Chicago weighs VC fund to fuel tech startups

Proposal would revitalize industry using pension
money, investments

A mayoral advisory panel is urging the city of
Chicago to help create a venture capital fund of
$100 million to $200 million to spur investing in
technology companies.

By Julie Johnsson – Crain’s Chicago

The proposed fund is part of a broader, 10-year
plan to kick-start investing in area start-ups, many
of which are starving for capital — and kick the
city’s reputation as a high-tech backwater.

While Chicago’s financial community holds more
than $500 billion in assets, less than 2% of those
funds is channeled into venture capital.

A mere 5% of the $10 billion in private equity held
by Chicago funds is invested locally, while less
than 2% of that winds up in Chicago start-ups,
according to Texas-based consulting firm A. T.
Kearney, which has worked for the past year to
draft the venture capital plan, commissioned by
the Mayor’s Council of Technology Advisors.

"A cycle has established itself, largely of
perception: that this is not an entrepreneurial
community or a hotbed of venture capital," says

Simon Bell, a principal at A. T. Kearney. "Money
flows elsewhere, and as a result, entrepreneurs go
elsewhere. It’s a self-perpetuating cycle."

To break the cycle, Kearney recommends forming
a "fund of funds," with the city ‘s pension funds
placing an initial $20 million as anchor investors.

City leaders would also seek matching
investments of $5 million to $20 million from state
of Illinois pensions funds, university endowments,
financial companies and other institutional
investors.

The private-equity fund, which would be run by a
private investment manager, would not directly
finance fledgling technology companies, a risky
proposition ill-suited to a municipal investment
vehicle.

Dream committee

Rather, the proposed fund would invest in a
portfolio of venture capital funds that invest in
seed- or early-stage companies within specialized
niches, from biotechnology to Downstate
companies. Similar approaches have proved
successful in Oklahoma and California, Mr. Bell
notes.

Kearney envisions a committee of luminaries
leading the effort: blue-chip corporate leaders
such as Aon Corp. CEO Patrick Ryan, SBC
Communications Inc. President William Daley —
Mayor Richard Daley’s brother — Northern Trust
Corp. CEO William Osborn, financier Carl Thoma
and city, state and county treasurers Judy Rice,
Judy Baar Topinka and Maria Pappas,
respectively.

The city’s role is to "serve as the catalyst," says
Robin Schabes, who advises Mayor Daley on
technology issues. "But this is a private-sector
initiative and needs to be led by the private
sector."

The plan would also seek to boost angel investing
and create a center to help entrepreneurs tap
funding, possibly run in conjunction with the
Chicagoland Chamber of Commerce. It remains a
work in progress, with many of the finer points —
like whether portfolio funds would be required to
invest in the state — still to be hammered out.

Of course, countless plans to revitalize technology
in Illinois have been drafted over the past 20
years, with little real effect.

Among the notable flops: the Skyscraper Fund,
which was supposed to leverage a $4-million
investment by the city’s pension funds into a
$100-million fund when it was launched in 2000.
Two years later, the effort has been reborn as the
more modest Draper Fisher Jurvetson Portage
Fund I L.P., a $12-million fund targeting seed- and
early-stage companies in Illinois and elsewhere in
the Midwest (Crain’s, June 3).

"It sounds politically wonderful to say we’re going
to support the local entrepreneur," says Robert
Lestina, a former director of Allstate Corp.’s
venture capital portfolio and an adjunct professor
of finance at Northwestern University’s Kellogg
School of Management. "But it just never works."

Still, this latest effort, a follow-up to a strategic
plan created last year for the city by McKinsey &
Co., is garnering serious consideration within
investing circles and in City Hall.

"It’s a pretty cool idea that’s worth reviewing,"
says city Budget Director William Abolt. "It’s
something the revitalized (Mayor’s Council of
Technology Advisors) is going to work on."

Daley support crucial

But Mayor Daley’s stand on the initiatives is
unknown. The mayor has been briefed on the
report, but he hasn’t gone over the
recommendations in detail or met with Kearney
officials.

Observers give the measure little chance of being
implemented without the support of a strong,
politically connected leader like the mayor. For
starters, the city’s pension funds have been
reluctant supporters of area tech efforts. They
have invested only $20 million in local early-stage
venture capital funds, a fraction of the $680
million their California counterparts have invested
at home.

Then there’s the thorny issue of risk. Although the
private-equity funds have outperformed the stock
market over the past 20 years, they are still
perceived as riskier. The public may balk at
seeing pension dollars flow to a venture fund with
no guaranteed return on investment.

"There are going to be people taking potshots,
saying you’re taking pension funds for economic
development and that’s not the best use for the
money," says David Tolmie, who co-chairs a task
force on access to capital within the Mayor’s
Council of Technology Advisors. "Where the state
of Illinois stands in terms of invested capital is
embarrassing. Something needs to happen.
Hopefully, this is something people can get
behind."

Senior Reporter Greg Hinz contributed to this
story.

©2002 by Crain Communications Inc.

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