There's a reason why more and more entrepreneurs are calling the Windy City home.
Currently, Chicago hosts as many as 104 private companies on the Inc. 5000 (last year, it counted 95), landing second place on the list of Top Cities for Fast-Growing Companies. New York City grabbed the No. 1 spot. Of those 104 businesses in Chicago, 38 fall under the IT services sector.
In a 2015 report from investment firm CBRE, Chicago ranked as the 5th largest and 11th fastest-growing tech market in the country. Over the past four years, the capital city has created more than 40,000 tech jobs. (CBRE's research team used 13 metrics to give each market a score, depending on its competitive advantage, ability to draw talent, and ability increase its pool of tech professionals.)
Indeed, technology is revamping an already-strong startup ecosystem, argues Howard Tullman, an Inc.com columnist and the CEO of 1871, a business incubator that currently works with 425 companies and 1,600 clients.
The advent of 3D printing makes manufacturing less costly. At large, the manufacturing sector is being infused with many technological advancements, he says, noting that the maker movement in particular is good for business.
"In Chicago, you see a lot of marketplace businesses and software as services," adds Stuart Larkins, founder of Chicago Ventures. The two-year-old venture capital firm provides seed and early stage funding to 44 startups in the area. One of those includes SpotHero, a Chicago-based on-demand parking app, which just announced that it raised $22 million in a Series B funding round on Wednesday.
"I personally think Chicago is very approachable," Larkins adds. "We find it very easy to get our companies introductions to new people for new business opportunities."
Still, the Windy City isn't trying to follow in the footsteps of its Western brother, Silicon Valley, as Pritzker Group founder J.B. Pritzker discussed with Tullman at Inc. and CNBC's iCONIC conference last May. "We aspire to be a great tech hub with great entrepreneurs," he said.
Here are three reasons for the Midwestern city's recent emergence as a major force for small businesses:
1. It's rich with industry diversity.
Chicago is famously home to large companies in diverse sectors. Industry giants like Boeing and United Airlines prove that transportation continues to thrive there, while health care and education services are also gaining traction. 1871 counts 100 companies in health care I.T., and 24 in education, the latter of which are bringing tech solutions to the classroom.
Infiniteach, for example, is an app that helps individuals with autism to better communicate and learn new skills. In March, the startup won the audience choice award at the Google-Autism Speaks pitch competition, including a cash prize of $10,000.
Another growing industry in Chicago is mobility, which includes parking and shared vehicle services like SpotHero. Essentially, the sector encapsulates "everything outside of a car," says Tullman. Major French car companies, along with executives from BMW, are now being drawn to the incubator's spacious digs. He predicts that bike-sharing will soon morph into electric car-sharing in the city proper, as the surplus economy continues to grow.
A wealth of big businesses provide new market opportunity for smaller ones: Startups are increasingly going the business-to-business (B2B) route, meaning they frequently work with other companies as opposed to going directly clients. "From the very beginning, they're focusing on how they can be bought," Tullman explains. "The frequency of exits is growing."
In fact, 2014 was the city's best tech year to date, according to Built In Chicago, an online community for startups. Overall, 155 companies received nearly $1.6 million in funding, while 34 exits raked in $7 billion. Still, Tullman doesn't expect to see many billion dollar exits any time soon, since successful founders are increasingly electing to launch secondary and tertiary ventures.
Industry diversity also means that it's easy for Chicago startups -- especially those B2B models -- to get in front of their customers, because larger companies want exposure to smaller ones.
2. It has a robust VC scene (though startups don't need much these days).
Chicago Ventures doesn't disclose its investments, but Larkins says he's seeing more Midwest startups receive minimal funding in the early stages, as opposed to raising big funding rounds.
A startup that launched in 2000 may have needed $10 million. Today, however, companies can get away with an investment as low as $500,000 and reach similar accomplishments, he says. Thanks to advancements in technology, tasks that would have been expensive a decade ago are much cheaper.
Increasingly, Chicago startups are turning to alternative financing models. Early stage funds, angel investors and crowd funding are now popular means of raising capital. "Traditional venture guys are migrating upstream to private equity, because these startups just don't need 5 or 10 million dollars," Tullman adds.
What's more, those larger venture funds can't afford to invest in small amounts, since they're trying to accrue their own capital.
Tullman encourages businesses at 1871 to focus more on creating a steady revenue stream instead of raising funding from a third party.
3. There's a bevy of tech talent.
The University of Illinois at Urbana-Champaign graduates hundreds of engineers and computer scientist each year, and ranks as having the sixth-best engineering program nationwide, according to the U.S. News & World Report.
The caveat, however, is the challenge of retaining the talents. Millennials are frequently lured away from Chicago by the promise of working in Silicon Valley and Silicon Alley. Many University of Illinois graduates move out of the state after graduation. The so-called "brain drain" is detrimental to the state's economy.
Chicago mayor Rahm Emanuel has been active in bringing in (and keeping) more tech talent. In 2012, he created the annual ThinkChicago: Lollapalooza competition. The event invites 125 elite tech and computer science students from universities nationwide to come and learn about the city's thriving business ecosystem and culture. In 2014, the Mayor launched the first-ever Chicago College Start Up competition, which gives 10 winning businesses free access to office space and mentorship.
The overall quality of life in Chicago may make up for its perceived sluggishness, at least compared to New York City. A recent "Livability" report, published by the Economist Intelligence Unit (E.I.U.), finds that Chicago ranks No. 33 for its stability, which is also the second-highest of any U.S. city.
Larkins, for his part, nods to the overall "ho, hum" attitude taken by Midwesterners. Windy though Chicago may be, there's little bluster. "We believe in karma and doing favors," he says.
While the cost of living in Chicago is significantly lower than The Big Apple, it's not exactly cheap. In a 2013 study from personal finance website NerdWallet, Chicago was ranked the 31st most-expensive city in America, with the median home price hovering at $436,871. Weather, too, may be more than just an anecdotal issue. A recent snowstorm accounted for at least 13 deaths in the metro area this year.
Still, if the sheer number of Chicago exits are any indication -- and coupled with this year's enviable Inc. 5000 data -- the city might just be an ideal place to launch your next venture (or two, or three).
Correction: August 21, 2015
An earlier version of this article misstated the name of the school (University of Indiana at Urbana-Champaign) that graduates hundreds of engineers and computer scientists each year. It is the University of Illinois at Urbana-Champaign.