Saturday, November 27, 2010

Opprtunities for angel investors and VCs in "Flyover Country"

Earlier this week, Technori published a two-part article that I wrote for it on "Angels in Chicago". The first part explained the concept of angel investing and introduced readers to four active angel investors in Chicago, and the second part discussed the problems that angels see in funding proposals, compared angel investing to incubators, and offered some suggestions for entrepreneurs.

There's a surprising number of angel investors in Chicago. AngelList only names 16 Chicago angels, but Hyde Park Angels, the biggest angel investing group in the city, has 76 members, only a handful of which are on AngelList. There are other angel groups just getting started, like Wildcat Angels. And Groupon notwithstanding, the angels I interviewed said that the valuation inflation and competition for deals that investors are seeing in Silicon Valley and New York isn't happening in Chicago.

Terry Howerton, the head of the Illinois Technology Association, believes that the lack of VCs in Chicago is a bigger problem for startups than the number of angel investors. He said that there's only three or four VCs in the city doing Series A or later rounds, so VCs from other cities in the Midwest come to Chicago to look for deals. There's an enormous opportunity for angels and VCs outside Chicago to do deals here.

According to Bankrate.com, the cost of living in Silicon Valley is more than 30% higher than Chicago, while New York/Brooklyn is more than 50% higher, and New York/Manhattan is almost 80% higher. That means that a startup's labor costs (as well as taxes and some other operating costs) are going to be dramatically less in Chicago and other Midwestern locations. In addition, there isn't the competition for deals and valuation inflation that's occurring in Silicon Valley or New York.

Chicago has become a center of startup activity, especially for online services, as well as vertical B-to-B applications (financial, real estate, travel, etc.). There's a real opportunity here for investors, especially if you keep the companies in Chicago (rather than moving them to Silicon Valley or New York) and take advantage of the area's lower costs.
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