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With more than $1 billion in bets placed on startups in just the last few years, St. Louis has rightly earned a reputation as one of the fastest-growing U.S. innovation hubs outside the coasts. The most recent data from the U.S. Census Bureau on “new firm births” shows that the Gateway to the West has not only surpassed pre-2008 highs, it is also seeing record job creation from small firms that are less than a year old (i.e. startups). There is an undeniable sense of optimism and energy surrounding the region’s entrepreneurial ecosystem.
When compared against its regional peers in the Midwest, St. Louis looks particularly strong. Proprietary research by the St. Louis Regional Chamber and Startup Genome in 2017 showed that startups in St. Louis have a better chance of getting funding than those in nearly any other major U.S. city. St. Louis consistently ranks among the top three in the Midwest for overall startup activity. And building on its tremendous strengths in biotech, St. Louis is beginning to attract attention as a global epicenter of AgTech innovation as cited in a recent Brookings Institution study.
Still, the future is by no means certain. Despite its strong momentum, St. Louis is rapidly approaching an inflection point in the development of its entrepreneurial ecosystem. If the companies that have received a portion of that $1 billion in venture funding continue to scale and generate exits and returns for investors, St. Louis will benefit from a “virtuous cycle” of increased confidence, risking risk capital, and talent retention. On the other hand, if too many funded companies fail, the ecosystem itself is at risk of entering a vicious cycle of decreased confidence, declining investment levels, and talent out-migration.
In a sense, medium-sized ecosystems such as St. Louis are not “naturally occurring” phenomena like the mega-systems on the coasts. They’re more like terraformation projects. A lot of things have to go right over a relatively long period of time before they become truly self-sustaining.
What lessons can other cities learn from the still-unfolding St. Louis startup story?
1. Start by building the trusted referral network
St. Louis is reaping the rewards of a deep ecology of entrepreneurial support organizations. Groups like Arch Grants have established a kind of distributed due diligence process that validates concepts and management teams. Over 83% of companies that have received an Arch Grant since 2012 are still in business. The $6.2 million in grants Arch Grants has distributed has led to over $170 million in follow-on venture capital. The lesson here is that quality matters, and a region must have a trusted referral network in order to evaluate quality. Indiscriminately blanketing a region with seed funding is not a viable long-term strategy.
2. Build on native strengths
St. Louis’ innovation scene is heavily weighted towards a few key sectors, especially biotech, fintech, cybersecurity, and agtech. The region has a long history of natural economic strength in these fields thanks to housing leading multinational corporations, research institutes, and universities. As a result, there is a natural inflow of talent, ideas, and capital to the entrepreneurial ecosystem.
3. You can’t go it alone
Between 2005 and 2012, the St. Louis region saw total venture capital investments averaging $96 million per year. Since 2013, the total has averaged over $340 million per year – a 256% increase. While local capital is vitally important, especially at the seed funding stage, a significant percentage of that new venture money is coming from outside the region. Because St. Louis invested wisely in a trusted referral network, many of its startups have scaled to the point where they can compete for investment dollars with their coastal counterparts. Varsity Tutors, Lockerdome, and FinLocker are just a few companies that have attracted significant coastal funding. To their credit, St. Louis venture firms have actively sought co-investment from outside the region by building relationships with their peers around the country.
Nothing is guaranteed in entrepreneurship and innovation. St. Louis still faces significant risks and challenges ahead. But the region’s adherence to these three guiding principles has given it an astonishing shot-in-the-arm and a great chance for success.
Early stage investment remains critical to St. Louis’ entrepreneurial ecosystem. Groups like Arch Grants, St. Louis Arch Angels, The Yield Lab, Stadia, SixThirty, SixThirty CYBER, and Capital Innovators are vital assets that must continue to receive funding if St. Louis wants to retain its gains, let alone compete with top innovators on the coasts.
In order to sustain momentum, the region must continue to support existing startups while also funding new ones. We must push for stable, meaningful levels of state funding for innovation activities. We must continue celebrating successes and supporting the organizations that serve as the “aquifers” of innovation.
To read the full 2017 Greater St. Louis Venture Capital Overview, click here.