Jul 15, 2014

Chicago investors flock to Madison start-ups

Excerpted from Milwaukee Journal Sentinel
By Kathleen Gallagher

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.

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.

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.

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.

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