• Entrepreneurial Finance in St. Louis

    May 03, 2017

    Like many American cities, St. Louis has a rich entrepreneurial heritage. In addition to the well-known names of Anheuser-Busch, Express Scripts, and Emerson Electric, St. Louis once boasted a vibrant shoe manufacturing industry as well as a world-leading cluster in advertising and public relations. Over time, through industry life cycles and policy changes, entrepreneurial growth receded as a driver of the regional economy—also a pattern repeated in other cities.

    Unlike many other cities, however, St. Louis has recently enjoyed an entrepreneurial resurgence in information technology, biotechnology, and brewing. Overall, new business creation in St. Louis outpaced the rest of the country in the years following the 2008-09 recession (see Figure 1).

    Business Creation Chart

    The increase in startup activity has increased the level of entrepreneurial financing in the region. In 2011, St. Louis firms raised $40 million in venture capital; five years later, that had risen to $273 million. This renaissance has not gone unnoticed, and St. Louis has garnered an increasing share of boosterish headlines:

    Challenges, of course, remain. The dynamics of entrepreneurial ecosystems are such that progress creates a new set of issues to address, and St. Louis is no different. Startups in St. Louis have been helped by an increase in early-stage funding, particularly through accelerators (of which there are now at least half a dozen), and the innovative Arch Grants program. Yet there now appears to be an acute financing gap for St. Louis startups between the Angel/Seed stage and the Series A stage.

    In an ideal financing landscape, many early-stage startups will have access to small amounts of initial capital to allow them to test ideas and try to gain customer traction. Over time, as some of those startups survive and grow (and many more do not), their financing needs grow larger even as there are fewer rounds for investors to fund. To get from the early rounds to the later rounds, startups must cross the “valley of death.” Here, they may have revenue growth and customer traction, but they have burned through their seed capital and need additional capital to sustain momentum. On the other side of the valley, in later stages, startups need funding to finance growth and build systems and structures around their core competence.

    Getting across that valley of death has been a persistent challenge for startups everywhere, and it appears as if this is what many St. Louis startups now find themselves facing. Boosted by the growth in early-stage funding and programs, startup activity has risen, yet the region’s startup ecosystem will get stuck if startups cannot access funding to help them cross the valley.

    Last year, nearly half of VC funding in St. Louis went into later-stage companies in Series B, C, and D financing rounds. Most of that, moreover, went to biotech companies. This is understandable: biotech firms often have need more money than their IT counterparts. But, it creates a situation in St. Louis where lots of IT startups have early traction and funding but can’t raise money after the seed round. The resulting landscape looks like this:

    Funding Cycle

    Importantly, this chart has removed a large, $86 million Series A round by Tioma Therapeutics last year. That may seem unfair, but it allows us to more clearly analyze the state of entrepreneurial finance. When Tioma is included, there were nine Series A rounds in St. Louis last year, at an average of $12.2 million per round. That sounds pretty good. When the largest round is excluded, however, the other eight Series A rounds averaged just under $3 million.

    Tech startups raised almost three-quarters of the Angel/Seed money, nearly two-thirds of the Series A funding (without Tioma), and just under half of the accelerator funding in 2016. At later stages, however, tech startups accounted for only 19 percent of the funding. (When Tioma is included in the Series A number, the tech startup share is just 13 percent.)

    This is not a bad thing. Many different institutions in St. Louis have put significant resources into developing biotech over the last 20 years, and the predominance of biotech in 2016 VC funding is only one data point we can look at. But the IT sector has emerged quite rapidly in the region and can also produce significant payoffs in jobs and innovation. Without getting more tech startups across the valley of death to Series A funding and beyond, the nascent sector could wither, to the detriment of the entire metro area.