June 2, 2014, 4:04 PM

Still the Second City

As e-retail executives from around the world descend on Chicago this month to attend IRCE, local e-commerce entrepreneurs describe the challenges and benefits of running an e-retail enterprise in the Windy City.

Lead Photo

Chicago has it all for an e-commerce entrepreneur such as 33-year-old Jeremy Gwynne, CEO and co-founder of online subscription fishing-supplies firm Mystery Tackle Box: Proximity to manufacturers and important wholesalers. A central location that makes it relatively easy to ship quickly to consumers across the country. And a local digital business incubator for startups that has provided his venture downtown office space, the support of mentors and introductions to potential investors.

Gwynne says he's giving his attention at the moment to developing new product offerings and finding new office space in the area. As of early May, Mystery Tackle Box, launched in 2012, employed four. Bringing on more people means the web-only retailer will outgrow its space at the 1871 incubator, a 2-year-old operation touted repeatedly by Chicago Mayor Rahm Emanuel as central to the city's tech scene. (1871 refers to the year of the Great Chicago Fire, after which the city was rebuilt with skyscrapers and other cutting-edge architecture and design that helped define modern Chicago.) 1871 collects money from rent and corporate sponsorships—including one from Google Inc.—and has received money from local venture capitalist J.B. Pritzker and a $2.3 million grant from the state of Illinois. Emanuel, commenting on the startups at 1871, describes the companies there as "building the next generation of Chicago's economy," and has pledged to continue fostering a business environment attractive to technology talent.

Chicago has changed a lot from the stockyard, railroad and Sears and Montgomery Ward retail hub it was a century or more ago. Evidence of that change comes from the young but growing e-commerce industry based there.

No business visitor to the city or attendee at this month's Internet Retailer Conference & Exhibition will mistake Chicago for Silicon Valley, the Northeastern tech corridor or Austin, Texas. But the recent rise and meaty IPOs of such Chicago-based online players as Groupon Inc. and GrubHub Inc. is helping to seed further e-commerce efforts here, say retailers and venture capitalists. Still, Chicago e-commerce suffers from a lack of readily available technology and e-commerce talent and visibility to venture capitalists, those same experts say. The view of both boosters inside the local scene and more objective observers outside of it is that improvements will come—producing, perhaps, a different flavor of e-commerce than is found on the coasts or in Texas Hill Country.

The latest data from Seedtable.com, a site that tracks startup activity, shows that of the 53 companies in Chicago that were founded or received early-stage funding in 2013, seven—or 13%—were from the e-commerce sector. In 2004, of the 24 Chicago companies founded or receiving early-stage funding, three—or 12.5%—were from e-commerce. While the proportion may not have changed much, these days there are many more e-commerce startups or early-stage investment targets: 18 in 2012 (11.3% of the total); 30 in 2011 (16.3% of the total); and 16 in 2010 (11.9% of the total).

Chicago, in fact, is the fourth-most active city within the last 12 months for e-commerce startup funding, Seedtable says. The city ranks behind London, New York and San Francisco.

Among the newer Chicago-based e-commerce companies that have received such funding is WeDeliver, a company that uses local drivers to provide same-day deliveries to online shoppers. WeDeliver launched in 2013 and has received $900,000 in seed funding, including $100,000 from AOL co-founder Steve Case. According to WeDeliver co-founder Daniela Bolzmann, the rest of the funding came from Chicago-area angel investors, typically wealthy individuals who provide capital for startups. She gives much of the credit for getting on Case's radar to the partnership between 1871 and Google. That relationship led to WeDeliver taking part in a Google for Entrepreneurs Demo Day, which is an event where entrepreneurs can pitch their companies before an audience of Silicon Valley investors at Google's Mountain View, Calif. headquarters. For Bolzmann, the investment she's been able to raise provides evidence to her that Chicago is a "major player in the startup technology world."

So how true is that? Josh Goldman, a former e-commerce entrepreneur who is now general partner at investment firm Norwest Venture Partners, would rank California's Bay Area and New York City as the top U.S. areas for technology startups, followed by a tier that includes Boston, Austin and Chicago. Still, he says of Chicago, "for its size and resources, there's still a lower concentration of dollars than there should be." The absence of offices in Chicago for major tech investment firms based on the coasts lends evidence to the relative lack of venture capital interest in the city, he says.

Goldman, who operates from the West Coast, is a Chicago-area native who graduated from a suburban high school in the mid-1980s. "At the time Chicago wasn't the place where people would build tech startups," he says, pointing out that the city's reputation for big traditional retail and industry persisted into the early part of the 21st century. "If you had a tech startup, people thought you were unusual. In the last five years, though, Chicago has started to shed some of its inferiority complex for tech startups. You no longer get puzzled looks when you say your startup is based in Chicago. But you don't get nodding heads and an 'of course' reaction like you do in San Francisco and New York City."

Such attitudes can lead to harder work here for local e-commerce operators seeking capital from local investors. "Chicago is a conservative city," says George Deeb, managing partner of Chicago-based Red Rocket Partners LLC, a firm that advises and invests in startups. "Investors in this town will make you run through hoops."

The conservative attitude also can extend to e-commerce talent. Take Brad Wilson, who runs the online discount site BradsDeals.com. It is relatively ancient by e-commerce standards—14 years old—and that affords him a longer perspective, one that predates the era of 1871 and similar organizations. His complaint? That the most talented employee prospects often are tempted by positions with larger, more established corporations that call Chicago home. "Candidates think a big company is less risk-averse," he says. "We are not a startup but we are still considered risky."

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