2017 Greater St. Louis Venture Capital Overview

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1 REGIONAL CHAMBER 2017 Greater St. Louis Venture Capital Overview Andrew G. Smith, VP Entrepreneurship & Innovation

2 2017 Greater St. Louis Venture Capital Overview Total VC Investment Each year, the St. Louis Regional Chamber compiles and publishes data on venture capital investment in the region. Our objective is to provide innovation ecosystem partners with a comprehensive statistical overview of the State of Venture Investment in the St. Louis MSA and to put some of those numbers into a comparative and historical context. The modern era of venture investment in St. Louis began sometime around This coincides with the launch of the St. Louis Regional Chamber s Accelerate STL Capital Initiative. Between 2005 and 2012, the regional economy generated an average of just over $96MM in venture investment per year. Since 2013, the total has averaged nearly $342MM per year, a 256% increase. Source: Greater St. Louis MSA Venture Capital Investments 2017 Greater St. Louis Regional Chamber, May 11, This slight downtrend in our market contrasted with an overall increase in US venture capital investments, which reached $82.4Bn in Using these numbers, St. Louis companies received approximately.4% of total US venture capital last year. Therefore, Greater St. Louis VC investment would have to double to be proportionate to population. One feature the Greater St. Louis market has in common with the broader US venture capital landscape is that money appears to be flowing to later-stage and therefore theoretically less risky opportunities. Just 48 deals in St. Louis closed in St. Louis in 2017, the smallest number since The trend towards a smaller number of deals represents a flight to quality, as venture investors look to de-risk their activities. The average deal size in 2017 was the highest on record, at $7MM. By contrast, the average deal size in 2016 was $5.5MM. Between 2014 and 2015, the average deal was approximately $2.75MM. Source: Greater St. Louis MSA Venture Capital Investments 2017 Greater St. Louis Regional Chamber, May 11,

3 Averages can be deceptive, however. A few disproportionately large deals can skew the numbers and create a false or at least exaggerated impression of local trends. For instance, the 2017 numbers included a $100MM acquisition of Confluence Life Sciences. In order to account for this, we looked at a few different metrics, starting with the median deal size: Here we see confirmation of the trend suggested in the mean deal size analysis. As recently as 2015, just 50% of venture deals in St. Louis were above $350,000. In 2017, the median deal size was just under $1MM. If we extend the analysis further and consider the 75th and 25th percentile bands, the picture remains the same. 2

4 Main Street Entrepreneurship Although this report focuses primarily on high-growth, VC funded startups, it is important to consider the broader entrepreneurial context as well. The most recent data available is from New firm births are on a strong upward trend and have reached the highest levels since immediately prior to the 2008 financial crisis. If we consider those firms with fewer than 20 employees to represent Main Street Entrepreneurship, the trend is even stronger. More than 80% of all new firm births in the St. Louis region were companies with fewer than 20 employees, and the total number of such firm births is at an all time high. US Firm fifth data can be broken down into business categories. The Professional, Technical, and Scientific Services industry includes such key employment categories as Engineering, Information Technology, Consulting, R&D, Biotech, and Life Sciences (among others). In some respects, he Professional, Technical, and Scientific Services industry thus serves as a kind of proxy for the health of a metro area s STEM related business ecosystem. On a percentage basis, St. Louis lags its peer cities in this category. 3

5 How Greater St. Louis Compares National Competition St. Louis would rank 19th among metro areas for total VC investment. Source: National Venture Capital Association, Martin Prosperity Institute, 2016 data Adjusting for population disparities, we can look at the top 20 cities by total VC investment per capita. On a per capita basis we perform a bit worse, with total venture investments of approximately $133 per person. Source: National Venture Capital Association, Martin Prosperity Institute, 2016 data How much can we conclude from this data? Perhaps not so much as to be desired, given the intrinsic disparities in venture funding. More than 80% of all venture funding is concentrated in 10 metro areas. Only 13 cities manage to garner more than 1% of the total funding. In fact, outside of the top 3 markets, only Texas and Washington captured more than a 2% share. The Midwest as a whole represented just 4%. In other words, venture capital is still largely concentrated on the coasts. 4

6 How Greater St. Louis Compares Regional Competition A better gauge may be how St. Louis compares to its peer cities in the Midwest. In this context, St. Louis appears to be punching above its weight. In fact, Crunchbase looked at several factors, including total venture capital invested, round counts, number of startups, and the number of accredited venture investors, and ranked 15 midwestern cities. 5

7 Venture Capital Investment by Industry Biotech represents the largest single investment category in Greater St. Louis by a wide margin. In 2017, over 50% of all venture dollars invested in St. Louis went to biotech enterprises. Across the US, biotech represented 17% of all venture investment. St. Louis clearly has a strong concentration in this area, perhaps one of the strongest concentration among US metros. Over $2Bn in venture funding has gone into St. Louis biotech firms since By comparison, two emerging area of strength for St. Louis Fintech and Cybersecurity have seen just $48MM and $9MM respectively in the same time period. 6

8 Summary and Conclusions While Greater St. Louis continues to rank among the top Midwestern cities for startups, there are some troubling trends in the data: The number of VC funded deals has fallen by almost 2 3 since peaking in The average deal size has ballooned from under $2MM as recently as 2012 to $7MM in 2017 with the median deal size following a similar trend. Our share of total VC funding in the US is not increasing. We are well behind some of our peer cities in terms of VC investment per capita. We are heavily reliant on a single sector of VC investment activity: biotech. We have relatively few exits. We lag peer metros in the growth of our Professional and Technical Services sector. Groups like Arch Angels, Arch Grants, BioGenerator, our array of Accelerators, and the Spirit of St. Louis Fund continue to deploy capital into early stage companies and represent the vital aquifers of the entrepreneurial ecosystem. But the macro-trend is crystal clear: like the rest of the US, we are seeing a shift away from seed stage investment towards more mature startups. What Does It Mean? As with most things, time will answer that question. If the shift leads to more and better exits and ultimately to more jobs then we will likely look back in 3-5 years and describe this as the beginning of a new era of sophistication and focus in how venture capital is deployed into the Greater St. Louis region. That is after all the ultimate goal of risk investment to create wealth for founders, employees, and investors and jobs for a region. However, there is a real risk that by shifting dollars away from smaller, higher risk startups, the region is cutting off future growth potential. Capital markets generally become more efficient as the dollars involved get bigger. The publicly traded stock exchanges, for example, are highly efficient. Similarly, companies that are positioned to raise $5 - $15MM in private capital can reasonably expect that national (and even international) funding will be available to them, regardless of their location. It is at the earliest stage of risk investment that markets are least efficient. For small companies seeking to raise $100,000- $500,000, factors like proximity to capital and access to a strong local ecosystem of validation and support matter quite a bit more. Much of St. Louis success as an emerging innovation economyhas rested on our ability to generate activity (company- and capital-formation) at the top of the funnel. In 2017, the Chamber published proprietary research by Dane Stengler, former head of research for the Kauffman Foundation, showing that startups in Greater St. Louis were more likely to receive initial seed funding than their counterparts in just about any other US metro. The increase in deal size and the contracting number of venture funded deals suggests that this may be changing. It is also possible that we have entered an epicycle wherein all of that early-stage formation activity over the last 5-8 years is now generating exactly what it should, which is follow on investment at higher levels. It does the region little good to create a vast number of new startups only to starve those same startups of the capital needed to pivot or grow to the next stage. The Chamber has described this as the Valley of Death, and has strongly recommended that ecosystem players and investors concentrate on providing late-seed capital to companies coming out of its validation network (Accelerators, Arch Grants, Arch Angels, etc.). The Spirit of St. Louis fund, a fund created by Cultivation Capital, Twain Financial, the Chamber, and a number of area banks, is designed to do just that. On the other hand sometimes the most obvious answer is the right one. It could be that St. Louis is experiencing a more extreme and acute version of what is happening in the broader venture landscape in the US. That would be a deeply unsettling development in terms of prospects for future growth. 7

9 Summary and Conclusions, continued What Is Needed? Early stage investment remains critical to St. Louis entrepreneurial ecosystem. Groups like Arch Grants, Arch Angels, the Yield Lab, Stadia, SixThirty, SixThirty CYBER, BioSTL, BioGenerator 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 innovation on the coasts. Having now invested billions of dollars into startups over the last decade, we have created what might be described as a high class problem: the need to continue supporting worthy startups as they grow and pivot and come back to the capital markets for follow on investment. The Spirit of St. Louis Fund and other late seed-stage venture groups are key players here. There are hundreds of millions of dollars in private investment monies in our region that can and should be unlocked for investment in startups. The state has a role to play here as well. The historical state vehicle for funding startups, the Missouri Technology Corporation, has seen its funding cut to life-support levels. This has had a cascade effect on the ecosystem, as entrepreneurial support organizations see their funding cut and must, in essence, compete with the startups themselves for support. While there may be better long-term strategies for the state in this area such as the creation of a professionally managed Missouri Venture Fund seeded with public and private money the MTC is the only current vehicle. Funding should be restored to historical levels as soon as possible, before the cascade effect becomes irreversible. Furthermore, the legislature should clearly signal that funding for MTC will remain consistent while the longer-term strategy is worked out. This will provide investors and entrepreneurs alike with a bare measure of stability and security as they fund, run, and grow their businesses. The cold, hard reality is that the healthiness of a startup ecosystem is measured more in terms of throughputs than inputs. Unfortunately, throughputs are more difficult to predict and nearly impossible to control. We can (and should) deploy more capital, support more talent attraction, and seed more high-potential startups. These are systemic inputs. The reason we do these things, however, is to generate successful exits for investors and entrepreneurs. Exits are the ultimate throughput metric. Exits serve to validate the work done at the ecosystem level, they effectively brand a city or region, they attract world-class talent, and perhaps most importantly they release capital for re-investment into the next wave of promising startups: The Greater St. Louis startup ecosystem is at a key inflection point. We ve done the hard work of ecosystem-building. We have deployed billions of dollars in risk capital into new ventures. What happens next is largely dependent on the outcomes of those investments. If our startups continue to scale and begin generating a significant number of liquidity events, we will begin to enter a virtuous cycle of re-investment, confidence, talent attraction, and sustainable growth. On the other hand, if our startups fail to generate positive outcomes for investors, we face the prospect of a vicious cycle of capital depletion, skepticism, and talent loss. In this respect, St. Louis is like nearly every city outside the venture hubs of the Bay Area, Boston, and New York. We are waiting to harvest the fruits of our work over the last decade s $100MM acquisition of Confluence Life Sciences was notable not only because of the size of the deal but because it represents one of the first big wins for St. Louis venture investors. There are a number of high-growth, high-momentum companies that have emerged from St. Louis startup scene and are poised for potential exits at some point in the next months: Varsity Tutors, Lockerdome, Plastomics, Gainsight, New Leaf Symbiotics and Finlocker to name just a few. All of our accelerators report rising portfolio values. One of the best things that could happen for Greater St. Louis would be for some of these companies to break through and return capital to their founders, employees, and investors. 8

10 Appendix A: The Aquifers Early stage investment platforms serve as the vital aquifers to the entire startup ecosystem. Here, we review the activities of some of the key early stage capital sources in the Greater St. Louis region. For each entity, we have calculated a Catalytic Factor, which is simply the multiple of total follow-on capital raised by portfolio companies divided by the amount of money invested by the entity itself. Thus, a Catalytic Factor of 10 would mean that the entity s portfolio companies have gone on to raise 10x as much follow-on capital as the entity itself has invested. While this is an interesting heuristic device, it does have its limitations. By definition, the earlier the stage at which an entity invests, the higher its potential Catalytic Factor. A high Catalytic Factor does not necessarily mean that the entity is solely responsible for the success of its portfolio companies, many of which may have gone on to raise follow on capital even without the entity s early support. Nor does it speak at all to the ultimate throughput metric: exits and liquidity events. Finally, the longer that the entity has been in existence, the higher its Catalytic Factor is likely to be. Arch Grants Catalytic Factor: 27.6 Since launching in 2012, Arch Grants, a local 501(c)(3), has attracted and retained 114 innovative startups to St. Louis with $6.2M primarily in the form of $50,000 non-dilutive grant awards. 95 of those companies are still in operation and 88% are still operating in St. Louis. 83% of Arch Grants Recipients have gone on raise additional funding from investors. The total amount these companies have raised stands at over $170MM as of Q Receiving an Arch Grant is one of the best predictors not only of a local startup s funding prospects, but of its long-term survivability and scalability. Arch Grants companies have created over 1,300 jobs in Missouri since inception. What distinguishes Arch Grants from other such competitions around the country is the rigor of its diligence process. Even among top VC firms, a 5 year survival rate of over 80% is exceedingly rare. Among grant-issuers, it is virtually unheard of. The predictive power of an Arch Grants award may be best illustrated by the following chart: This list is not intended to be exhaustive, but it is representative. There are a number of early-stage funders operating in the Greater St. Louis region. We do not have complete data sets on all of them. Arch Grants Recipients have generated over $135MM since Within the next months, the amount of annual revenue will likely exceed the total amount of follow-on capital the companies have raised. This is how successful venture investing is supposed to look. 9

11 Appendix A: The Aquifers Arch Angels Catalytic Factor: 9.2 Established in January 2005, the St. Louis Arch Angels is an independent, not for profit 501c(6) corporation. The group was established to help individual Angel investors work together to mutual benefit, sharing ideas, insights into the market, and expertise. Since inception, the Arch Angels have been vital to the success of the St. Louis Startup Ecosystem by providing seed and early investment to startups in the range of $50,000 to $1,000,000. As of the close of 2017 the Arch Angels cumulative investment in startups comes close to $80 million invested in 91 companies SixThirty Catalytic Factor: 40.5 The oldest of the industry-specific venture funds, Six Thirty launched in November of Since then, it has invested in 37 companies over 9 distinct portfolios. Those companies have created 433 new jobs. All but one of its portfolio companies 97% are still in business. With $3.7MM of its own funds invested, Six Thirty s portfolio has generated $164MM in follow on capital. SixThirty CYBER Catalytic Factor: N/A SixThirty CYBER is the newest of the Accelerators, having launched in November of It has completed 3 cohorts and invested in a total of 11 companies. Those companies are responsible for 142 new jobs. All of its portfolio companies are still in operation. Yield Lab Catalytic Factor: 38.3 In 2017, an Arch Angel company, Confluence Life Sciences, had one of the most successful exits in the ecosystem after being acquired by Aclaris Therapeutics for an estimated $100MM. Capital Innovators Catalytic Factor: 35.3 The Yield Lab was founded in May of 2015 and has now invested in 19 companies. 95% of its companies are still in operation, and they employ 140 people. The Yield Lab has deployed $4.1MM of its own capital, and its portfolio has raised over $90MM in follow-on funding. Stadia Ventures Catalytic Factor: n/a Capital Innovators does not release a publicly available annual report, but their management team reported of more than $8MM invested in 86 startups as of the end of Capital Innovators portfolio companies have raised over $300MM in follow-on capital and have created more than 800 jobs in the Greater St. Louis region. Stadia Ventures launched in August 2015 and is focused on the global sports and entertainment markets. It has completed 6 cohorts, with 25 individual companies receiving funding. 92% of its portfolio companies are still in operation. 10

12 Appendix A: The Aquifers BioSTL Catalytic Factor: N/A BioGenerator Catalytic Factor: 27 Since 2001, BioSTL has laid the foundation for St. Louis innovation economy with a comprehensive set of transformational programs that advance St. Louis leadership in solving important world challenges in agriculture, medicine, health care, and other technology areas. BioSTL has introduced nationally-acclaimed initiatives in startup creation and investment (Bio- Generator), strategic business attraction (GlobalSTL), physical environment (including the Cortex Innovation District and BioGenerator Labs), entrepreneur support (BioSTL Fundamentals), seed and venture capital, a diverse and inclusive workforce, and public policy. BioSTL has recruited startups to St. Louis. Through its GlobalSTL initiative, the organization provides St. Louis companies access to cutting-edge technology to boost their competitive advantage; grants international companies access to prized U.S. customers and strategic partners; and leverages the first two activities to convince these international companies to open a U.S. headquarters in St. Louis; thus creating jobs and bringing economic activity into the ecosystem. Since inception, GlobalSTL has engaged 10 foreign countries, created 11 new direct business relationships, and brought 15 new international companies to St. Louis. BioGenerator, the investment arm of BioSTL, creates, grows and invests in promising companies and entrepreneurs. It de-risks commercially-viable innovations; recruits and advises leadership teams; makes staged investments grounded in rigorous due diligence; and provides free access to wet lab space and research equipment. BioGenerator helps companies navigate the unique challenged of early-stage bioscience company development. Confluence Life Sciences: BioGenerator s largest investment in any single company is paying off for St. Louis. Aclaris acquired Confluence for its world-class research team, intellectual property, and drug discovery assets. Confluence was BioGenerator s first lab tenant and continues to carry out its research there under the leadership of Joe Monahan and Walter Smith. BioGenerator worked with Monahan to form the company, build out labs, purchase instrumentation, develop a business plan, and raise capital to support Confluence s cancer and autoimmune disease drug discovery research. Not only is Confluence producing returns for investors, but Aclaris, which is based in Philadelphia, expects to keep Confluence s operations and 40 scientists in St. Louis, while adding additional talent and expanding its local footprint. Charlie Bolten, BioGenerator Vice-President, served on Confluence s Board of Directors since its founding. We increased our capital commitment over the last two years, including our largest single investment in 2016, Bolten said. Successful companies generating capital return to investors are critical to future growth in the region, and we look forward to additional exits as the BioGenerator portfolio matures. The state-of-the-art BioGenerator lab at Cortex has over 270 users. The organization itself has deployed over $21MM directly into 112 area startups employing nearly 500 people. BioGenerator s portfolio companies have gone on to raise $560MM in follow-on capital. 11

13 Appendix A: The Aquifers OPO Startups Catalytic Factor: N/A OPO is a co-working center for digital Startups. Located in the newly renovated Old Post Office building, the 10,000 square foot facility provides regional startups with affordable workspace and access to mentors, potential investors, programming, educational resources and a community of local entrepreneurs. In , the organization assisted nearly 100 startups and launched 12 via its MTC grant monies. OPO Startups portfolio was responsible for creating over 120 jobs in the region while attracting over $10MM in private, follow-on capital. T-REX Catalytic Factor: N/A T-REX is a non-profit organization dedicated to strengthening the economic vitality of St. Louis by supporting entrepreneurs in the downtown core. It s impact on the regional innovation ecosystem has been significant, with over 1,500 jobs directly created since inception and an annual economic impact estimated at nearly $465MM. More than 200 startups are currently operating out of T-Rex. Nearly 30% of its startups are run by minorities. 12

14 Q&A Is the Greater St. Louis region investing enough in entrepreneurs and startups? No. While we perform well against other midwestern cities, we continue to lag coastal competitors in terms of total venture capital as well as venture capital per capita. We punch somewhat below our weight given our total population, though the same may be said of virtually every city outside of the few true innovation hubs. Early stage startups in our region do not have ready access to coastal capital pools and therefore must rely on local sources of funding. We should set a goal of at least doubling the total amount of venture capital flowing into St. Louis regional startups within the next 5-7 years. Is our heavy concentration in biotech a bad thing? No. While biotech investments tend to take longer to generate returns and generally do not create jobs at the same rate as, say, advanced manufacturing or information technology startups, there is much to be said for playing to our regional strengths. We have a number of key assets in biotech, and it is entirely natural that this would be an area of strength for the Greater St. Louis region. It does, however, have the potential to increase our overall risk profile. The solution is not to migrate dollars away from biotech but to continue to grow capital pools dedicated to other areas, such as fintech, IT, advanced manufacturing, and cybersecurity. traditionally associated with innovation, R&D, and startup growth. Why are exits important? Exits return money to investors and entrepreneurs and serve to validate their choices. Monies returned to investors and entrepreneurs tend to be re-invested in new startups at a relatively high rate. More exits will mean more capital freed up for additional investment as well as more success stories to validate the potential of our ecosystem. Why is stable, meaningful funding from the state important to the regional innovation ecosystem? Midwestern entrepreneurs and startups are at something of a disadvantage in terms of access to capital. Large, coastal investors tend to invest in deals that are closer to them. The early stage capital markets are relatively inefficient. By providing funding to support organizations and individual companies, Missouri can help make up that disadvantage. Investors, entrepreneurs, and talent all need to know not only that the funding is there but that it will continue to be there across political and budgetary cycles. Why is it troubling that the average and median deal size is increasing? This is part of a broader national trend, and therefore should not be overemphasized. Nevertheless, a move away from early seed stage investments could signal decreased appetite for risk among investors. It is worth keeping an eye on. What does the Professional and Technical services sector have to do with entrepreneurship and innovation? The Professional and Technical services sector is a broad category within the federal employment dataset. A much deeper analysis could be performed correlating growth in specific job categories (i.e., electrical engineers, computer programmers, biotech specialists) with innovation ecosystem activity. Such an analysis is beyond the scope of this overview. However, the Professional and Technical services sector does include many of the job categories that are 2017 Greater St. Louis Venture Capital Overview 13 REGIONAL CHAMBER

15 Greater St. Louis Incubators, Accelerators & Innovation Timeline 2003 BioGenerator begins building and investing in early-stage bioscience companies 2002 Cortex Innovation Community Founded September 2001 BioSTL forms to fund STL biosciences 2001 Skandalaris Center formed at Washington University to foster innovation 1998 Center for Emerging Technologies (CET) Founded 2005 Missouri Technology Corporation founded as government entity to empower entrepreneurship in Missouri April 2008 Information Technology Entrepreneur Network (ITEN) formed 2008 BRDG Park Founded at Danforth Plant Science Center May 2009 First Annual Ag Innovation Showcase 2010 Capital Innovators formed to support early stage technology ventures in St. Louis. August 2012 CET becomes an affiliate of CORTEX June 2012 Arch Grants provides equity free grants March 2012 Cultivation Capital Founded 2012 Accelerate St. Louis begins connecting and funding St. Louis startups October 2012 Helix Center is formed as a bioscience incubator 2011 Tech Incubator T-Rex opens its doors August 2013 Global FinTech seed fund SixThirty founded May 2014 BioSTL launched GlobalSTL to attract international innovation to St. Louis January 2014 Women's entrepreneur accelerator, ProsperSTL founded September 2014 AgTech accelerator Yield Lab founded October 2014 Cambridge Innovation Center Opens May 2015 OPO Startups Digital Co-Working Space Opens April 2017 Missouri Technology Corporation budget reduced to life-support levels June 2016 SixThirty launches SixThirty Cyber, an accelerator focused on the emerging cybersecurity industry April 2016 Missouri Technology Corporation budget increased by $7.05 million October 2015 Venture Cafe St. Louis opens in Cambridge Innovation Center June 2015 Global Sports Innovatio investor Stadia Ventures Founded April 2017 Ameren and UMSL announce partnership with Capital Innovators to launch energy accelerator August 2017 St. Louis Regional Chamber, Twain Financial, and Cultivation Capital launch "Spirit of St. Louis Fund 1," an SBIC seed fund August 2017 Confluence Life Sciences acquired for $100MM by Aclaris Therapeutics September 2017 Governor's Innovation Task Force presents options to help establish Missouri as "the #1 entrepreneurial hub between the coasts," including the creation of a professionallymanaged Missouri Venture Fund Infrastructure and Capacity Building Funding and Financing Public Policy 14

16 The Greater St. Louis Venture Funding Landscape 15

17 REGIONAL CHAMBER Special thanks to: Tim Alexander Peter Furlow Adrian Aquilino 16