Few St. Louis entrepreneurs can rival the success of Jim Eberlin.
Within the past two decades, the St. Louis entrepreneur has launched and sold three St. Louis-born technology startups. But when Eberlin first sought capital to support his ventures, he had to travel hundreds of miles to find funding. It’s an experience he recounted recently at an event hosted by the Missouri Technology Corp. “I had trouble raising money locally here, so I went to Silicon Valley,” Eberlin said. “It was kind of funny because the investors were like ‘Jim, a tech company in St. Louis? I don’t get it. You guys are known for beer.’”
For much of the past 20 years, startups have often harbored the notion that success meant tying your fate to Silicon Valley, whether it be through sourcing funding there or physically relocating. But the pandemic has served as something of a geographic equalizer. In 2011, Silicon Valley venture firms only invested $3 billion in startups outside of the Bay Area, New York and Boston. Last year, that figure grew to $13 billion, according to data from Washington, D.C.-based venture capital firm Revolution, and it’s projected to continue growing.
That creates an entirely new, and largely wide open, competitive landscape among metro areas that believe their startup communities have what it takes to be the next major tech hub. St. Louis, which in the past decade has experienced significant growth in startup fundraising, lucrative exits and the number of locally-based funding organizations, is certainly in the game. But so are dozens of other peer metro areas.
“Whether we like it or not, we are competing with them,” said Sam Fiorello, president and CEO of the Cortex Innovation Community. “It’s not just that we’re competing with Boston, San Francisco or San Diego, we’re competing with Indianapolis and Nashville and in the food and agriculture sector with places like Madison, Wisconsin, and Des Moines, Iowa. We have to remember that.”
Recognizing that the game has changed, the Business Journal sought to get a clearer picture of the competitive field with the goal of understanding how — or if — St. Louis stands out amongst its metro peers. In doing so, we reached out to Seattle-based financial data firm PitchBook, which offered us some insight on which data points would best be used to measure the health of a regional startup economy.
In examining data on startup funding, exits (including initial public offerings and acquisitions), capital raised by local venture capital firms and startup job growth, the picture becomes clearer: St. Louis is not only on a strong footing when it comes to competing with peer metro areas, it’s showing signs of momentum in two categories key to fueling continued growth: exits and local VC fundraising.
The findings could bolster the innovation community’s claim, being made now to state lawmakers, that their industry represents the future, and deserves more public support, including via increased use of tax credits.
“That entrepreneurial story and strength, we know from the data, moves the needle positively on St. Louis when people are exposed to, with what’s happening and what we have to offer,” said Jason Hall, CEO of the economic development group Greater St. Louis Inc.
A player among peers
One of the most common metrics used to measure the vitality of a city’s startup economy is the amount of venture capital provided to companies located there.
This provides an indicator of the innovation and ingenuity behind a city’s startups and entrepreneurs.
Because venture capitalists are often more willing to bet on cutting-edge, disruptive businesses, this provides an indicator of the degree of innovation within a city’s startup community.
In St. Louis, the amount of venture capital poured into local startups has ballooned in recent years, climbing 303% from $173.4 million in 2014 to $699 million last year. The region's success in attracting startup capital isn't happening in a vacuum; the venture industry at large has experienced a surge, with startups raising a record-high $329.9 billion in 2021, according to Pitchbook. That almost doubled the 2020 total, which was also a record amount at the time.
As venture capital dollars flow more easily into startups, metro areas in the Midwest, Rust Belt, and parts of the Southwest and Southeast are starting to gain a greater share of the dollars compared with the typical major tech hubs like Silicon Valley. The Midwest in particular is a region that PitchBook analyst Kyle Stanford says has been historically “underserved” in terms of investment.
As the data show, St. Louis ranked 34th in the country in total venture investment into startups between 2014 and 2021, pacing well off the biggest tech hubs but placing in a position to be competitive with other upstart peer markets in our analysis. And that competition is getting stiff. Consider Columbus, Ohio, where companies raised $1.6 billion in 2021, up from just $140.3 million in 2014. However, while experiencing growth of their own, cities like St. Louis and Columbus still are tens of billions of dollars behind the nation’s premier startup cities when it comes to venture investment.
Fundraising momentum
In an effort to track current momentum, the charts below show each metro area’s growth in startup fundraising over the full eight-year period represented in the PitchBook data and the more recent five-year period.
For example, when looking at the 8-year period between 2014 and 2021, Denver’s growth in total VC raised was 136%. But for the 5-year period between 2017 and 2021, it sped up to 433%.
The chart is broken up into two categories: the 10 biggest MSAs by total venture capital raised by individual companies from 2014 to 2021 and St. Louis peer markets identifed by the Business Journal.
Dealflow: Number declines, dollars don't
In addition to looking at the aggregate amount of venture funding provided to startups in a city, another way to measure the scope of its startup economy is to analyze the number of individual funding deals to local startups. For cities with smaller-sized startup ecosystems, one or two large funding rounds could account for an outsized portion of a region’s annual venture capital investment. By looking at the number of individual deals, you can get a clearer picture of the true volume of deals flowing into a region.
It can also offer insight into the relative growth stage of a startup community.
St. Louis, for example, was home to 55 and 58 deals in 2020 and 2021, respectively. That’s a smaller number than in 2014 and 2015, the first year of this PitchBook dataset, when the region yielded 64 deals in each of those years. Yet during that same time, we know that the total dollar volume of VC investment into St. Louis-area startups climbed more than 300% between 2014 and 2021. What does that tell us? The individual deals have gotten significantly bigger, which is usually the case as startups mature and reach later stages of development. In 2014, the average VC deal in St. Louis was around $2.7 million. In 2021, it was $12 million.
Such ebbs and flows in deal volume aren’t uncommon. Kansas City startups attracted between 34 and 54 VC deals per year between 2014 and 2021, while Nashville swung between 69 and 113. But in each case, dollar volume during that time also increased, albeit at a much slower pace than in St. Louis (80% for Kansas city and 64% for Nashville.)
On that same token, an increase in the number of deals on its own also doesn’t always signal momentum. Indianapolis startups, for example, have attracted at least 73 deals per year since 2018 after failing to surpass 63 in the three years prior. Yet while the volume of deals has increased, dollar volume over the past five years increased just 53% — not a terrible number on its own, but well off the pace of other peer startup markets.
What does all this say about St. Louis? Even if the region’s deal flow numbers are inconsistent, the dollar amount tied to those deals has grown tremendously, an indicator that the startup landscape here is maturing into more of a magnet for continued investment.
The chart below includes the top 10 MSAs by total venture capital raised by individual companies from 2014 to 2021 and St. Louis peer MSAs identifed by the Business Journal. While only 32 MSAs are shown, each rank value represents the respective market’s standing among all MSAs that PitchBook collects data on.
Tracking exits: A big 2021
The sale or initial public offering of a startup is often offered up as proof that a region’s ecosystem is working as designed.
According to Stanford, the PitchBook analyst, it's an event worth celebration. A startup exit usually involves a financial return for investors as well as founders and employees of the company. That can expand a city’s startup economy, Stanford said, with the proceeds from exits often leading to the creation of new angel investors, mentors, and more seasoned entrepreneurs, all of which help to support and create new companies.
In St. Louis, 2021 marked a monumental year for startup exits. Two of its premier startups, Benson Hill and Varsity Tutors, become publicly traded companies through mergers with special purpose acquisition companies. Several other startups — including software firm TopOPPS, e-commerce startup OneSpace and digital health company CareSignal — were acquired. In total, the region had nine exits in 2021, according to Pitchbook. That’s up from two in 2014.
Collectively between 2014 and 2021, the St. Louis region had 37 exits, No. 32 among all metro areas and valued at nearly $1.8 billion, according to the Pitchbook data. But within that data are signs of continued momentum, no doubt fueled by last year's big IPOs. Looking at growth over the eight years of data provided by PitchBook, the number of exits of St. Louis startups increased by 350%, ranking No. 4 among all markets.
The chart below compares the total number of exits — typically initial public offerings or acquisitions — from 2014 to 2021 involving companies in 10 major tech hubs and a collection of St. Louis peer markets identified by the Business Journal.
Included are a series of tables comparing the growth rate of exits within those metro areas both during the total eight-year period and the more recent five-year period, along with their rank.
St. Louis' VCs gain strength
In recent years, coastal investors have expanded their reach inward. A report published in December by Washington, D.C.-based venture capital firm Revolution notes the amount of investment funneled to San Francisco Bay area-based startups “has been on a steady decline.”
Revolution’s report found that Silicon Valley investors provided more than $13 billion in investment in 2021 to companies located beyond the technology hubs of the Bay Area, New York and Boston. A decade earlier, in 2011, the number was just $3 billion. But Silicon Valley’s greater receptivity to backing companies in smaller startup communities shouldn’t discount the importance of having venture capitalists in your own backyard, said PitchBook’s Stanford.
“Very few times are seed-stage companies or early stage — Series A, Series B — companies going to be raising capital from an investor from the Bay Area or an investor in New York, simply because those investors and those large firms don’t have the network in these smaller markets or the access to the startups. The local investors and local funds are very important,” Stanford said.
Among all of the data points in the Business Journal analysis, St. Louis performs the strongest when it comes to the amount of capital raised by locally based venture funds. Since 2014, venture funds in St. Louis have raised nearly $2.6 billion, according to PitchBook, placing St. Louis 24th nationally. Venture firms like RiverVest Venture Partners and Prolog Ventures have long called the region home. And within the past decade, several new venture firms have launched locally, including Cultivation Capital, Lewis & Clark Ventures and SixThirty Ventures.
That’s certainly helped ramp up the growth rate for local VC fundraising, which in the past five years has increased 614%, the 11th highest growth rate in the country, according to the PitchBook data.
But that doesn’t necessarily mean all that capital is flooding into St. Louis startups. During that same period, startup fundraising in St. Louis also increased, but at a much smaller rate: 177%.
The below chart shows total fundraising by venture capital firms located within selected MSAs. The top 10 MSAs were chosen by total venture capital raised by individual companies from 2014 to 2021, while the rest are peer markets to St. Louis identifed by the Business Journal. While only 32 MSAs are shown, each rank value represents the respective market’s standing among all MSAs that PitchBook collects data on.
Startup job growth
Strong startup ecosystems proudly tout their funding figures and company exits, but they also position themselves as a place for entrepreneur and technology talent to converge.
Cities across the country are seeking to boost their technology and entrepreneurial workforce, aiming to become the next major U.S. technology and innovation hub. Earlier this month, the Brookings Institution released a report that described St. Louis as a “rising star” technology city, citing its technology employment growth in recent years. Technology jobs locally grew 3.9% between 2015 and 2019, according to Brookings.
While technology job growth and a vibrant startup economy often go hand-in-hand, Brookings’ report doesn’t break down how much of St. Louis technology job growth stems from early stage companies. To get a better glimpse of job creation among the region’s startups, we’ve utilized state-level job growth figures derived from U.S. Census data. The data, published in the Missouri Technology Corporation’s newly released strategic plan, quantifies how Missouri’s job growth among its younger companies stacks up to its peer states.
Among nine states in the analysis, Missouri ranked fifth in total new jobs created and in companies one year old or less, the category that across all states produced the most new jobs between 2010 and 2020. The chart below shows Missouri’s job growth by company size.
