Risk aversion erects barrier to area small businesses
St. Louis Post-Dispatch
May 24, 2010
By Tim Logan
It's not as if no one's trying. When it comes to boosting entrepreneurship, St. Louis is making all sorts of moves.
Talk to any local banker or economic development official, and that person will tell you about efforts to help small business. Ask social service agencies, universities, even the unions -- they have programs, too.
And small-business incubators have popped up like dandelions in recent years, targeting most big counties and everyone from Hispanics to the homeless. St. Louis County alone operates four, with a fifth on the way.
Yet for all the effort, the results don't seem to add up.
For years, St. Louis has lagged much of the country in the creation of small businesses, and the jobs they bring. Over the last decade, our metro area has created new companies at roughly half the rate of faster-growing cities like Atlanta and Charlotte, or even Indianapolis. As the big-business backbone of the region's economy gradually fades, the need to launch new, young and innovative companies grows more urgent.
So what's holding St. Louis back?
The answer is elusive. It's difficult to diagnose the disconnect between the effort and the results. But in conversations with local experts, one point came up again and again: the culture.
"We don't pay enough attention to small companies," said Alan Richter, a former head of the region's Small Business Development Center. "It's just not in our psyche."
Maybe it's the hard-working but conservative Midwestern ethos. Maybe it's a regionwide fear of failure. Maybe it's a residue of the big-company climate that made this city so prosperous for so long. But whatever the cause, it adds up to St. Louis having too little of the oxygen that small businesses need to grow.
Ideas are not the problem.
People who support startups say they're busier than ever. Galen Gondolfi, a small-business loan counselor with the midtown nonprofit Justine Petersen, said applications for his agency's microloan program jumped 40 percent last year. 2010 is on pace for even more.
Gondolfi can barely stay in his chair as he enthusiastically rattles off the ideas that come across his desk, from artsy print shops and microbreweries to courier services and cabinetmakers.
"There should be absolutely nothing going on right now," he said. "But people are trying this stuff." One reason Gondolfi's so busy, of course, is that his agency is something of a lender of last resort, the place where entrepreneurs turn when they can't get a bank loan. And, for many businesses, bank loans are hard to come by.
The recession is making it harder, certainly. But the sort of companies Gondolfi works with have long struggled to access capital in St. Louis.
"If St. Louis wants to pour water and stir and have entrepreneurship bloom, then we're going to have to change underwriting criteria," he said. "We need money in the hands of entrepreneurs."
Many local banks -- as you might expect -- see it a bit differently. They argue that tight underwriting is what kept them afloat in the recession. But they will certainly lend in the right circumstances, said Joe Stieven, a longtime bank analyst for Stifel Nicolaus who now runs his own firm.
"If there's a good opportunity, local banks are very willing and able to extend credit," he said.
St. Louis, after all, is one of the most competitive banking markets in the country. There are 78 small and midsize banks based here, and dozens more with a presence. And those banks only make money when they lend money.
The trouble comes when businesses seek a loan when what they really need is someone to buy a stake in the company. When it comes to helping entrepreneurship, banks are lenders, not investors.
"They're not supposed to be venture capital funds," Stieven said.
Which raises the question: What about venture capital? And the other forms of equity investment that often fuel entrepreneurship?
Like most of the country, St. Louis saw a surge of venture investing about a decade ago, as money poured into the dot-com bubble. Since that bubble popped, venture capital still flows into industries like biotech, medical research and alternative energy. But St. Louis has fallen behind the pack.
Last year, according to PricewaterhouseCoopers, Missouri drew just $3.22 in venture investment per resident. Minnesota, by contrast, drew $48.52 and Massachusetts, $301.08.
This is a problem, said Marcia Mellitz, president of the Center for Emerging Technologies, because the type of companies that see venture investment tend to punch above their weight in terms of economic activity. They pay higher wages, generate more business for suppliers and, if they successfully develop a new drug or popular technology, can create more jobs.
"There's a lot of money that churns around these companies," Mellitz said. "That's why states go after them so much."
Mellitz's Central West End incubator hosts 27 of these sorts of companies, many of them drug research labs that have spun off from Washington University or local science companies. This is where St. Louis' economy is heading, Mellitz said. Even CET's building illustrates her point.
A century ago, the brick building on Forest Park Parkway was an auto plant, home to the Dorris Motor Car Co. Then it spent decades as a shoe factory, before falling vacant and being rehabbed into CET. Today, it houses a new generation of innovators, and automotive patents from the '20s hang framed on the wall, a reminder of the ideas born here before.
It also illustrates some of St. Louis' challenges.
In its 12 years of existence, CET has helped launch 42 companies. Only one -- medical technology firm Stereotaxis -- has hit the jackpot of a public stock offering. Seed funding and venture capital have been slow to come, and more than one CET company has left St. Louis to find the money it needed to grow.
"These companies have to find money or they die," Mellitz said.
There is still a lot of money in St. Louis -- the fruit of all those big companies down through the years -- but too little of it gets invested in startups, said Jerry Katz, professor of entrepreneurship at St. Louis University.
It's another symptom of our risk-averse corporate culture, he said. The same caution that buffered St. Louis from the worst of the recession makes it hard to grow the companies that will pull us out of it. Venture investing isn't "safe," Katz noted. Even the best investors see half their bets flop. But they make a bundle on the ones that take off.
And when the region does invest in startups, he said, it tends to focus on the "next big thing" -- these days, plant biotech -- pouring resources into one industry while others stagnate.
"The St. Louis way is to bet on a winner," Katz said. "Unfortunately, the ability to predict winners is not widely distributed in our society."
Better, he said, to water the whole garden. After all, the region's roster of winners in recent years has come from all over the map. There's a car rental company, a pharmacy benefits manager, retail investment brokerages, a chain of quick-service restaurants. Not necessarily the industries one might have predicted 20 years ago.
Today, one of the region's fastest-growing small companies is Dynalabs, a drug-testing startup in midtown St. Louis.
It was launched in 2003 by Michael Pruett and Russell Odegard, two Sigma-Aldrich veterans who stepped out to carve their own niche testing the prescriptions that are hand-made by compounding pharmacies, a fast-growing, highly regulated slice of the drug industry. They saw an underserved market and pounced, Pruett said. But they also struggled to raise cash -- no bank loans, no seed capital. Conversations with local venture capitalists didn't get too far.
"St. Louis doesn't fund things they don't understand," Pruett said. "And they really didn't understand what we were up to."
So they burned savings and borrowed against credit cards. Pruett didn't take a salary, and Odegard worked nights after his day job at Sigma. They got a pair of timely loans through city and county economic development agencies, and soon after, business took off.
Dynalabs now employs 19 people and controls nearly one-third of the U.S. market for compound drug testing. Pruett and Odegard are about to launch an easily portable testing system to sell to hospitals, and one wall of the windowless office they share holds mock-ups of the company's new building that's in the works. They're glad they took the leap out of the corporate world.
"(There) you have a lot of ideas, but it can be frustrating, because there are 6,000 people with good ideas," Odegard said. "We were able to take some of the ideas we had and put them into play."
Taking those sorts of risks, and putting new ideas into play, is crucial if our region hopes to thrive after the recession, said Denny Coleman, president of the St. Louis County Economic Council. And that means being more open to people who may not succeed the first time.
"Look at the places that are most successful at entrepreneurship," he said. "You'll find that people not only tolerate, but expect, failure. Then the entrepreneurs seem to dust themselves off and go back at it."
St. Louis isn't quite there yet, Coleman acknowledged. We still tend to dwell on what didn't go right, he said. It's that culture thing again.
"But I think we're starting to change our attitudes towards that."
