When looking for the initial jolt that put St. Louis’ booming startup culture into motion, much of the credit can be traced back to the formation of the St. Louis Arch Angels, a nonprofit angel-investment group launched in 2005 by the St. Louis Regional Chamber and Growth Association and the Nidus Center for Scientific Enterprise. The organization provides between $250,000 and $1 million in early-stage capital per company.
Almost as important as the funding it provides is the blueprint Arch Angels has laid down for what can happen when a group of private investors—CEOs, venture capitalists, entrepreneurs, and others—come together to help local companies turn ideas into full-fledged businesses.
“It grew very rapidly,” says Gilbert Bickel, chairman of the St. Louis Arch Angels and a senior vice president of investments at Wells Fargo Advisors. “When we started, we thought that we would be a success if we had invested $5 million in five years. Within five years, we had invested between $17 million and $19 million.”
Angel funding is made by wealthy private investors who are using their own money, rather than by professional firms, as is the case with venture capitalists. Venture-capital funding, which is usually larger than angel investments, is made using money from institutional and high-net-worth investors.
At the outset, the bulk of the Arch Angels’ funding was going to new companies in the medical sector—businesses making medical instruments, creating new technology, or working within the drug market. “IT was still very much in the background,” Bickel says. “The tech sector had never been a piece of our business, and then in the latter part of 2010 and early 2011, it just started to explode.”
One factor in this explosion was the involvement of Rick Holton Jr. and his brother Rob, both of whom are engineers with an interest in funding tech startups. The brothers attended a meeting of the Arch Angels and came away impressed. While the Arch Angels had successfully provided millions of dollars to fund startups in the city over a five-year period, Holton also saw the upside of expanding the program into the technology sector.
“There is this tremendous infrastructure for life sciences, but the problem is that it takes so long for people to see a return on their investment,” Holton says. “People could have funded for 15 years before they see a return. These companies aren’t dead; they just haven’t returned the investment.”
Cultivation Capital is a venture capital fund that grew out of the Arch Angels and invested $1 million in tech startups within its first several months. Holton says that the goal for the firm is to have $100 million in deployed capital within five years.
Besides his investments through Arch Angels and his work with Cultivation Capitation, Rob Holton Jr. also sits on the board of Arch Grants, which gives $50,000 to the local startups it funds. He also led the formation of Venture STL, which serves as an umbrella organization for much of the entrepreneurial and startup activity in the city and has the ambitious goal of helping to start more than 2,020 local companies by the year 2020.
Bickel says that at least 50 percent of the people who pitch Arch Angels for funding now come from the IT sector. While it is very rare for a tech company to turn into the next Google or YouTube, this momentum in startups could one day mean jobs for the middle-market economy in St. Louis. Bickel predicts that within two years, the city will have more than 100 active IT companies.
“What we have found is that these companies have three to four employees, and then they get off the ground and gain traction and are no longer working for peanuts,” he says. “The real impact then is the people that are working with them to write code, do market research. There’s a multiplier effect.”
One of the biggest tech startup successes thus far has been LockerDome, a social media site that connects sports fans with teams and athletes. The company, which is now partnered with USA Today, received an early $250,000 investment from Cultivation Capital. Holton predicts that LockerDome could be valued at a billion dollars in the next decade.
Meanwhile, Bickel speaks excitedly about all the collaboration and startup activity that is happening in the city. “The entrepreneurship in St. Louis is on fire right now,” he says. “Every night when I leave [his job at Wells Fargo], I’m going home and getting on my computer and working on all of these projects we are helping to fund.”
One of the keys to keeping the momentum going will be finding more investors with “patient capital,” says Bickel. This means people who are willing to invest in companies with the understanding that the return on their investment could take years to materialize.
While Cultivation Capital has been a successful venture capital fund since launching out of the Arch Angels, the reality is that local entrepreneurs don’t have access to the same amount of venture money that exists in cities like Boston or San Francisco, which are hotbeds for venture-capital firms. Furthermore, the amount of available venture capital is declining across the country. The U.S. deal volume dropped to 752 deals in the first quarter of this year, from 800 in the fourth quarter of 2012, according to the Dow Jones VentureSource quarterly report. The amount of dollars invested dropped to $6.4 billion for the first quarter of 2013, from $7.2 billion invested in last year’s fourth quarter.
“We are aware that the number of venture capital firms is declining very rapidly, principally because the results aren’t very good,” he says. “So our biggest challenge is going to be raising patient money that will see these things from the beginning to the end.”