6/09/14

Is the Chicago e-commerce scene growing up?

As some 10,000 e-retail pros prepare to gather in the city for IRCE 2014, local entrepreneurs and venture capitalists provide an overview of the e-commerce landscape.

Thad Rueter , Senior Editor

An expected 10,000 or so e-commerce pros will hit Chicago this week for the 10th annual Internet Retailer Conference & Exhibition. So what does the host city offer in terms of e-retail action?

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, Chicago has it all: 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 called 1871 that provides startups such as his downtown office space, the support of mentors and introductions to potential investors.

As reported in the June issue of Internet Retailer magazine, the recent rise and meaty initial public offerings of such Chicago-based online players as Groupon Inc. and GrubHub Inc. is helping to seed further e-commerce efforts here and put Chicago on the e-commerce map, say retailers and venture capitalists. Still, they say, Chicago e-commerce suffers from a lack of readily available technology and e-commerce talent and visibility to venture capitalists. 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 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.

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 the 1871 organization and similar groups. His complaint? That the most talented employee prospects often are tempted by positions with larger, more established corporations that call Chicago home and focus on areas such as traditional retail and finance. "Candidates think a big company is less risk-averse," he says. "We are not a startup, but we are still considered risky."

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: CEO Michael 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? For more, read June’s issue of Internet Retailer magazine.

Topics:

Chicago, e-commerce, Internet Retailer magazine, IRCE 2014, Mystery Tackle Box, Norwest Venture Partners, Seedtable.com, startup, Technology

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