of venture capital deal flow, according to the National Venture Capital’s Yearbook, an annual scorecard of venture capital deals that was released this month. Less than two percent of venture capital in the United States is invested in Chicago, same as it’s been since 2012, when we started building this Potemkin Village. By comparison, over that same time, New York has doubled its share of the American venture capital market, and now one in ten venture dollars are invested in New York. While new markets are being created in the genomic sciences, artificial intelligence, and robotic technologies in the Bay Area, New York, and Boston, Chicago seems rooted in designing new software programs that could have easily been produced at the coasts years and years ago.
This failure to build new industries here in Chicago is having disastrous consequences for people all over the Midwest and Rust Belt. Technology is racing ahead of the region while corporations and the federal government turn to the coasts for solutions. Midwest and Rust Belt workers are mistakenly blaming our region’s economic struggles on Chinese imports and Mexican labor when the real threat is our inability to compete in advanced industries.
This region is looking to Chicago for leadership, and we’re not providing it.
Those who comfort themselves with misleading headlines that tell a different story — “New Ranking Names Chicago #1 Emerging Tech Hub” — are simply not helping matters. As all relevant data makes clear, these headlines are based on perception, not reality. New technologies are not being introduced to the market by Chicago startups at a high rate; financiers, including the federal government, are not turning to Chicago to source new technologies.
We are collectively missing out on a real opportunity to maximize our potential. Rather than celebrate every new venture capital round of Chicago-based software programs, we should be emulating communities like USTAR in Utah, North Carolina’s research triangle, and Ohio Federal Research Lab network.
Let’s recognize that startups will no longer be able to thoroughly identify commercial problems and needs while quickly and iteratively designing a solution with software development. New industries — sensors, battery technology, advanced materials, and so forth — will require the kind of cross-cutting collaborations that Chicago has yet to build.
The wall separating labs from entrepreneurs
Hitherto Chicago’s many different university and national labs and entrepreneurial support organizations have been carrying out their own agendas, building their own fiefdoms, celebrating themselves, and building their own corners of our Potemkin Village. It must stop if we’re going to move forward.
A recent report from the Illinois Science & Technology Coalition illustrates the problem. The good news: Startups are emerging from Illinois universities at an unprecedented rate. More than 250 startups were built at Illinois universities in 2016, more than triple the number that were generated in 2012. The bad news: Few of these startups involve transferring technology generated at these universities; nearly all of these new startups do not transfer lab-generated inventions.
Of the 804 startups that emerged from Illinois universities from 2012 and 2016 that ISTC examined, only 16 percent of these startups transfer some university-generated technology into the commercial sector. What does transferring university-generated technology mean for startups? Funding. The 16 percent of university startups that transfer technology raised more than half of the venture capital invested in the 804 startups examined by the ISTC.
“The increase in funding raised by tech transfer companies underlines the value of university research and its potential for commercialization,” the report noted.
The problem is that there is a wall between Illinois’ laboratories and our entrepreneurs. We are not building enough startups that actually transfer technology, prototype designs, and introduce new products into the market. The Potemkin Village that we have built does not strike at the root of this problem.
Today, with my business partner Alex Duchak, we are expanding upon an initiative that moves beyond Chicago’s Potemkin Village to drive real value emerging from the laboratory. Invent2026 aims to design and develop new technologies and new products, from the lab all the way to the commercial market, here in Chicago and throughout our nation’s Rust Belt. We launched this as “Project 2026" late last year; with a sharp focus on supporting inventors and pairing new designs with industry partners, we’re rebranding as Invent2026 so to make clear that we’re about the high sciences and invention.
Chicago and Illinois are home to Argonne National Laboratory and Fermilab, both located in the Chicago suburbs, the only city with two Department of Energy laboratories. Chicago is home to two of the top 15 national universities, Northwestern University and the University of Chicago, and one of the country’s most respected engineering schools at the University of Illinois at Urbana-Champaign.
And yes, we are home to a group of wonderful organizations and exciting working environments that support our talented and resourceful entrepreneurs. Our favorite is the recently-opened mHUB, a new working facility that provides members the most advanced manufacturing devices to support the prototyping of real, physical products.
Let’s put these organizations to work in a seamless lab-to-product value chain.
Building a channel of lab-generated inventions
University and federal laboratories hold massive portfolios of intellectual properties that, for various reasons, sit idle.
This summer Invent2026 will launch TNEBULA (as in Tech Nebula), the brainchild of Alex Duchak. TNEBULA will be an interactive platform that employs game mechanics to identify technologies emerging from client laboratories with the most commercial promise.
TNEBULA is supported by a $350,000 grant from the U.S. Office of Economic Adjustment, awarded in January. Here’s an early look at what TNEBULA will look like.
Upon logging onto TNEBULA users will be presented an inventory of intellectual properties, discovered at partner laboratories.
TNEBULA users competitively collaborate to uncover the technologies that hold the strongest commercial potential, ultimately prioritizing and highlighting trending technologies, as determined by our users. This will enable our partner labs to devote resources to transfer technologies with the strongest commercial potential.
If you are interested in being an early participant in TNEBULA, sign up here.
Let’s also build teams around technologies, and make sure that our laboratories are finding capable partners, with adequate seed funding, to prototype their designs.
The most active users on TNEBULA will be provided the opportunity to participate in our 2026 Fellows program, which we plan to launch this September, and eventually execute a startup license for technologies posted on platform, provided the user and his or her company meets certain requirements.
Where will the money come from to drive this lab-to-product value chain? We’ll begin by turning to Washington.
The federal government continues to drive technology advancement through entrepreneurship with the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs, federal grants that provide multi-phased funding for small businesses that are commercializing technologies of strategic need to the federal government.
SBIR grants are awarded in two phases. The first phase, typically around $150,000, identifies a technology and establishes its commercial potential. Phase II grants are awarded based on the success of Phase I, and provide about $1 million to bring a technology to the point of commercialization.
California and Massachusetts received more than 33,043 and 21,590 SBIR Phase I and Phase II grants in 2015, far outpacing the third-highest recipient of SBIR grants, Virginia, which received 9,320 SBIR grants. Illinois ranks 17th among all states in receiving SBIR grants, but that ranking tells only half the story. It would be more accurate to note that Illinois ranks near the bottom among states with a major metropolitan market, since the SBIR recipients are more frequently headquartered in large cities.
We need to do a much, much better job of finding SBIR and STTR money.
The 2026 Fellows program will provide weekly programming to equip teams with the ability to target SBIR and STTR funding, as well as identify market needs and commercial pathways for new technologies, and test new products on consumers. Through the 2026 Fellows program, Invent2026 will build complete teams — with researchers as well as entrepreneurs — around technologies.
We’re also going to turn to our industry partners to help drive this process so that these technologies eventually become a part of their portfolios.
Invent2026 will look to support seed funding for companies taking the technologies most-favorably reviewed by our TNEBULA users into the commercial market. These funds will be pooled together by our industry partners to provide necessary capital for entrepreneurs to prototype designs and to identify and test sales channels. This process provides corporate sponsors the ability to administer due diligence on the R&D process that they are effectively outsourcing, for a very low cost, to our partner labs and TNEBULA users.
Corporate venture capital has skyrocketed in recent years, as corporations have looked to source R&D externally. We are convinced we can bring more venture capital into Chicago by servicing the acquisition needs of corporate venture arms. Forty-four percent of all venture capital deals in 2016 had some involvement of corporate venture, by far the most ever recorded by the National Venture Capital Association. Invent2026 has designed a process to directly service this new approach to R&D by building new ventures around technologies that corporations can then acquire, once the technology is in final product form.
This is how we’re going to bring more investment, private and federal, to our startups. Alex and I are excited to read about promising trends in the Chicago startup community, and about efforts to increase access to venture capital in the region, such as Steve Case’s “Rise of the Rest” initiative, but reject the idea that our challenges begin and end with visibility and messaging.
It is clear to us that capital will come only when Chicago’s startups dramatically increase the number and quality of new technologies they introduce into the commercial market. That’s not happening nearly enough right now.
But it can. Together Invent2026’s TNEBULA program will extract, our 2026 Fellowship program will nurture, and our industry partners will fuel the technologies that will grow the innovation economy Chicago has so eagerly sought since 2012.
Thomas Day is the co-founder of Invent2026. This opinion piece included a great deal of insight from the other Invent2026 partner and co-founder, Alex Duchak.
