Letter from Chicago

On the 36th floor of the Playboy Building in downtown Chicago, Michael Ferro, CEO of Click Commerce, contemplated why the high-tech economy has not taken off in his town.

The impressively old-school office, with its lofty ceilings, chandeliers, fireplace and a view of the John Hancock Building, isn’t the kind of place one would expect to find the 34-year-old CEO of an Internet software development firm. But the surroundings match Ferro’s role as a seasoned and influential technology leader. In fact, he sat down with “The Upload” after returning from a meeting of Mayor Richard Daley’s new Council of Technology Advisors where he volunteers as a board member, offering advice to Chicago politicos on how to solve the city’s high-tech woes.

Ferro acknowledged that Chicago has had its share of problems in developing a viable high-tech community, but he was optimistic about its future.

“At the end of the day, when the dust settles, I’m going to bet that a lot more high-tech firms have succeeded here than you think,” he said. “This is still a bigger economy than Austin, Texas.” Michael Ferro, CEO of Click Commerce (Felicia Morton/Washtech.com).

The main problem, he said, is the lack of venture capital. Although he bootstrapped Click Commerce himself, growing it to a Nasdaq-traded company with a market capitalization of $200 million, he knows this path is not the answer for every high-tech start-up. Access to capital, therefore, is key.

But when it comes to venture financing, Chicago is far behind the rest of the country. The Washington, D.C., area, which still fights the impression of being a “government town”, trounces the Chicago region in terms of venture capital investment. According to the latest PricewaterhouseCoopers MoneyTree survey, the D.C area had $491 million in VC investment in the second quarter of 2001, compared to $190 million for the entire Midwest region. Meanwhile, the Progressive Policy Institute, a Washington think-tank, rated Chicago 19th, just behind Philadelphia, in its study measuring the high-tech economies of cities in the U.S. By comparison, Austin ranked second and the D.C. region sixth.

So what’s the deal with Chicago? Why did Mark Andreesen, co-founder of Netscape, Larry Ellison, founder of Oracle, and Thomas Siebel, founder of Siebel Systems, pack up their University of Illinois degrees and make their fortunes in Silicon Valley?

The city is certainly not lacking in intellectual capital, boasting the world-renowned University of Chicago, Northwestern University and the nearby University of Illinois at Champaign-Urbana. And the city is no stranger to entrepreneurship. At last count, nearly 200 corporations in the Chicago area netted a billion dollars or more in revenue, including high-tech powerhouses like Motorola, Abbott Labs and U.S. Cellular.

But according to Andrew “Flip” Filipowski, the city’s conservative business culture is to blame.

Filipowski has a unique window on Chicago’s tech bust. Once christened the high-tech king of the city after selling his Chicago-based software firm, Platinum Technology, for $3.6 billion in 1999 and then starting Divine Interventures, the city’s first high-tech incubator, his luster has diminished significantly. After launching Divine’s IPO at $13 a share in July, shares now hover around $1. The incubator never got off the ground either, and now the property intended for burgeoning high-tech start-ups is up for sale. Andrew “Flip” Filipowski, CEO of Divine, Inc. (Courtesy Divine Inc.)

“It’s hard to make a dent in it,” Filipowski said of Chicago’s established business climate. The city’s many different sectors — manufacturing, banking, printing/publishing and trucking as well as two of the world’s largest commodities markets, the Chicago Board of Trade and the Chicago Mercantile Exchange — have afforded it an economy that’s like a dependable, old train that chugs along at a steady pace.

“I wish there was a sense of panic,” said Filipowski, criticizing Chicago’s business culture. “There’s not the sense that something is broken. The economy is doing well.”

He said the corporate executives and bankers who make up a good part of the city’s economy are content with the way things are. He chalks it up to the “conservative Midwestern investing style.” Filipowski said Chicago investors dragged their feet in the critical do-or-die period of the late 1990s. His struggle to raise venture capital from local sources was part of the reason why he had to wait until the summer of last year to take Divine public, he said.

“It took a little while to get over the barriers of skepticism,” said Filipowski. “Some wallets did open but by then, it was too late in the game. The whole point is to get in early and get out.”

Other players in Chicago’s high-tech scene are more blunt.

“Chicago is really messed up,” said Stephen Meade, founder of KnockNOW, an exclusive high-tech networking organization that caters to venture capitalists, entrepreneurs and high-level corporate executives. “You have this dynamic where early stage capital is not available so ideas are going elsewhere.”

Meade, who also runs a Chicago-based high-tech firm called 2Xchange (a service that allows businesses to trade goods and services over the Web), is aiming to change the business culture by hosting intimate gatherings at swanky night spots in the city, like a recent gathering at “The Whiskey” in the ritzy downtown neighborhood near Lake Michigan called the Gold Coast.

No more than 40 high-tech executives are invited to the events and they’re not allowed to bring guests unless clearing it with him first. People like April Diehl, CFO of Capital Markets for BankOne, one of the largest banks in the U.S., is most welcome. In fact, Meade gave her a big hug and a kiss when she walked through the door.

Diehl acknowledged the lack of high-tech activity and she said a lot of it has to do with the quality of life in Chicago. Diehl, who moved to city from Boston, said Chicagoans just aren’t pulling the long hours she’s used to on the East Coast.

“Look at the lights on at night in the Chicago skyline — there aren’t any,” said Diehl. “There are no people in their offices because they want to spend time with their families or go to a Cubs game on a Friday afternoon.”

Others at the KnockNOW event were more sanguine, passing business cards furiously and not taking advantage of the open bar.

One of the event’s most well-known guests was Jennifer Filipowski (daughter of Andrew Filipowski), who has started organizing “Pink Slip Parties” where high-tech workers who have just been laid-off can network with recruiters. She’s said the events have been very successful, attracting 300 to 500 people per event. After hearing that’s much more than have attended similar “Pink Slip” parties in the Washington, D.C. area, she immediately said, “That’s great!” But upon further reflection, she said, “Actually, I don’t know if that’s such a good thing.”

Whether it’s good or bad for Chicago remains to be seen. The town is known for its gritty determination, chronicled by famous Chicago writers like Carl Sandburg, who coined Chicago’s moniker, “the city of big shoulders.”

It will be interesting to see if that determination will rise again in the coveted sector of the New Economy. In the meantime, people like Ferro are working to establish a support system for high-tech start-ups. He acknowledged that it won’t happen overnight.

“But it’s coming,” he said confidently. “In ten years, we’ll be just fine.”

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