Mrs. O'Leary'S Cow Starting Fire

Speak to a casual Internet and technology industry observer about Chicago, and you won’t get too far before Groupon comes up in the conversation. Founded in 2008, the daily deals pioneer quickly became one of the fastest growing companies in Web history, attracting enormous amounts of attention to the then burgeoning Chicago startup scene — as well as its own fair share of criticism.

But Groupon quickly turned into a cautionary tale of growing (revenue, personnel, prominence, etc.) at the expense of sustainability. Despite a particularly tumultuous lead-up to its IPO, Groupon went public on November 4, 2011 at a price of $20 per share, valuing the company at more than $13 billion. Today, less than two years later, the company is trading at $8.88 (up from a 12 month low of $2.60) with a market capitalization of approximately $5.88 billion, and is operating with an interim CEO, following the board’s firing of founding CEO Andrew Mason.

Groupon still has a 10-figure valuation, and employs 2,700 Chicagoans among its 8,000 global employees. But, needless to say, the company has lost much of its luster, and the Chicago startup and technology community could do with a new hero company. I spent the last week on the ground in the windy city, meeting with those entrepreneurs and investors tasked with creating the next city-defining companies, to get a better idea of what Chicago has waiting in the wings.

Here’s a list of five likely IPO-candidates that appear to have the chops to become the next iconic Chicago technology company:

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GrubHub+Seamless: Chicago-based GrubHub is a nine-year-old online and mobile food ordering platform. The company, which has raised $84.1 million and employs approximately 350 Chicagoans, announced a planned merger with its New York-based competitor Seamless in May, subject to regulatory approval. The yet-to-be-named combined company will be headquartered in Chicago, and GrubHub CEO Matt Malone will retain the top position. Malone admitted at the time of the merger announcement that GrubHub was already meeting with bankers to explore a near-term IPO. During last month’s PandoMonthly fireside chat, GrubHub investor and Benchmark partner Bill Gurley called the combined GrubHub+Seamless the most underrated company in the firm’s portfolio.

Braintree*: There’s plenty of competition over who will own the next generation of online and mobile payments. But no one has been hotter recently than Braintree, which doubled the value of its payments processed over the last six months, reaching a rate of $10 billion annually. The company has also been aggressively expanding its mobile offerings through its subsidiary Venmo. Braintree, which was founded in 2007, has raised $70 million to date and employs roughly 60 people in Chicago, among a growing global organization. Anecdotally, Braintree was the company most often described as a “billion dollar company” in my discussions last week. [*Disclosure: Braintree investor Accel Partners is also an investor in PandoDaily.]

Mu Sigma: Big data is a phrase so broadly used recently that it sometimes loses its meaning. But Mu Sigma is “a data scientist’s, data science company,” one engineer told me this week in what seemed to this journalist like high praise. The company must be doing something right, because Mastercard, owner of trillions of points of retail consumer behavior and financial data, came knocking in February of this year to acquire a minority stake in the company and form a commercial partnership. In total, Mu Sigma has raised $163.77 million in funding and employs 37 people in Chicago.

Cleversafe: With more data being created in a single day today than in most of previous human history, any company focused on “limitless storage” might be considered in the right place at the right time. Cleversafe is just that, offering dispersed data storage solutions to system administrators. The nine-year-old company has raised a total of $36.4 million and has 75 employees in Chicago, among its 102 globally. The company recently named former Juniper Networks and IBM executive John Morris as its President and CEO, with founder Chris Gladwin assuming the role of Vice Chairman – a move that may be a precursor to a near-term IPO.

KCura: There are few technology companies that can bootstrap their way to more than 320 employees, but 12-year-old e-discovery software provider KCura has done exactly that. The company’s flagship product, Relativity, is a Web-based platform used by more than 40,000 active users to review, analyze, and produce of electronic documents during litigation. The company also produces Method, a legal hold and risk assessment workflow and notification system. Without venture investment, KCura has dramatically different incentives and shareholder pressures that the above four companies, meaning that an IPO may be further from its mind.

[Honorable mention: Centro, GoHealth, Blue Health Intelligence, Guaranteed Rate, Sprout Social, Silk Road, Single Hop, CouponCabin, and Belly]

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While Chicagoans still speak positively about Groupon, in my experience, there’s a hint of defensiveness in much of the praise. Yes, a $6 billion market cap is nothing to scoff at, but in situations like this, it all comes down to expectations. And in 2010 and 2011, expectations for Groupon were set at continued exponential growth and massive prosperity for the company, its employees, its investors, and the city of Chicago. For a good portion of those on that list, the result has fallen short of the promise.

The best thing about the above five companies is that they are true to the Chicago mold, something that Groupon never was. Yes, the midwest is good at sales and customer service, which Groupon had in spades. But it was clear throughout my week of Chicago meetings that the city is all about under-promising and over-delivering. Investors like to see early traction and a clear path to monetization and even profit, not promises that “if we build it, they will come.” In other words, Chicago likes real businesses, not moonshots.

As I explained in last week, Chicago is an unnatural place to create the next Instagram or Twitter, but it could very well create the next PayPal, WorkDay, or Yelp – and it already has Orbitz, CareerBuilder, and Classified Ventures from the previous generation. Like every startup ecosystem outside the Valley, Chicago could benefit dramatically from a few more flagship technology companies to continue attracting talent and capital, as well as inject social proof into the entrepreneurial ecosystem.

Unfortunately, perception matters. And although it appears several legitimate candidates already exist, they’re often less well know outside the region. According to those who know them best, these five are ones to watch, and there are a host of other hopefuls looking to follow in their wake.