Chicago was justifiably proud when Boeing decided, this spring, to move its headquarters there from Seattle. The third-largest city in the United States, Chicago is home to more Fortune 500 companies than any other metropolitan region except New York. This concentration helped the Windy City post the highest growth in personal income and the second-highest rate of growth in employment among the five largest US cities during the past decade.

Even so, will Chicago be able to attract the important companies of the future? Today, more than 90 percent of all employees in the Chicago metropolitan area work for businesses in traditional sectors such as financial services, manufacturing, real estate, and retailing-industries that are expected to experience relatively low job growth nationally over the next few years. If Chicago is to go on growing, it must win its share of companies in newer, mushrooming sectors such as biotechnology and software.

A study delivered to the mayor in March 2001 concluded that the city should think small and build a business environment attractive to start-ups as well as to giant Boeing. New businesses and "gazelles" (companies that grow by more than 20 percent annually over a four-year period) accounted for 80 percent of US net employment growth from 1992 to 1998. Large cities such as New York (which since 1993 has been home to 10 percent of the nation’s start-ups) and new-economy cities such as Austin, Texas, rode this wave by attracting and nurturing small companies (Exhibit 1). New York, for instance, invested public money in New York–centric venture funds, leased affordable space to new firms through a public-private partnership, and streamlined or eliminated 1,300 regulations for small businesses. In this way, the city revitalized the area now known as Silicon Alley, which bursts with small high-tech firms.

If Chicago is to attract its share of start-ups, it will have to become more compelling to entrepreneurs. The study for the mayor recommended that the city work on three areas important to this group.

Funding. Compared with other large states, Illinois has a relatively low level of seed capital investment, particularly on a per capita basis. One reason for this gap is the fact that Chicago is home to relatively few venture capital firms that provide seed or early-stage investment funds. To remedy this problem, Chicago could create a seed fund with public and private capital, develop a network of local early-stage investors, and woo leading investment firms to open offices in the city.

Technology. New ideas and patents, often hatched at local universities and research centers, are the food and drink of technology start-ups. The many Boston-based ones that have sprung from technologies incubated at the Massachusetts Institute of Technology are prime examples. Chicago’s top-ranked universities and research centers could yield an abundance of ideas, but the city and its universities need to remove barriers to commercializing them-by, for instance, making it easier for entrepreneurs to find and license new technologies bubbling up in the labs (Exhibit 2).

A business community that supports start-ups. Short-term leases are too hard to find in Chicago, and security deposits are usually too big; venture capitalists don’t want their investment dollars sitting in escrow instead of being at work developing the business. Finding out which buildings are "wired" can also be a problem, and so can finding lawyers and accountants who know how to work with start-ups and understand their needs. In addition to ameliorating these problems, the city could foster the development of a technology corridor, as other cities have done, to make it possible for the employees of start-ups to mingle, to swap ideas, and to support one another.

In addition, the city should concentrate its business-building efforts on a handful of growth sectors. The study for the mayor highlighted four in which Chicago could realistically compete: the biomedical sector (including biotechnology, medical diagnostics, and medical devices), nanotechnology (the manipulation of structures at the atomic level), software development, and software for wireless devices. Indeed, Chicago has a start in each area, with anchor companies to draw on, research under way in the region’s laboratories, and talent. In the biomedical sector, for instance, the city boasts two (Abbott Laboratories and Baxter International) of the world’s top five medical-device companies, as well as several smaller ones, while the 240 hospitals in the state of Illinois and in Northwestern University’s biomedical-bioengineering programs could be trawled for research, ideas, and talent. In the wireless sector, entrepreneurs could draw on another anchor company, Motorola, and on a large local pool of programmers, software engineers, and computer scientists.

Together, the four sectors represent a $300 billion US market that is expected to grow by 15 to 25 percent a year for the next decade. The city could do much to develop each sector. It could, for example, create a test center for third-generation wireless software-a move that would attract attention and talent and foster related research-and establish formal opportunities for the state’s life sciences community to network.

As cities assess their chances of attracting growth companies, they should consider how to create a critical mass across the five assets and linkages that are central to driving the growth of start-ups: accessible smart capital, the ability to attract and retain a rich talent pool, strong R&D and commercialization skills, a cost-effective and easily available local infrastructure, and a favorable business and policy climate. One element alone will not suffice.