More venture capital flowed into Chicago startups in 2014 than any year since the dot-com boom 15 years ago, topping $1 billion. But while all that cash makes it easier to launch and grow a company here, funding levels still lagged behind those of other big cities.

The year started off anemically, with barely more than $100 million in VC investments in each of the first two quarters, but roared through the last 13 weeks of 2014, with more than $400 million in funding, based on totals compiled by Crain’s. The annual tally was lifted by a pair of outsize deals—AvantCredit’s $225 million raise and Naurex’s $80 million infusion—as well as 21 others of at least $10 million, a sum common in other parts of the country but relatively rare in Chicago.

Though mostly symbolic, crossing the $1 billion threshold is another sign that Chicago’s tech industry has staying power. “A billion is a big number. It shows that Chicago is taken seriously in the VC world as a major producer of high-growth companies,” says Erik Gordon, a professor at the University of Michigan’s Ross School of Business in Ann Arbor who oversees the university’s $7 million Wolverine Venture Fund.

Local firms still lead most of the deals. But investors from large funds on the coasts are showing up more frequently, including Foundation Capital and Technology Crossover Ventures, both based in Silicon Valley, and East Coast firms RRE Ventures and Bain Capital Ventures.

“Entrepreneurship is being democratized,” says Roger Lee, a Menlo Park, Calif.-based partner at Battery Ventures, which has invested in Groupon, Narrative Science and SingleHop. “The rest of the world is taking notice (that) there are great entrepreneurs, engineers and companies coming out of Chicago. Now there is a community of success.”

Funding is growing in other tech hubs, too. Through the first nine months of 2014, VC investments in the U.S. eclipsed the $35 billion full-year total for 2013, with Silicon Valley companies pulling in at least $1 billion every month, on average.

‘BIG MONEY FLOWING’

No one is forecasting a 2015 slowdown in Chicago. “There’s big money flowing,” says Michael Gray, a partner at Chicago law firm Neal Gerber Eisenberg who helps startups raise money. “What feels different to me is the size of the deals and how many. It’s not just a bunch of $1 million and $3 million deals. Ten years ago, it was a wasteland after the dot-com crash. It’s continuing to grow and gain momentum.”

In the past three years, Chicago companies have raised an average of $732 million annually, more than double the amount raised from 2002 to 2008, according to Dow Jones VentureSource. The last time Chicago flirted with $1 billion in deals was 2010, when Groupon, Elevance Renewable Sciences, ExteNet Systems and BigMachines each raised more than $100 million.

Stuart Frankel, CEO of Chicago-based Narrative Science, an artificial-intelligence software spinout from Northwestern University, notes that more companies launched in the past several years. They need more capital to underwrite the next phase of their growth. “Part of it is the law of large numbers,” he says. “There are more quality companies.”

ANOTHER BUST AHEAD?

There has been plenty of worry—particularly on the coasts, where companies like taxi-alternative Uber have raised $1 billion in a single round—that valuations have bubbled to unrealistic levels, suggesting another tech bust is in the making. Frankel, who is on his third startup and lived through the dot-com boom and bust, doesn’t see it. “It’s still really hard to raise money,” he says. “Professional investors haven’t relaxed their criteria. The quality of companies is better.”

Chicago’s technology scene has improved dramatically in the past five years, with five IPOs and four buyouts of more than $400 million, which helps drive the pace of startup funding.

But Chicago continues to punch below its weight class. Funding here trails not only Silicon Valley but New York and Los Angeles, which are larger markets and thick with media startups. It also lags Boston, San Diego, Washington, D.C., and Austin, Texas, according to VentureSource data for 2013 and the first three quarters of 2014.

Illinois, the nation’s fifth-biggest state by population, was ninth in venture funding in 2013, according to data from the National Venture Capital Association and PricewaterhouseCoopers. Since 2008, Illinois has ranked as high as fifth and as low as 13th. It has, however, consistently topped other Midwestern states in recent years.

Michael Marasco, for one, isn’t declaring victory. “The numbers are trending in the right direction, and the pace of what I’m seeing now is greater than at any time I’ve seen in my career,” says Marasco, director of the Farley Center for Entrepreneurship and Innovation at Northwestern’s McCormick School of Engineering in Evanston. “But the volume of deals occurring and the amount of money coming in is relatively small.

“There are people acting like we’re a new coast. We’re still so far away from that.”

 

A billion in VC funding is real money for Chicago – In Other News – Crain’s Chicago Business.