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How did St. Louis become an entrepreneurial boomtown?

How did St. Louis become an entrepreneurial boomtown?

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To many Americans, St. Louis is known for urban dysfunction and slow economic decline. It’s one of those places where every year or two another big homegrown company seems to get bought by outside owners.

But the city that has lost so many big old companies is becoming home to a lot of small new ones. Last year, Popular Mechanics deemed St. Louis to be one of the 14 best startup cities in America; in January, Business Insider said it had the “fastest-growing startup scene” in the country.

St. Louis is a long way from becoming another Silicon Valley. But its sudden emergence as a hotbed of entrepreneurship holds lessons for a country struggling to make a growing economy benefit Americans who don’t happen to live in a handful of booming coastal megalopolises.

For decades, St. Louis followed the familiar economic development playbook: try to attract big out-of-town companies, or keep local ones from leaving, by showering them with tax breaks and other subsidies. While it hasn’t exactly abandoned that old strategy, St. Louis has increasingly shifted to a new one of attempting to grow its own small firms, and it appears to have hit on the right formula.

The numbers don’t lie. Business creation in St. Louis has risen every year since 2009, jumping 18 percent from 2012 to 2013, a year business creation actually fell nationally. In 2006, St. Louis was 11 percent below the national average in the number of new firms per 100,000 people. By 2012, St. Louis had narrowed this “startup density” gap to only 3 percent, according to the Kauffman Index of Entrepreneurship.

St. Louis now ranks 26th among the top 40 metro areas by startup density, ahead of some cities that garner lots of attention for their entrepreneurship scenes, such as Pittsburgh, Columbus, Ohio, and Philadelphia.

St. Louis’ startup scene is most noticeable in the information technology sector, led by such firms as the social media company LockerDome and app developers RoverTown and Aisle411. Venture capital companies poured $176 million into area IT startups in 2015, up from $66 million in 2013, according to the St. Louis Tech Startup Report. That is roughly double the figure of Kansas City. St. Louis tech startups employed more than 1,400 people in 2015, up from less than half that in 2011.

In 2015, three new accelerators started in St. Louis, and three new venture capital funds entered the fray. But it’s not just IT and biotech startups that are flourishing. New St. Louis firms are popping in sectors such as education, food, and — in the longtime home of Budweiser — craft beer.

The beginning

The roots of St. Louis’ startup boom go back to the late 1990s, when a group of political and business leaders, frustrated with the metro area’s slow economic growth, began studying how other old industrial cities, such as Boston, were turning themselves around.

They concluded that St. Louis had the necessary resources — highly ranked universities, medical schools and hospitals, plus major research-focused agricultural firms such as Ralston Purina and Monsanto — to become a hub of life science startups. This precipitated the creation of a number of economic organizations that today form a kind of infrastructure for entrepreneurial activity: new investment funds, incubators for companies, new workforce programs.

Two organizations were especially critical in these early years. One was the Donald Danforth Plant Science Center, which opened in 2001 with funding from Monsanto and the Danforth Foundation. It has quickly grown into a world-renowned research facility, attracting tens of millions of dollars in federal grants annually to support hundreds of plant scientists.

These scientists work directly with ag-tech startups developing new strains of crops that have, say, higher nutrition value, or better capacity to withstand the droughts that come with climate change. The center also cofounded the Ag Innovation Showcase, which has become the premier event in the nation around agricultural technology and innovation.

The other key institution was the Skandalaris Entrepreneurship Program at Washington University, begun in 2001 and expanded in 2003 with a grant from the Ewing Marion Kauffman Foundation.

Renamed the Skandalaris Center for Interdisciplinary Innovation and Entrepreneurship, it became a hub of entrepreneurial training and networking, with a mentoring program for budding area entrepreneurs that has proved invaluable.

But by 2008, all this activity still wasn’t generating much in the way of actual economic outcomes. This was partly a result of the inherent cycles of research and development and commercialization in the sectors St. Louis chose to stress. It takes longer to build a plant science company than a new mobile app startup. Then the Great Recession hit, shrinking St. Louis’ per capita personal income by 5 percent that year and eventually driving the metro unemployment rate to over 10 percent.

It was also the year that multinational brewing giant InBev acquired Anheuser-Busch, the corporate crown jewel of St. Louis, and laid off hundreds at its south St. Louis headquarters.

That same year, a former telecommunications manager and entrepreneur named Jim Brasunas had an idea. Brasunas had lived in St. Louis since 1994 and been involved with several technology companies, including running an incubator in downtown St. Louis. In his dealings with tech entrepreneurs around the region, he discovered that they all felt alone in their attempts to build successful companies. Sometimes an entrepreneur and an investor would be on the same flight to San Francisco to talk to venture firms, unaware of each other’s presence.

“After hearing the same story 25 or 30 times, I just started getting these people together casually,” says Brasunas. In 2008, he started a nonprofit organization, the Information Technology Entrepreneurs Network, or ITEN.

Jim Brasunas

Jim Brasunas, the founding executive director of ITEN.

To get his operation off the ground, Brasunas applied for funding from the Missouri Technology Corporation, or MTC, a public-private investment fund controlled by the state government and championed by Gov. Jay Nixon. The MTC’s very existence was another example of the change in thinking about how to jump-start economic growth. Over the next eight years, ITEN helped catalyze the entire entrepreneurial ecosystem in St. Louis. Today, many entrepreneurs and others give a huge amount of credit to Brasunas and ITEN for building connections and thus creating a new network of entrepreneurial support.

Three years later, the MTC made another shrewd bet: It put seed money into a new program, called Arch Grants, with a model for economic development unlike any in the country. The organization runs a global competition to identify potential entrepreneurs from virtually any industry sector. It then provides those with the most promising business plans $50,000 equity-free grants and pro bono support services if they agree to build their businesses in St. Louis. Even more important than the money, Arch Grants helps these emerging entrepreneurs connect with each other.

By 2013, all of this activity was bearing fruit. That year, the St. Louis Regional Entrepreneurship Initiative Report released an analysis of entrepreneurial activity and deal flow. According to the report, in 2007 only 11 companies reached “validated startup status.” (This was judged to be when a company reached milestones such as going through an accelerator, receiving equity investment, completing an intellectual property license and so on.) By 2012, 42 companies had become validated startups.

The composition of startups receiving equity investments had changed significantly. In 2006, two-thirds of investments went to bioscience companies; only a quarter went to tech startups. This reflected the orientation of official economic development efforts in St. Louis. Yet by 2012, the situation was reversed: Tech firms received two-thirds of equity investments, and bioscience companies accounted for one-quarter.

Key differences

In some ways, St. Louis is not unique. What we call “startup fever” has swept the country over the last several years.

Pittsburgh, for example, has been celebrated for its entrepreneurial renaissance, with recognition from various “best places to start” rankings, and an increase in venture funding, new incubators and state programs. But this activity has yet to translate into entrepreneurial outcomes. In 2014 and 2015, Pittsburgh ranked last among large metro areas on the Kauffman Index, with the lowest rate of new entrepreneurial entry, the second-lowest startup density, and even one of the lowest rates of “opportunity” entrepreneurship.

A similar story might be told of cities such as Milwaukee, Cincinnati, and Philadelphia.

What, then, is St. Louis doing differently that might explain its relative success? In a recent article in the journal Innovations, Ken Harrington, who led the Skandalaris Center for over a decade and has been closely involved in the St. Louis startup scene, argues for “connectivity.” In the past, St. Louis was not without entrepreneurial energy, according to Harrington, but it existed in disconnected pockets. This stymied the formation of an “entrepreneurial genealogy” that occurs when successful entrepreneurs from one generation become the next generation’s mentors and investors. This genealogy is a distinguishing characteristic of places such as Silicon Valley.

A metro area without this genealogy needs to create it by bringing together the disconnected pockets. It’s faddish in economic development circles today to talk about collisions. If you create lots of bars and coffee shops and parks, serendipitous unexpected connections will occur: The strategy is premised on people running into each other.

But that’s not what happened in St. Louis. Instead, organizations such as ITEN, the Skandalaris Center and Arch Grants came into being and intentionally and deliberately built connections and networks.

Rovertown co-founders

Rovertown co-founders Jeffry Harrison, left, Michael Rzeznik and Mike Philip. Rovertown offers discounts to college students over their mobile devices.

An example of how this connectivity can work is RoverTown, a startup that provides student discounts through a mobile app. After receiving an Arch Grant in 2013, the company moved to St. Louis from Carbondale, Ill. It relocated to T-Rex, a nonprofit co-working space downtown, went through an accelerator program called Capital Innovators and received a follow-on Arch Grant. It then took part in another program run by ITEN called Mock Angel, which prepares entrepreneurs to make their pitches to equity investors, and secured nearly a million dollars in funding last year. In 2014 it was named the fastest-growing tech startup in St. Louis. RoverTown is not small-time — they have a satellite office in Chicago, and two VPs of GrubHub are on the board. They are in St. Louis by choice.

RoverTown’s experience also illustrates another side of St. Louis connectivity. One of its investors is Tom Hillman, a serial entrepreneur who formerly owned Answers.com, a leading IT firm based in St. Louis. Hillman has become a central figure in St. Louis entrepreneurship and philanthropy and embodies the new entrepreneurial genealogy that has developed in the region.

Challenges

Despite its recent successes, St. Louis faces challenges in sustaining today’s entrepreneurial momentum.

Policymakers in Washington could make the city’s job easier by continuing federal funding and tax credits for research. Remaining economically open and engaged with the rest of the world also is vital, especially for a region that seeks to attract foreign entrepreneurs. And financing is another area where federal policymakers could extend help to entrepreneurs.

But arguably the biggest favor the federal government can do for St. Louis’ startup scene is to change its policies on antitrust enforcement. For more than 30 years, Washington has allowed corporate mergers and acquisitions to take place largely unimpeded, to the point where a handful of huge companies dominate market after market. Most of those behemoths are located in places such as New York, San Francisco, Seattle and Los Angeles. And most startups today, especially in the technology fields, never expect to grow their companies, but instead hope to get bought out. This makes for a useful “exit strategy” for investors.

But it also leads to less competition: Startups seldom get big enough to challenge the incumbents. And it means that smaller cities like St. Louis that have painstakingly nurtured startups are likely to see most of them skip town after getting gobbled up by the Googles, Facebooks and Pfizers of the world. In that scenario, instead of competing in the big leagues, St. Louis would become an uncompensated farm team for San Francisco and Boston.

Dane Stangler is vice president of research and policy at the Ewing Marion Kauffman Foundation. Colin Tomkins-Bergh is a research analyst for the foundation. A longer version of this report appears in the current edition of the Washington Monthly.

St. Louis tech startups, by the numbers

* Some startups in the survey declined to provide this number. 

Source: St. Louis Tech Startup Report, ITEN

CATEGORY 2011 2012 2013 2014 2015
Money invested $12.3 million $30.3 million $66.7 million $155.1 million $175.9 million
Combined monthly revenue * $3.5 million $5.0 million $5.9 million $7.5 million $8.3 million
Full-time employees 601 835 827 1,073 1,461
Part-time employees 57 109 252 386 450
* I understand and agree that registration on or use of this site constitutes agreement to its user agreement and privacy policy.

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