Chicago Investors Flock to Madison Startups

Riding high on big paydays from companies such as Braintree, Groupon and GrubHub, Chicago investors are looking outside the Midwest’s biggest city for some of their next investments. One increasingly popular option: Madison’s digital start-ups.

Chicago has seen significant growth in new technology companies in recent years. As successful Windy City start-ups have been sold or gone public, their investors have reaped profits that they want to funnel back into promising young companies.

Some of that money is flowing to new Wisconsin businesses, including companies that are applying their technological prowess to routine activities such as ordering takeout food and refilling prescriptions.

“We don’t see as many people fleeing toward (Silicon) Valley anymore. We’re seeing them come to Chicago or stay in Madison,” said Stuart Larkins, a partner at Chicago Ventures, which operates a $40 million venture capital fund that includes three Wisconsin start-ups in its portfolio. Those companies include Healthfinch Inc., which has developed a product to help doctors shift prescription refills to other members of their staff.

Entrepreneurs who have stayed in Madison include a group of University of Wisconsin-Madison computer science graduates who in 2008 started PerBlue Inc., a mobile game developer. Chicago-based Lightbank LLC, a technology investment fund that was an early backer of Groupon, led a funding round in May that pumped $3 million into the start-up.

Lightbank talked with PerBlue for more than a year before making the investment, watching the start-up’s revenue rise dramatically as its “Greed for Glory” game gained popularity, said Bill Pescatello, a principal.

“With the funding environment in Madison, they had to be really careful and couldn’t really step on the gas like they wanted to,” Pescatello said.

Now, aided by Lightbank’s mentoring and network of connections, PerBlue has an opportunity for much bigger growth, Pescatello said.

PerBlue is getting the same kind of support, he said, that Lightbank partners gave to Groupon before its 2011 initial public offering, in which it raised $700 million. At the time, that was the largest IPO by a U.S. Internet company since Google Inc. raised $1.7 billion in 2004.

“We want to make sure we give them every opportunity to make it big,” Pescatello said of PerBlue.

Big thinkers

Thinking big is one of the hallmarks of a Chicago community that has been powered in recent years by talent from world-class universities like Northwestern and the University of Chicago; leadership from J.B. Pritzker, part of the family that grew the Hyatt hotel chain; the development of co-working spaces like 1871 and Lightbank’s The Warehouse; help from organizations like Built in Chicago that connect entrepreneurs; and events like the pocketbook-friendly Chicago Ideas Week, which inspires new ideas and ventures.

“They believe they can build billion-dollar companies,” said Joe Kirgues, co-founder of gener8tor, a Wisconsin start-up accelerator. “They take that vision very seriously, and they’ve started to have successes that prove it’s not just a daydream.”

Chicago has had three big successes that are considered $1 billion achievements: Investors who still have stakes in Groupon and GrubHub, an online food-ordering service, have watched the market capitalizations of those companies surpass $1 billion. Braintree, which ran a payments gateway, nearly reached the $1 billion mark when it was acquired by PayPal for $800 million in cash last year.

While not as far along, Madison has been building an entrepreneurial ecosystem of its own that is attracting out-of-state investment. At the community’s core are technically skilled students from UW-Madison and droves of recruits from top schools that are coming to work at rapidly expanding Epic Systems in Verona.

“A lot of the entrepreneurs I’ve interacted with have been pretty humble, blocking and tackling-type folks who are really trying to execute — the type who are mentorable and have businesses that can become strong companies,” said Michael Gruber, founder of Cornerstone Angels. Through its affiliated funds, the Chicago angel investing group was the biggest investor in a $6 million funding round this year for EatStreet Inc., a Madison company that runs an order management platform for restaurants.

Regional strategy

UW-Madison students tend to be more predisposed to starting companies than their counterparts at other big universities, said Jeff Carter, co-founder of Hyde Park Angels, a Chicago angel investing group.

“Madison is definitely a place we want to do more investing in if we can,” Carter said.

Chicago investors say Madison is part of a larger regional strategy that encompasses Ann Arbor, Mich., Cincinnati, Detroit, Indianapolis, St. Louis and other Midwest entrepreneurial hot spots.

The Midwest’s expertise in building business-to-business companies that make components and parts, and a growing tech community in those hot spots, are expected to fuel more successes, said Carter of Hyde Park Angels.

That sort of regional perspective is exactly what the Midwest needs to attract more investment dollars from the coasts, said Lisa Johnson, vice president for entrepreneurship and innovation at the Wisconsin Economic Development Corp.

For Wisconsin, it is important to continue to build on Madison’s entrepreneurial infrastructure, said John Philosophos, business development partner in the Chicago office of Great Oaks Venture Capital LLC in New York.

On Philosophos’ wish list: UW-Madison needs an undergraduate data science major to meet demand from in-state employers, big and small.

Wisconsin needs a highly visible success like Braintree, Groupon and GrubHub. And a strong leader needs to emerge — the likes of J.B. Pritzker — to lead an effort to build a technical center near the UW-Madison campus similar to Chicago’s 1871.

Philosophos, a UW-Madison alumnus who provided tours of Madison for several of the Chicago investment groups, is optimistic about Madison’s ability to continue its rise.

“There’s a recognition that things are happening in the state,” Philosophos said. “When you spin through the Midwest, you need to spend some time in Madison.”

CHICAGO MONEY

Aside from Gearbox Express Inc. in Mukwonago, all of the following start-ups that have received funding from Chicago-based investors are in the Madison area. Here are some of the funds and their investments:

Chicago Ventures: Catalyze Inc., Healthfinch Inc. and MdotLabs Inc.

Cornerstone Angels affiliated funds: EatStreet Inc., Gearbox Express LLC

Great Oaks Venture Capital LLC (Chicago office): EatStreet, MdotLabs Inc., StudyBlue Inc. and 13 more Madison-area companies

Hyde Park Angels: Fishidy Inc.

Lightbank LLC: PerBlue Inc.

Well Ventures (venture arm of Walgreen Co.): Propeller Health

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