Thanks to an incubator, Chicago is becoming a leader in health technology

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A few extremely motivated personalities, private investors and public offices have been at the forefront of bringing Chicago’s startup economy together. Nowhere is that more evident than in the founding of Matter, the city’s co-working and incubation hub for medical and healthtech companies.

It was a years-long effort to just create the space says Subbu Arumugam, Co-founder of SugarSnap and a co-organizer of Chicago’s Health 2.0 meetup group who spoke to Geektime on Matter’s behalf. The idea was helped along by the birth of 1871, the mega co-working space down the hall on the 12th floor of the Merchandise Mart building in downtown Chicago. That space is home to 450 startups and offices for all the major venture capital and research players in the region. But it wasn’t suitable for medical startups.

“HealthIT has got its own needs,” says Arumugam. “If you’re a healthIT company then you might think you know what the problems of providers or payers are. Most of the startups see the problems from one perspective but don’t see it from others.”

That was the thesis of Co-founder David Schonthal, Clinical Assistant Professor of Innovation & Entrepreneurship at Northwestern University’s Kellogg School of Management. And now, the space has about 130 startups of its own (you can check out the whole list of startups in the community here).

There were three independent organizations that helped consolidate support for the center: iBio Propel, which focuses on early-stage biotech companies, Chicago Innovation Networks (CIN) which focuses on technology transfer from universities to private companies, and the Chicago chapter of Health 2.0. The first two groups were already receiving private funding with full-time staff, but Health 2.0 was sustained by volunteers and borrowing space to host events.

“They were able to showcase these three organizations. They presented this to the governor, the mayor and other folks in the industry.” From there they raised over $8 million, including a $2.5 million grant from the state and $4.4 million from private investors.

Members listen to one of Matter's many guest talks in September 2015 (image, Matter via Facebook)
Members listen to one of Matter’s many guest talks in September. Photo credit: Matter via Facebook

Arumugam illustrates an issue that startups dealing with other industries or consumer devices don’t really have. Medical technology, be it a software platform or something as critical as a heart stent, needs to be seen from the perspective of providers, insurance companies, doctors and patients. But if you aren’t considering the perspective of each group involved, the product will absolutely fall on its face. Matter’s mentors step in to fill in that knowledge gap, especially for people coming into the industry from the outside.

“Now you’re realizing your product is only half-baked. You somehow try to get in front of providers and payers. Getting those meetings can take at least six months,” he says, emphasizing that the medical venture business is not as fast-moving as other verticals. It might take another half a year before a primary backer can round up a number of other potential investors to hear your pitch.

Chicago tries making healthtech its niche

Matter's flashy startup-esque entrance hall in Chicago (image, courtesy)
Matter’s flashy startup-esque entrance hall in Chicago (image, courtesy)

Startup Compass ranked Chicago as the seventh best startup ecosystem in the world in its report last year, up three spots from its 2012 rank. They estimate between 1,800 and 3,000 startups are active in Chicago. How much of that is in healthtech isn’t immediately clear, but Chicago is the midwest’s major hub for medical industry. There are multiple providers such as North Shore, the University of Chicago, Rush and Northwestern as well as smaller community hospitals. It hosts a branch of the Cleveland Clinic and is home to the Mayo Clinic. The American Medical Association and American Hospital Association maintain their respective headquarters downtown, and the offices of big payers like Baxter, Abbott, MedLine, and Allscripts are all in the Windy City along with representatives from Minnesota’s medical device manufacturing industry.

As a result, the health divisions of KPMG and Deloitte call the city home, medical device companies like Zimmer (Indiana) and Striker (Michigan) have set up shop, and the city attracts organizational conferences like ACEP’s (American College of Emergency Physicians).

Matter CEO Steve Collens told Forbes last year, “We have more health care expertise in the Chicago region than anywhere else in the world, but we don’t have a well-connected community that efficiently fosters health technology innovation.”

Matter, like 1871, has created an unusually consolidated physical ecosystem. So many companies are located in one space.

“That was by design. 1871 happened so Schonthal and his comrades needed to look for a place,” Arumugam tells Geektime, with Schonthal’s cadre gravitating to the same office space as 1871 in order to amplify their goal of a tight ecosystem. The result has been a lot of cross-pollination and co-sponsored events, although Matter remains wholly independent. The two organizations have similar beginnings with support from JB Pritzker, and CEO Steve Collens having been a board member at 1871 at the time.

Chicago Mayor Rahm Emanuel visits Matter at their first anniversary event in February (image, Matter via Facebook)
Chicago Mayor Rahm Emanuel visits Matter at their first anniversary event in February. Photo credit: Matter via Facebook

But could having everything in one place be a double-edged sword?

“Honestly I don’t know if it’s a disadvantage. There are multiple stories of startups here who came together through some serendipitous event,” he says. Instead, Matter has all the industry players coming to the same place and rubbing shoulders when it might be an otherwise colossal task for a small, bootstrapped operation to make all the right contacts, from investors to partners. “They solve problems. There’s a disadvantage for other ecosystems that don’t connect everyone in a common space.”

Can Chicago scale the funding wall?

Matter's CEO, the Harrison Wells-esque Steven Collens, at Matter's opening in February 2015 (image, Matter via Facebook)
Matter’s CEO, the Harrison Wells-esque Steven Collens, at Matter’s opening in February 2015. Photo credit: Matter via Facebook

If you ask observers and Chicagoans themselves, venture capital is the main issue. Chicago leads North America in terms of exclusively local funding rounds (85%), but that also evidences Chicago’s low funding numbers. The average seed round is in the $650,000 range, 26% below the North American average. Series A rounds are about $5.5 million, also about 20% lower than the rest of the continent.

Arumugam explains, “There are corporations like Baxter doing VC. GE has one. They’ve actually supporters a lot of Chicago startups in Series A and B even though they’re based outside Chicago. You are seeing groups like Origin and OCA Ventures getting into healthcare, [but] a lot of them need to learn more about the healthcare ecosystem.”

Some medical companies are organizing their own venture arms, but even those are based outside the city.

“It’s hard for startups to raise money [here]. It’s not going to happen until there is a serious exit from the local startups.”

But recent news might be a strong indicator that things are turning for the better. Matter-based startup Endotronix announced a $32 million Series C round last week for its heart monitoring technology, and a day before medtech company Caremerge announced a $14 million round. With Startup Compass raising the city’s rank to #7 globally, it may prove inevitable that the city finally presses its local industries and big city advantage to start dominating the medical technology markets in the near future.

Featured image credit: Matter via Facebook

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