Startups struggle as flow of venture capital funds ebbs
St. Louis Post-Dispatch
May 23, 2010
by David Nicklaus
St. Louis has done a lot in the past decade to create an entrepreneurial ecosystem, but the money flowing into local startups remains just a trickle.
Missouri companies attracted just $1 of every $750 invested by venture capital funds in the U.S. during the latest 12 months, according to a leading national survey. That's 0.13 percent, which is unacceptably low for a region with such scientific assets as Washington University and the Danforth Plant Science Center.
St. Louis has built a network of incubators and other institutions to nurture them. The region's laboratories spin out several innovations each year with the potential to create new medical, agribusiness or technology companies.
The biggest missing piece is also the most important one -- money.
Joseph Schlafly, a senior vice president at Stifel Nicolaus who heads the investment firm's venture-capital efforts, says the region's shortcomings are most acute for the companies just emerging from the lab.
"If we brought some nourishment, meaning noninvestor capital, to the table for the very early stages of these companies, then they could become venture-ready," Schlafly said.
In other words, create attractive companies and the venture capital will find them. St. Louis does, after all, have four homegrown venture-capital funds along with the Arch Angel Network, a group of individuals who are willing to invest in new businesses. Some observers, however, say the capital shortage extends beyond startups and includes ventures that are already a few years into their development.
"My concern is that as hard as we're trying, ... our capacity in the region is limited," says Robert Calcaterra, managing director of Startup Midwest Management in Clayton. "What I'm worried about is that we've hit a plateau where it's going to be very hard for these companies to raise $3 million to $5 million. ... They will progress, but they will struggle."
The financial crisis made things worse for St. Louis. As big institutions, such as university endowments, saw their portfolios shrink, they decided to scale back their exposure to venture capital.
Venture capital firms, as a consequence, are conserving cash and taking fewer risks. When they make new investments, they look for companies that already have a product on the market rather than those that need years of research.
Because St. Louis has relatively few market-ready companies, and more startups that need years of nurturing, the financial pinch has hurt us more than other places.
That's not to say we don't have some success stories.
Akermin, an enzyme-technology firm that emerged from research at St. Louis University, raised $10 million in December from venture funds that included Prolog Ventures, based in Clayton; Chrysalix, based in Vancouver; and Burrill, based in San Francisco.
"There's been a good network of people who have been willing to help us in St. Louis," says Barry Blackwell, Akermin's chief executive. He said Akermin got local funding from the Arch Angels and Emerson in addition to Prolog, and has found a home in a technology incubator at the University of Missouri-St. Louis.
Akermin, which employs 20 people, hopes that by 2012 it will be getting revenue from a carbon-capture process using its technology.
Divergence, based in Creve Coeur, also raised money last year from individual investors, Prolog and funds in Indianapolis and Chicago. The 22-employee firm is developing ways to fight parasitic infections in plants and animals, and expects its first product to be commercialized next year.
Divergence often gets mentioned as one of the region's most promising young companies, but it is more than a decade old. "Between the challenges of science and the volatility of the markets, you have to be prepared for things to take longer than you think they will," says Derek Rapp, the company's CEO.
That advice could apply to St. Louis as well. It has been nearly a decade since the region put several elements in place to build entrepreneurship.
One venture capital fund, Prolog, was seeded with state tax credits; two others, Rivervest Venture Partners and Oakwood Medical Investors, were founded with private money. Incubators such as the Nidus Center and Center for Emerging Technologies were built to house startup companies. The Arch Angels were organized in 2005, about the same time that a fourth local venture group, Vectis Life Sciences Fund, was established.
Add it all up, Rapp says, and this is a very good place to start a company.
"Being in St. Louis has been a clear advantage for Divergence. The success of a company like Divergence starts with its people, and we are able to attract people here because they know this is a community with serious scientific activity. ... I am convinced that the St. Louis we are going to see in five or 10 or 20 years is going to be considerably larger in the area of life sciences entrepreneurship."
In St. Louis and Jefferson City, there is an ongoing debate about what role the state should play in helping those future entrepreneurs.
Business groups proposed, and Gov. Jay Nixon endorsed, something called the Missouri Science and Innovation Reinvestment Act (MOSIRA), which would funnel a small percentage of state revenue growth into a technology investment fund. The Legislature failed to act on the proposal before adjourning this month.
The business groups argued that every other Midwestern state provides significant support for technology-based startups, while Missouri invests next to nothing.
Baiju Shah, president of BioEnterprise in Cleveland, says Ohio's seven-year-old, $2 billion Third Frontier Fund has given a big boost to entrepreneurial activity in the state. Shah has visited St. Louis a few times, and he says it would benefit from a boost in public and private funding.
"You've got incredible assets," Shah said. "What's been missing has been a committed effort to grow and fund emerging enterprise."
In the Midwest, he said, Cleveland, Pittsburgh, Detroit and Minneapolis are far ahead of St. Louis in creating biotech companies. "If you compare what the other regions have done with what St. Louis has done, it's an order of magnitude difference," Shah said.
Some St. Louisans are ready to sound the alarm, saying we will never catch up without a state program such as MOSIRA. Others are more optimistic, arguing that our ecosystem just needs more time to mature.
"It's impressive how much infrastructure has been put in place here to support this kind of activity," says Thomas Melzer, a managing director of Rivervest. "Over time, we'll have a couple of companies that are started here and get very big here, and then they'll start spinning people off."
In other words, success can beget more success. As St. Louis tries to get that virtuous cycle started, though, money still seems to be the missing catalyst.
