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As St. Louis’ ecosystem continues to evolve and define itself, more and more attention is being paid to the companies and the innovative minds behind it. And with good reason: According to the Kauffman Foundation in 2015, St. Louis was one of the top 40 metro areas in the country for both startup and “Main Street” entrepreneurs (businesses more than five years old and with fewer than 50 employees). However, many startups in the region still struggle to find enough capital needed to grow their companies locally.
Carter Williams, president and CEO of locally based iSelect Fund, says there are 75,000 to 100,000 accredited investors in the St. Louis region. If just 600 of them invested $50,000 each—the minimum investment in iSelect Fund—it would double the amount of early-stage venture capital here, serving to help develop companies that might be the next big thing in their industry and transform the area.
“Look at Express Scripts or Monsanto,” says Williams. “At one point, each of these companies had just one employee—the guy who started it and persuaded a few other people to invest—and off they went.”
Williams says iSelect discovered that St. Louis investors want to invest in startups, but they’re put off by the prospect of having to put so much time into the process.
“I spoke with one potential investor who told me, ‘I’d like to invest in startups, but I don’t want to do the due diligence,’” says Williams. “He said, ‘I’d really like someone else to find the startups, do the due diligence, tell me a little about them, and let me decide if I want to invest.’”
Minimizing the Risk
“Express Scripts recently invested $25 million in Lewis & Clark Ventures for healthcare innovations. That’s great—Express Scripts can invest that much,” says Williams. “But what if I, as an individual, only have $300,000 or $200,000 to invest? How do I go about it? We’re figuring out a way to pool smaller investments from individual investors to allow them to invest alongside venture capital firms like Lewis & Clark and Cultivation Capital.”
The vetting process for iSelect portfolio companies is, understandably, extensive. A team puts in between 80-120 hours of due diligence per deal and focuses on companies that are moving toward commercialization and have received initial capital from venture capital funds, angel groups, or otherwise, to keep the risk low for their clients. Investments must be a minimum of $50,000, and clients can choose whether they spread that money around or go all in on one company, although they’re encouraged to diversify by investing in 10 or more companies.
Championing Local Startups
Companies within iSelect’s portfolio vary from biotech startups like Euclises Pharmaceuticals, a drug discovery company working with innovative cancer therapies, to Kultevat, a company developing a technology that creates natural rubber from dandelions.
Crazy for Education, an iSelect portfolio company launched by Dr. Renato Cataldo in 2013, provides a software platform for educators utilizing flip teaching, a technique that “flips” the traditional classroom teaching model. The instructor creates a video of a lesson, which students then watch on their own time. During school hours, students complete what would have been a homework assignment, increasing student engagement with the material.
Cataldo has benefited from iSelect’s approach, saying his participation in the iSelect portfolio has allowed him to get in front of interested investors to whom he normally wouldn’t have access.
So far, Crazy For Education has received just over $166,000 from iSelect investments in 2014 and 2015. Most of that funding has been invested into research and product development, such as a version of Crazy For Education’s platform specifically for the healthcare market. With the help of iSelect’s investors, Crazy For Education tripled its income from 2014 to 2015 and will be adding 1,500 new lessons in 2016, compared to about 1,000 added last year.
Beyond capital, Cataldo says another boon of working with iSelect is the time he saves. “I don’t have to talk to anybody,” he says, adding that if individual investors come to him directly, it means a lot of work ensuring they understand the company and the rules of the investment game.
“Over the last year or two, iSelect has become my biggest investor,” he says. “The people who invest in them are aware of my company. They do a great job of explaining things. On my books, I just have one investor, but that one investor increasingly becomes more generous.”
Advancing The Region
Growing companies locally is part of a bigger picture for iSelect. The fund intends to invest in 20 more companies over the next year. Whereas in the past it typically raised between $400,000 and $500,000 for their portfolio companies, by the end of 2016—depending on deal flow—the company expects to invest an average of $1 million per new company, in addition to follow-on investment in current companies.
The projected increase in dedicated capital ties in with Williams’ confidence in the region. He counts St. Louis in the top tier of regions in terms of growth, with entities like Cortex, The Donald Danforth Plant Science Center and the Downtown Innovation District full of entrepreneurs creating groundbreaking new companies.
“Investing in these startups will increase the local GDP,” says Williams. “These are companies that are really going to make a difference. They could be the next Square or Monsanto.”
But all too often, investors look to other regions, forgetting the potential in their own backyard.
“The reality is, if you’re going to build a company that’s going to do something different, in health care, agriculture, energy, chemicals, or industrial products, St. Louis is one of the best places to do that,” Williams says. “There are certain things that Silicon Valley does really well, but there are a bunch of industries where they’re not so good. If we want to grow the economy, if we want to grow St. Louis and Missouri and the United States, we need to figure out how to get more capital into great companies. The reason all the jobs are in Silicon Valley is because that’s where the money is. Start putting your money here and that will drive the economy. It’s that simple.”