6/02/14

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.

Thad Rueter , Senior Editor

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."

While concerns about talent remain widespread among various sectors of Chicago e-commerce, other e-retailers spot positive signs of candidates more enthusiastic about the local scene. "When you used to graduate from college, you went to a consulting firm, law firm, big company and worked your way up in Chicago," says Michael Alter, CEO of The Tie Bar, a 10-year-old web-only seller of men's neckwear, socks and accessories based in the Chicago suburbs. "I think the loyalty in big companies have changed with Great Recession and also the one in 2001."

So what does that mean for recruiting and retaining e-commerce talent? Pumping up salaries certainly helps, say some local e-retailers. So will the chance of working on a lucrative startup and cashing in. But boosting the scene's visibility through more success is probably the best remedy, those entrepreneurs say. That said, those chasing quicker payouts will continue to gravitate toward the West Coast and its relatively established and fast-moving startup culture, those experts say.

Of course, there's a bit of a chicken-and- egg thing working through all this: Develop the city's e-commerce industry more, and the money and talent will follow. But first the industry has to develop, which can be difficult without the money and talent. If any Chicago-area company has helped to break that cycle and encourage a more forward-tilting movement, that company is Groupon Inc., say just about everyone interviewed for this story. The daily deal operator's initial public offering in November 2011 valued the company at $12.67 billion, the largest tech valuation since Google went public in 2004. (Groupon offered no comment for this story.)

As of early May, Groupon was worth about $4.16 billion and it had reported a first quarter net loss of $37.8 million, compared with a loss of $3.2 million a year earlier—even as revenue from the sale of physical products through its Groupon Goods division increased 68.4% from the first quarter of 2013. (Groupon Goods is No. 44 in the Internet Retailer 2014 Top 500 Guide.)

Groupon may lately have been turning the stomachs of some investors, but it helped to put Chicago e-commerce on the map. So have GrubHub, the online ordering service founded in Chicago in 2004 that won funding from local firm Origin Ventures among others, and which raised some $200 million its 2014 IPO; and locally based online payment processor Braintree, which eBay Inc.'s PayPal division bought in September 2013 for $800 million.

Chicago gains e-commerce entrepreneurial experience from the executives and other professionals involved in these companies who then can seed the next generations of online retail and marketing startups here, experts say. For instance, Groupon co-founders Brad Keywell and Eric Lefkofsky help to run venture capital firm Lightbank, founded in 2010 and based on Chicago. While it doesn't limit its e-commerce investments to Chicago, the firm helps organize the get-togethers and "innovation nights" that bring together the city's tech professionals for networking and mentoring.

Matthew McCall, a partner at Pritzker Group Venture Capital in Chicago, says there are now executives in the city on their "fourth or fifth generation" of startups. "There are a widening number of players coming out of here," he says.

Those pros are increasingly concentrating not only downtown, but immediately west and north of the Loop, as Chicago's downtown area is called. The city's once-thriving meatpacking district west of the Loop has become a technology hot spot, made hotter by Google's expansion into the area where it is building out more than 250,000-square feet of office space. The Tie Bar, which private equity firm Chicago Growth Partners acquired majority ownership of last year, is an example of an e-retailer that wants to be close to all that activity: Alter says the company plans to moves its offices from west suburban Naperville—about 30 miles from the Loop—to the West Loop area, near one of the city's commuter rail stations. "Young people want to be downtown," he says. That's not lost on bigger, more traditional e-retailers: north suburban-based Walgreen Co., for instance, about four years ago began moving e-commerce workers to a downtown location so as to better appeal to younger tech workers. Then there's online travel giant Orbitz Worldwide Inc., headquartered downtown, and online grocery delivery service Peapod LLC, which is based in Skokie, a suburb just north of Chicago. "These are defining players in their spaces," McCall says. He adds that such older, established online companies help to boost the reputation of Chicago e-commerce while providing their workers the experience to potentially strike out on their own.

While striking out on their own might mean leaving the city, some e-retailers that started here say there is an advantage in maintaining some operations here. Travel apparel e-retailer ScotteVest Inc., for example, relocated its corporate headquarters to Ketchum, Idaho, in 2003, but kept its distribution center in the Chicago area because the central location gave it an advantage on fulfillment. "We're able to ship orders much faster [from Chicago] than other locations," says a spokeswoman for the retailer, noting the location has allowed it to expand more quickly than if it handled fulfillment from Idaho. "The delivery times to either coast of the U.S. are fairly evenly distributed and we're able to take advantage of well-established mail delivery routes and systems here for both our national and international orders."

So what does the future hold for Chicago e-commerce startups? Certainly, places such as 1871 will continue to nurture entrepreneurs, and events like a late May "Portfolio Night" organized by Razorfish, a Publicis Groupe-owned digital marketing agency with an office nearby 1871 in the Merchandise Mart, a 4 million-square-foot commercial and office building on the Chicago River, put creative, smart and ambitious talent together. But whether out of Midwestern pride or honest insight or both, nearly everyone interviewed for this story—whether retailers, investors, marketers, rising mid-level managers or even the odd e-retailer fulfillment worker here or there—agree on this: Those seeking the quick buck, to ride the latest online fad, to flit from one fledging endeavor to another, will probably not find Chicago to their liking. That's because Chicago e-commerce entrepreneurs are more likely to fixate on one product or service and stick with it a while longer than their peers on the coasts, say locals. "If a startup on the West Coast has a bad quarter, [workers] are often running to the next startup," says Tie Bar's Alter.

Then again, Chicago e-commerce still has much work to do. "We have to show the world that Chicago is not just Groupon and not just GrubHub," Alter says.

Thad@verticalwebmedia.com

@THADRUETERIR

 


The pros and cons of Chicago for e-commerce, according to the experts

Pros:
– Compact downtown area that attracts tech and e-commerce companies
– The 1871 startup incubator and several others like it
– Central North American location
– "Midwestern work ethic"
– Relatively cheap real estate, both for offices and workers
– A host of good—even great—tech and business colleges

Cons:
– The scene claims relatively low visibility from coastal VCs
– Shortage of e-commerce talent
– Still perceived as an industrial, financial and traditional retail city
– Not "cool" enough as New York or San Francisco
– The winters ... oh dear God, the winters
– Ties need to be stronger between those schools and local e-commerce
– Those chasing big, fast bucks are likely to find more success on the coasts

Source: Internet Retailer interviews with investors, e-retailers, e-commerce tech and marketing workers and entrepreneurs

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