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Adventure Capital

Chicago's venture capital climate is heating up after years of stagnation


When David Demirjian was starting out in business in the 1980s, he sought investors for ThermoGen, Inc., his first biotech company, but didn't have much success. The company, however, an innovator in enzyme technology based in Chicago, got off the ground without the help of venture capital funding.

Demirjian is now onto his second biotech company, zuChem, Inc., a developer of glycochemicals, which are sugar-like molecules. The entrepreneur says that finding funding for the new company -- also located in Chicago -- has been a dramatically better experience. The company found venture capital partners, angel investors, in Peoria and other financing help through governmental offices.

"The climate is a lot better than it was back in the 1980s," Demirjian says, but adds that the Chicago area, despite significant research occurring in the Midwest, has a lot more work to do before it is known as a top place in the country for venture capital investments.

Venture capital is important to both the U.S. and local economy for a number of reasons. The funding creates and helps develop innovative companies, new jobs and even new industries. The National Venture Capital Association lauds that venture capital can improve standard of living not only through the generation of tax revenues, but also through new technologies and services.

In this type of deal, investors inject substantial revenue into, but don't entirely take over, a growing company. Investments typically take the form of preferred stock equity or a combination of equity and debt obligation and come with a planned exit event in three to seven years. Despite the high risk of these investments, there's potential for greater than average returns.

Entrepreneurs say that in order for Chicago to become a big dog in the world of venture capital, it needs to make changes. One necessity is to develop an investment climate that is somewhat less adverse to risk, Demirjian says, adding that Chicago could easily become a national powerhouse for venture capital because of the money in the region. Government-led initiatives to entice investors or simply better coordination might also change the landscape, others say.

"A lot of [potential venture capital] either doesn't go anywhere or it ends up on the East and West Coast," he said. "[Venture capital] needs to snowball -- it needs to grow."

Money seems to follow the entrepreneurs, says Maura O'Hara, executive director of the Illinois Venture Capital Association (IVCA). She points to California as a place where the culture seems to be friendlier to the entrepreneurial spirit.

"Even if you go into business and fail miserably, it's still seen as an honorable effort there," O'Hara says.

For certain, much of the action in venture capital hovers around the coasts of the United States. O'Hara says that about 70 percent of venture capital money lies in just four states: California, Massachusetts, New York and Texas. In comparisan, Illinois looks miniscule, she says. Illinois is currently home to only about 3 percent of the national investment of venture capital.

Although Chicago isn't considered a big player in the venture capital arena, it has enjoyed some big name successes in recent years. Electronic trading platform Archipelago Holdings won venture capital investment in Chicago. The company was recently bought by the New York Stock Exchange. Chicago-based Morningstar, Inc., the independent investment research provider, made an initial public offering in May 2005 through the help of venture capital funding.

According to the IVCA, approximately $246 million worth of venture capital was invested in more than 100 Illinois companies in 2005. For Illinois, this meant a 10 percent increase from 2004, but it didn't keep up with the 18 percent growth rate for the same time period experienced by the Midwest region. Chicago has a much larger national presence with firms that simply buy out an existing company with the intention of making it bigger or more profitable, says O'Hara, whose organization is working to link entrepreneurs with potential investors.

At least for this year, Chicago was on the national map for venture capital. In April it hosted BIO 2006, the annual convention of the biotech industry. Some 20,000 people attended BIO 2006, which istouted as the industry's largest event for networking and luring investors to new businesses, research and manufacturing sites.

BIO 2006 ran simultaneously with the BioETHICS Conference 2006 at Columbia College, which warned attendees of the health, safety and environmental effects of genetically modified biotech foods (GMO's). Will venture capitalists shy away from investing in controversial GMO's that have been rejected by Europe, Japan, New Zealand, Australia and China? Will Chicago's hosting of BIO 2006 bring a significant boost in venture capital funding of biotech innovations or will it be business as usual in Chicago? o

Published: June 01, 2006
Issue: Summer 2006