Boomtown, U.S.A.

St. Louis’ startup business scene is on the fast track.

 

 

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In February of 2012, FoodEssentials was having a crisis. The company, which performs deep analysis on ingredients liter on food labels, had started off with a bang. Within weeks of launching its website, an out-of-the-blue call from the FDA resulted in a government contract worth $2.4 million dollars over five years to analyze US food and cosmetic products using its unique intelligence and analysis.

Much of what they were contracted to deliver would be world firsts‰ÛÓneedless to say, it was an immense challenge. The company would need to grow its team, but the FDA money was on paper, not in their pockets, and the three co-founders‰ÛÓDheeraj Patri and brothers Anton and Dagan Xavier‰ÛÓhad already invested most of their personal savings. Further complicating the issue, they lived in three different countries on three different continents: Australia, France and the US, and were beginning to have doubts about their business.

“As a startup company, you have to believe 110 percent in your vision and your purpose,” says Dagan Xavier. “But on the other end of the scale, you must be self-reflective at all times and always question if you’re doing it right‰ÛÓ or even if you are the right people to do it.” Amidst the uncertainty, a friend sent them an article about a new business plan competition for funding in St. Louis called Arch Grants, an entity that helps foster entrepreneurship and the city’s rapidly expanding startup scene. Just like it has for dozens of other fledgling businesses, St. Louis was about to change everything for FoodEssentials. Startup DNA Although the St. Louis startup scene’s recent momentum has been making news as of late, a vibrant startup business culture is nothing new to the region.

St. Louis is a city built on entrepreneurial spirit, from its founding fathers’ fur trading posts to mega-corporations like Anheuser-Busch, Brown Shoe Company and Purina Mills. The city flourished, as did its business leaders, and people like August Busch and Purina Mills founder William Danforth helped create a city that greatly valued and supported innovation.1 That spirit had all but faded away by the 1990s.

“There was a period of slowdown,” says Dr. William Peck, director of the Center for Health Policy at Washington University in St. Louis, who had served on the board of Innovate St. Louis, an organization focused on accelerating successful innovative entrepreneurship in the St. Louis region.

The notion that businesses were leaving St. Louis goes as far back as Shell Oil’s exit in 1929; more recently, companies like McDonnell-Douglas, Ralston Purina and even Anheuser-Busch were swallowed whole by out-of-town conglomerates. Gradually, the entrepreneurial activity seeped away. Ironically, it would be Peck and William Danforth’s grandson, former Washington University Chancellor Bill Danforth, who would stop the seepage and replenish the waters of innovation. Danforth, recognizing that St. Louis had a strong manufacturing base but little innovation in the plant sciences arena, headed a group in 1998 to develop the nonprofit Donald Danforth Plant Science Center, now a world leader in plant science discovery.

By the time construction of the research building was completed in 2001, the center was an extraordinary success, attracting millions in funding and grants, drawing scientists from around the world, creating dozens of businesses and making many important scientific discoveries. At the time, Peck was transitioning from his role as dean of the medical school to president of the Washington University Redevelopment Program that focused on enhancing the Central West End economically and socially. He, along with Ken Harrington, managing director of the Skandalaris Center for Entrepreneurial Studies at Washington University, saw the success of the Donald Danforth Plant Science Center and thought a similar effort could help spur entrepreneurship in other areas in the region.

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Believing in what could be accomplished, Schlichter moved forward despite the obstacles and found enough people who shared his vision to fund the first competition. When the month-long application period got underway in January 2012, it began to look as though Arch Grants’ naysayers might be right. Only one or two applications rolled in each day. But then, with only a few days to go, five or six applications came in, then the same the next day and the next, until finally, more than 400 applications stuffed the Arch Grants inbox. “We knew we’d have quality companies, given the numbers,” Schlichter says.

FoodEssentials was one of those quality applicants. With Arch Grants just getting off the ground, the founders of Food-Essentials weren’t aware of the competition but had heard of adviser and head judge Jim McKelvey, co-founder of Square, the company that allows credit card transactions via mobile devices.4 Believing that with star power like that, Arch Grants must be on the up and up, they applied.

“We were using it as an opportunity to help us solidify our business plan, not thinking we would actually win,” Patri says. To their surprise, FoodEssentials was named one of 40 finalists, so in 2012 they traveled to St. Louis to give their final pitch in person. Patri and Anton Xavier flew in from Chicago and France respectively, while Dagan Xavier remained in Australia. They were bowled over by St. Louis and what they experienced.

Along with the other finalists, they were taken on a tour of the city, Forest Park and Cherokee Street. They sat in a suite at a Cardinals game, which made a big impression. “It was the first time I’d ever been in a luxury suite. You know, as a little startup‰ÛÓnot having much value in other people’s eyes‰ÛÓwe were treated with respect, as though we could be someone. We were hooked even before we found out that we won.”

That night, back at the hotel, they called Dagan Xavier in Australia and told him about St. Louis’ dynamic new startup scene. “The way that Jim McKelvey talks, the way that Joe Schlafly 5 talks, the way the business leaders in St. Louis talk, there’s something here,” Patri told Xavier on the phone. “They want us here. They are treating us as if they hope we win, but they want us here, regardless.” That was the first taste of real community that the FoodEssentials team had ever experienced, and they decided that night they would relocate to St. Louis whether they won or not. A few months later in May 2012, they were announced as winners, and FoodEssentials relocated to St. Louis and took up residence in T-REX.

Power of Community

Walking the halls of T-REX is never a boring exercise. The walls are covered in signs promoting coding classes and whiteboards filled with scratches of color. The offices range in size from 8-by-10-foot workstations suitable for a single entrepreneur‰ÛÓwhich go for a mere $50 per month‰ÛÓto 24-by-14, $525-per-month suites for multiple workers. Each offers privacy for occupants, but it’s common to see the entrepreneurs chatting in hallways or meeting in the shared conference spaces or kitchens. The offices are not fancy‰ÛÓthese are startups, after all‰ÛÓbut they’re an excellent value for fledgling companies that benefit from shared amenities at shared expense. And there’s a certain energy hanging in the air. Opportunity. Enthusiasm. The face of its mascot, the tyrannosaurus rex, and its motto, “Be Gigantic,” show up on directional signs and Macbook Pros.

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Founded in 2012 by Jerry Schlichter, thanks to his “desire for St. Louis to be seen as a city of significance for the longer term,” the business plan competition awards a total of $1 million dollars to 20 startups each year in the form of individual $50,000 non-dilutive grants. Additionally, two companies are awarded follow-on grants of $100,000 each. 3 Arch Grant winners are provided access to mentors, a variety of pro bono services and affordable office space at T-REX (short for Technology Regional Entrepreneur Exchange). The T-REX facility was created in 2012 to provide startup companies low-cost, flexible office space with the backing of The Partnership for Downtown St. Louis, The Regional Chamber and the City of St. Louis.

Arch Grants stipulates that winning companies must take up residence in St. Louis for one year. The competition is a way for St. Louis to keep its bright young people here while attracting others, and Schlichter believes that makes for a better quality of life for everybody. “No one wants to be depressed about their community,” Schlichter says. “These negative headlines that we’ve seen a lot in the past are really something I wanted to see changed‰ÛÓto substitute for a different narrative.”

And that narrative has been changing. Headlines in publications like Forbes (“Arch Grants: Transforming St. Louis Into America’s Next Startup City”), the Wall Street Journal (“St. Louis On Cusp Of Entrepreneurial Boom”) and Business Week (“More Startups in St. Louis”) herald St. Louis’ transition from “flyover city” to entrepreneur hotspot.

But when Schlichter was getting started, not everyone in a position to fund the cause‰ÛÓwhether corporate purses or individual pocketbooks‰ÛÓthought Arch Grants would succeed. Some were skeptical whether $50,000 dollars would be enough money to get entrepreneurs to relocate to St. Louis or to stay here long-term, citing a lack of future funding, or simply the lure of greener city pastures. Others doubted he’d even be able to raise this amount of funding. Still others weren’t confident the contest would draw many applicants, especially companies with a high chance of success.

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Believing in what could be accomplished, Schlichter moved forward despite the obstacles and found enough people who shared his vision to fund the first competition. When the month-long application period got underway in January 2012, it began to look as though Arch Grants’ naysayers might be right. Only one or two applications rolled in each day. But then, with only a few days to go, five or six applications came in, then the same the next day and the next, until finally, more than 400 applications stuffed the Arch Grants inbox. “We knew we’d have quality companies, given the numbers,” Schlichter says.

FoodEssentials was one of those quality applicants. With Arch Grants just getting off the ground, the founders of Food-Essentials weren’t aware of the competition but had heard of adviser and head judge Jim McKelvey, co-founder of Square, the company that allows credit card transactions via mobile devices.4 Believing that with star power like that, Arch Grants must be on the up and up, they applied.

“We were using it as an opportunity to help us solidify our business plan, not thinking we would actually win,” Patri says. To their surprise, FoodEssentials was named one of 40 finalists, so in 2012 they traveled to St. Louis to give their final pitch in person. Patri and Anton Xavier flew in from Chicago and France respectively, while Dagan Xavier remained in Australia. They were bowled over by St. Louis and what they experienced.

Along with the other finalists, they were taken on a tour of the city, Forest Park and Cherokee Street. They sat in a suite at a Cardinals game, which made a big impression. “It was the first time I’d ever been in a luxury suite. You know, as a little startup‰ÛÓnot having much value in other people’s eyes‰ÛÓwe were treated with respect, as though we could be someone. We were hooked even before we found out that we won.”

That night, back at the hotel, they called Dagan Xavier in Australia and told him about St. Louis’ dynamic new startup scene. “The way that Jim McKelvey talks, the way that Joe Schlafly 5 talks, the way the business leaders in St. Louis talk, there’s something here,” Patri told Xavier on the phone. “They want us here. They are treating us as if they hope we win, but they want us here, regardless.” That was the first taste of real community that the FoodEssentials team had ever experienced, and they decided that night they would relocate to St. Louis whether they won or not. A few months later in May 2012, they were announced as winners, and FoodEssentials relocated to St. Louis and took up residence in T-REX.

Power of Community

Walking the halls of T-REX is never a boring exercise. The walls are covered in signs promoting coding classes and whiteboards filled with scratches of color. The offices range in size from 8-by-10-foot workstations suitable for a single entrepreneur‰ÛÓwhich go for a mere $50 per month‰ÛÓto 24-by-14, $525-per-month suites for multiple workers. Each offers privacy for occupants, but it’s common to see the entrepreneurs chatting in hallways or meeting in the shared conference spaces or kitchens. The offices are not fancy‰ÛÓthese are startups, after all‰ÛÓbut they’re an excellent value for fledgling companies that benefit from shared amenities at shared expense. And there’s a certain energy hanging in the air. Opportunity. Enthusiasm. The face of its mascot, the tyrannosaurus rex, and its motto, “Be Gigantic,” show up on directional signs and Macbook Pros.

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The 4-year-old startup business incubator recently purchased the Lammert Building, a designated city landmark featuring one of Washington Avenue’s most heavily ornamented facades. To enter through its brass revolving door‰ÛÓ inset in an arched wall of dark wood trim and glass that gives it the appearance of a domed mantel clock‰ÛÓis like walking into a past that bustles with the energy of the future.

Occupying five floors, T-REX houses more than 110 startups, as well as ITEN, Capital Innovators, Cultivation Capital, SixThirty and Arch Grants. The facility is also the site of other entrepreneurial activity, such as Startup Weekend and Start-Louis meet-ups. 6 Far more than cheap rent, T-REX and other incubators like it‰ÛÓsuch as CIC@CET (formerly known as Center for Emerging Technologies) in Cortex, Helix Center Biotech Incubator, STLVentureWorks operated by St. Louis Economic Development Partnership, and the St. Louis Enterprise Centers, jointly operated by St. Louis DevelopmentCorporation and the St. Louis County Economic Council‰ÛÓoffer startups community. A software problem can be solved by someone at the company in the neighboring office, while an elevator ride with another entrepreneur can birth an entirely new business.

In 2012, when FoodEssentials won its Arch Grant, T-REX was still located in the Railway Exchange Building, in the former Macy’s office space. “It was an exciting time for us,” Patri says. “Everyone was very excited to meet us, very excited to learn about our company, very positive about everything. We were on top of the world.”

Dagan Xavier, who was still based in Australia, would spend several weeks at a time working in St. Louis, and then return to the company’s operations across the globe. “Just to actually sit in an office and turn around and Dheeraj was there and Anton was there‰ÛÓit was such a surreal feeling,” Xavier says. “And then to sit outside of our office and have other entrepreneurs right there talking, it was like, ‰Û÷This is so strange.’ The excitement was just massive.”

Community building may be inherent in incubator facilities, but it’s also the main mission of numerous organizations that have cropped up to serve entrepreneurs. ITEN was one of the first to create a sense of community. “In the early days, it was just about making connections that didn’t formerly exist‰ÛÓ and it’s still a lot of what we do,” says Executive Director Jim Brasunas, who has helmed the organization since its founding. “The startup ecosystem, if nothing else, is a network of people and organizations that are connected with each other and find each other.”

Still, other organizations have popped up that offer help to the entire startup community and niche groups, particularly women entrepreneurs. Prosper, helmed by Jennifer Ehlin, offers both support and access to Golden Seeds, a female-focused angel network, and Women Entrepreneurs of St. Louis (WEST) organizes events that bring together the brightest and most accomplished women in the region. Just creating awareness about women-led companies is already having an effect. Last year, the 20 Arch Grant winners included only one female-led company, Triflare. This year, there are eight.

For FoodEssentials, connecting with ITEN was a gamechanger. Anyone can join the organization at no cost, and members take advantage of a variety of programs, events and resources geared toward helping tech companies get off to a quick start, including matching them with a mentor and helping with business and concept development. Many companies, like FoodEssentials, also take part in its intensive Mock Angel Program, which helps startups prepare for serious investor consideration.

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Many companies, like FoodEssentials, also take part in its intensive Mock Angel Program, which helps startups prepare for serious investor consideration. While participating in that program, the FoodEssentials founders were introduced to Judy Sindecuse, CEO and managing partner of Capital Innovators, an accelerator based in T-REX that selects 10 startups each year and provides them mentorship and $50,000 in seed funding. 7

Sindecuse encouraged FoodEssentials to apply, and its founders were accepted into the fall 2012 class. By the time they started the program, the company had steady revenue. They had collected and digitized more than 40,000 US food labels. The $50,000 allowed them to grow their team from the three co-founders to approximately 10 full-time staff and 25-30 external part-time data collectors. They were also in need of more executive-level talent.

Given that they were surrounded by tech talent every day within the halls of T-REX, they were able to quickly find Ronak Sheth, a graduate of Washington University Olin Business School’s MBA program, who at the time had taken office space at T-REX in the hopes of starting his own business. He now serves as FoodEssentials’ chief product officer.

A widely recognized benefit of a vibrant startup culture is creating jobs for a highly skilled workforce. “St. Louis has great universities 8 and a lot of talented people,” Patri says. “A lot of times they leave to go to Chicago, New York or Silicon Valley because that’s where they all think they need to go, because they’re very smart and they want to do something big. We’re trying to show we’re in St. Louis and we’re also doing something big.”

Show Me the Funding

When FoodEssentials graduated from Capital Innovators in December 2012, they were already in a courtship with Cultivation Capital, a venture capital firm founded eight months earlier by serial entrepreneurs Jim McKelvey, Rick Holton and Brian Matthews. FoodEssentials was now looking for a different level of funding: not tens of thousands, but hundreds‰ÛÓa major investment was crucial to allow FoodEssentials to add staff and concentrate on scaling their business and technology.

Cultivation Capital is well-known for its extensive vetting process of any company in which it invests, so much so, that it almost serves as a green light for other potential investors. In March of 2012, the FoodEssentials team was feeling the pressure.

“We went through a lot of due diligence with them,” says Patri. “I remember we were going on a trip to SXSW with several other startups, and I had been up all night trying to close the round. I sent my final documents at 3am.” At 5am, he had received an emailed reply saying the company had been approved. The investment, led by Cultivation Capital, totaled $600,000 dollars.

One month later, FoodEssentials was selected by Arch Grants as one of two companies to receive additional follow-on grants of $100,000. After struggling for five years in Chicago, the team had found a welcoming home in St. Louis. “Just being in St. Louis, we went from zero dollars to getting $800,000 in outside money in less than one year,” Patri says.

So where was all this money going? FoodEssentials was just starting to get validation of product market fit, meaning it was in a good market with a product that could satisfy that market. As a result, it had signed more contracts. The Cultivation Capital investment and Arch Grants’ follow-on grant allowed the founders to hire additional full-time staff, including senior staff, which allowed them to better execute the contracts they were signing. Their database grew from approximately 40,000 digitized labels to more than 100,000.

“We grew our team further to approximately 15-17 full-timers, all of which were St. Louis locals, and anywhere from 20-50 part-timers, depending on the contracts we were working on,” Xavier says. “To this day, apart from the three co-founders, our team is 95 percent from St Louis. There is a tremendous pool of talent here in St. Louis to pull from and our dynamic, high-performance team is a reflection of that.”

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Problem Solving, St. Louis Style

The talent pool, though growing now, is something that hasn’t always been as strong. And a notable factor in the St. Louis startup ecosystem is that where there has been a weakness, somebody comes forward to strengthen it. Jim McKelvey is one such individual. Although he’s best known as the co-founder of Square, he’s also a major catalyst in the local startup boom. Not only is he a co-founder of venture capitalist firm Cultivation Capital, but beyond that, he has personally invested in approximately 30 startups. He solves problems, often in spectacular ways (see sidebar: “McKelveyed”).

When he and Jack Dorsey‰ÛÓboth St. Louisans‰ÛÓfounded Square, they did it in Silicon Valley, not St. Louis, because there simply wasn’t enough local engineering talent. They did try to open a St. Louis satellite office but found they couldn’t even do that. This lack of engineering talent was and still is a problem with the ecosystem.To help remedy the situation, McKelvey co-founded LaunchCode, a program that fills open IT positions by giving those who lack credentials, such as a college degree, an opportunity to apprentice with a company’s experienced developer. More than 100 St. Louis companies are participating, from Express Scripts and Build-A-Bear to FoodEssentials and other startups. Recently, LaunchCode collaborated with edX, offering free HarvardX programming classes in downtown St. Louis. “I think you’re going to see a reversal in the talent shortage, mostly due to LaunchCode and the participation of a hundred companies who are willing to change their hiring practices,” McKelvey says. “That’s the biggest thing you’re going to see.”

McKelvey also founded SixThirty, a financial tech acceletor. Home to Edward Jones, Scottrade, US Bankcorp and other industry giants, St. Louis is recognized as one of the largest financial services hubs outside of New York, but the city lacked financial technology startups. McKelvey’s answer was SixThirty, an accelerator that each year offers eight FinTech startups $100,000 each, plus mentorship, pro bono and discounted legal and accounting services, web hosting and office space. SixThirty‰ÛÓnamed for both the height and width in feet of the Arch‰ÛÓis backed by the St. Louis Regional Chamber and Cultivation Capital.

Gabe Lozano, founder of LockerDome, one of St. Louis’ startup jewels, also recognized a shortage of coders, who are critical to a startup ecosystem. Lozano’s response? He founded GlobalHack, a nonprofit organization that hosts “hackathons,” where coders work in teams to solve one company’s programming issue with a prize of $50,000 and the ability to keep the intellectual property for whatever they build. The idea is to attract coders to St. Louis, and it’s working. “A side benefit is people can get hired,” Lozano says. “TopOpps hired 10 people from the first GlobalHack event, and that’s incredible. Almost its entire company was hired from GlobalHack.” A second GlobalHack will take place Aug. 22-24 in the Cortex Innovation District.

Lozano believes that what sets St. Louis apart from other cities is that people here are inspired to greatness. “St. Louis was one of the greatest cities in the world at one point, and people want to reclaim that,” Lozano says. “I believe in nine years we’ll be one of the top technology cities in the whole world. That I believe 100 percent.”

FoodEssentials hasn’t received any additional venture capital funds, but the company hasn’t needed them. It is thriving and now has 17 full-time staff members and anywhere from 30-50 part-time workers around the country at any given time. The founders continue to be surprised by the desire of people in the startup community to help them, even when there’s nothing in it for them. “We can see that our success is their success,” Patri says. “We’ve become adept at letting people help us, and when you’re willing to open up yourself to advice from people who are very powerful in St. Louis, they can move mountains for you.”

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1. Founded in 1764 as a French trading post and with the advent of steamboat power about 50 years later, the city grew rapidly. St. Louis industries flourished, including brewing, flour milling, machining, slaughtering, tobacco processing, and to a lesser degree, the manufacture of bricks, iron and paint. By 1880, the city was the fourth largest in population and as measured by its manufactured products. In 1890, more than 6,100 factories were in operation. 2. The startup “ecosystem” is a word used by people in the industry to describe the interconnected nature of the environment in which startups thrive. There are dozens of other organizations, accelerators, funding organizations, venture capitalists and individuals who are dedicated to a strong startup ecosystem and the city of St. Louis. As the name “ecosystem” implies, there are many elements involved, all interconnected, and all necessary for the health of the overall system. See infographic: “It Takes a Village.” 3. As a nonprofit entity, Arch Grants doesn’t take equity in the companies it funds, unlike other funding models. This allows entrepreneurs to retain their shares to have more to sell when seeking outside investment. To date, Arch Grants has awarded 45 companies a total of $3.15 million. 4. McKelvey has founded or co-founded the following companies and organizations: Square, Cultivation Capital, SixThirty, LaunchCode, Third Degree Glass Factory, Mira Inc. and GlassFaucet.com. In addition to serving as head of Arch Grants Advisory board, McKelvey is also an adviser to LockerDome, Aisle411 and Kabbage. See sidebar: “McKelveyed” and infographic: “It Takes a Village.” 5. Joe Schlafly is a co-founder and board member of Arch Grants and currently serves as chairman of the Missouri Biotechnology Association. He also serves as a board member of BioSTL and Innovate St. Louis. He is also senior vice president of Stifel Capco LLC and serves as president of a group of venture capital funds of Stifel Financial Corp.6. Both events bring local entrepreneurs together. At Startup Weekend, people pitch ideas, form teams and spend 54 hours creating a business model and validating the market. The St. Louis Startup Challenge is a business plan competition with no-strings-attached cash prizes. 7. Ranked by TechCrunch as the seventh top tech accelerator in the US, Capital Innovators provides startups $50,000 in seed money, mentorship and networking over 12 weeks. To date, CI has also provided $75 million in follow-on funding to graduate companies. 8. Universities are a fertile source of top talent, whether turning out business creators or the tech talent like coders and software engineers that are necessary to make tech companies run. St. Louis is rich in universities with entrepreneurship programs: Wash U’s acclaimed Skandalaris Center, SLU’s Entrepreneurship Program and Center, and University of Missouri’s Center for Entrepreneurship.

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IT TAKES A VILLAGE TO SUPPORT A STARTUP BOOM.

The success of St. Louis’ startup scene is largely credited to the complex ecosystem supporting it. From the organizations cultivating talent to the facilities where ideas can be incubated to the funders who back it all, St. Louis is quickly becoming known as a city where innovative companies and talent go to thrive. Here’s a snapshot of the who, what and where behind it all.

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HOW TO SUCCEED IN STARTUP BUSINESS WITHOUT LEAVING ST. LOUIS

We’ve all heard the classic business mantra, “start anywhere, go anywhere”‰ÛÓand it definitely holds true for St. Louis’ thriving startups. Follow along the paths of 10 of STL’s biggest startup successes to see how they went from brilliant idea to booming business.

 

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