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Serial entrepreneurship in a conservative business town

This article first appeared in the St. Louis Beacon, May 9, 2012 - Sam Fiorello sits comfortably in his office at the Danforth Plant Science Center while he relates a story about a search firm that went through a list of hundreds of candidates seeking a position to head a cutting-edge company.

As Fiorello, president of BRDG Park, a local life sciences campus, tells it, the winning candidate noted that he had started six failed companies and he was glad the firm had chosen him despite that.

“They said, 'We chose you because of that,’” said Fiorello with a smile. “If you go to Silicon Valley, try to start a company and fail three or four times, it’s not the scarlet letter of ‘no, don’t touch this person.’ In fact, it’s assumed you are going to learn something.”

The tale illustrates a challenge that isn’t lost on local leaders who have spent the last decade learning how to build an ecosystem of innovation in St. Louis. Conversations on creating a tech or biosciences hub often revolve around issues of money, facilities, incubators and research but Fiorello’s story reveals an often hidden aspect of giving birth to a scientific or technology-based boomtown: an adventurous culture.

“Risk taking is celebrated, rewarded,” Fiorello said of innovation hubs. “Here we have a Midwestern sensibility and I think we need to continue to build a culture where it’s OK to try something, fail and get another opportunity to try something else.”

That idea defines serial entrepreneurship but it doesn’t always translate easily to St. Louis.

St. Louis is a town where conservative values have deep roots and the business culture has revolved less around iconoclastic, cowboyish figures like Bill Gates and Steve Jobs than it has around a Fortune 500 manufacturing base that seemed to emphasize stability and security over innovation and speculation. St. Louis may have been a victim of its own triumphs, a place that developed a reputation for producing cars, beer and planes -- but not necessarily ideas or entrepreneurs.

With a strong corporate presence driving the city’s economic engine, comfortable long-term employment often seemed a better recipe for Midwestern success than risking it all to make something out of nothing on one’s own.

But that’s precisely what more and more people are coming here to do. Groups and individuals around the area are working to push the envelop and create a new ethos to attract those entrepreneurial pioneers. In the end, it’s a process that’s inextricably tied to money and the flow of venture capital that nourishes new ideas.

Biotech is a promising piece of that pie but it can also be a particularly challenging sell to investors. While new IT or internet enterprises might catch fire or fail quickly, yielding profit or disappointment for their backers within months, the life sciences and medical device fields are a different story. Seemingly endless rounds of research and myriad governmental approvals make for a lengthy and harrowing process that can consume the better part of a decade and burn millions of dollars before one even knows if a product can be taken to market.

It’s a daunting dynamic that requires the right relationships between attitudes, personalities, institutions and money as well a particular environment for nurturing the next spark of genius – wherever it may choose to ignite.

Jockeys, not just horses

Donn Rubin, executive director of BioSTL, describes an almost ideal set of conditions that occurred 10 years ago in St. Louis for startups to thrive: respected medical schools and top-flight research institutions, a newly formed plant science center, big names in corporate science like Monsanto, Pfizer and Sigma-Aldrich. The Gateway City had it all.

Well, almost all.

“What we didn’t have was a robust entrepreneurial startup environment where inventors could easily and successfully start new companies based on the discoveries that were being made at the research institutions,” he said.

The local economy wasn’t based on freewheeling experimentation but on successful companies that often had one thing in common:

“They were started during an entrepreneurial boom a century ago,” he said. “We had lost a lot of that entrepreneurial spirit and the kinds of support systems, risk capital and the kind of culture that accepts and encourages entrepreneurship.”

That started to change a decade ago after an extensive study commissioned by civic leaders. The study cited great potential for biosciences development and recommended creating an environment that could attract innovators to the city.

It needed to be an environment that could attract cash, too.  Rubin noted a woeful lack of capital at the time.

“There were fund managers who were trying to start the first (start up) funds in St. Louis. But what they were finding was that it’s a very conservative financial community that at that time wasn’t investing a lot in venture capital and private equity,” he said.

Those who were making such investments were largely channeling it through gatekeepers on the East and West coasts.

“That money virtually never came back to the Midwest,” he said.

Location was a big part of the issue. Eric Gulve, president of the St. Louis BioGenerator, notes that venture capitalists don’t simply invest and let it ride. They want to have an active role in their new projects.

“They tend not to want to fly somewhere else to have those sorts of meetings,” Gulve said. “It’s not unique to St. Louis. It’s (characteristic of) all the cities in the interior of the country.”

The result of all the new focus on biosciences was the Coalition for Plant and Life Sciences, the forerunner to BioSTL, which began to promote the city nationally. St. Louis leaders worked to develop credible fund managers here in town to bring in cash from the coasts, where half-billion dollar funds dwarfed anything produced locally. The idea was to ensure that companies launched here didn’t find themselves yanked to thriving biotech hubs in Boston or San Diego as they grew and the price tags attached to each funding series got more expensive.

Culture was also a big part of that equation. It was necessary to sustain an environment that brought in people who those who had available money felt comfortable funding.

“What we are learning more and more as we mature is that capital is not the main gap,” Rubin said. “It’s the people who have relationships with capital. It’s the serial entrepreneurs who have been successful in the past and have made money for investors.”

Even a great idea would have trouble getting dollars unless a proven name was on the management roster.

“Venture capital fund managers tend to invest in the jockeys rather than the horses,” Rubin said.

Finding the funding pipeline

Gil Bickel, chair of theSt. Louis Arch Angels, a seven-year-old venture capital group, knows a thing or two about sizing up a good jockey. He said money here is still conservative.

“But in the next breath I would have to say that sources are available for a well-thought-out and well-managed business plan,” he said. “In my mind, I would say we absolutely still have issues in terms of funding companies but I’m really excited about what’s going on in St. Louis.”

He said that the down economy had dampened development. But the culture of late has been “on fire” and as head of a prominent group of venture capitalists, he’s had a good view of the blaze. From its inception several years ago through the beginning of this year, the Angels have put $26 million into 28 companies. Three have succeeded and sold out to larger ventures. Three have failed. The rest are somewhere in process.

However, money is finite; and Bickel said angels, who typically have an upper limit for the percentage of their portfolio allocated to high-risk ventures, are often forced into difficult dilemmas when companies they’ve already funded come back needing more money to keep the ball rolling.

Failing businesses are easy to abandon; but often the returnees aren’t deals that have gone sour. Many times the entrepreneur has hit his or her milestones and needs a capital infusion to move to the next level. Asking for more cash is often an indicator of success, not failure.

Still, faced with constant requests from newcomers, it presents a conundrum.

“The problem is that if you have two or three interesting opportunities coming at you every month, you have a conflict,” he said. “Do I put money in the deal I’m already in or do I do a new deal?”

If the answer is the latter, then the original venture may seek greener pastures in other cities in search of the next, and usually more costly, funding series.

“That’s what I’m trying to prevent,” Bickel said.

Bickel notes that he feels more angels are one answer. He has just more than 50 but he’d like to double that. Other sources of continuing cash are good, too.

“In my opinion, the area desperately needs one or more seed funds, in other words a tub of money that will co-invest along side of the angels or a venture fund so there is that permanent source of capital,” he said.

Disruption, dollars and deep conversation

But money needs ideas and that takes effort as well.

“Basically, we’re interested in letting people play with disruptive innovation,” said Dan Reus. “It’s really a conversation about the future.”

As head of Openly Disruptive, an area group that promotes get-togethers among local innovators with monthly events, Reus is hoping to help define that future or at least help others to define it. April’s event, held in the stylishly gritty, laid-back midtown venue of Plush, explored the phenomenon of community bio labs. Future events will tackle the nexus of science fiction and technology and new ways to invest in local engines of growth.

“People stay for hours and get into really deep conversations talking about working together,” said Reus, whose title is “chief instigator” of the group. “It’s a very inspirational and action-oriented kind of thing rather than just being a polite lecture series.”

Kevin C. Whittington, an attendee at the April gathering, said he feels good about the St. Louis ecosystem calling it “friendly” and “primed.”

“I think we’re really getting there,” he said. “I have to say I’m very positive about what I’ve seen.”

Whittington runs Portfolio Partners, a technology transfer company he founded last summer to help university faculty with promising concepts commercialize their research.  The Ladue High School graduate, who has degrees in biomedical engineering, physics and neuroscience, said the local BioGenerator, university technology transfer offices and area incubators are doing a great job promoting development.

He feels there is still space for more human capital in the city, however.

“One thing I think we do need is a larger pool of capable entrepreneurs to manage this stuff,” he said. “We need people to be on management teams.”

He said another challenge is finding more avenues for early-stage funding. Early-stage funding often comes from nonprofits or academic sources in town. The application and decision processes involved in nonprofit or award-based models, while valuable and necessary, take time.

Whittington said that’s understandable since the high-risk nature of early-stage funding makes such sources the most willing to take it on. A vetting process has to occur even if it creates some delay.

There are no easy answers, he noted.

“You can’t do a shotgun wedding,” said Whittington. “That’s not going to be good for the investor or the entrepreneur over the long term, but we do have time pressures.”

The success of failure

Pete Peters is all about success. But he’s not opposed to failure.

“Failure is an important thing. That’s how we learn,” he said. “Those that win all the time don’t collect as much information along the way.”

Peters is executive director of InnovateVMS, the mentoring arm of Innovate St. Louis, a local nonprofit. He said that while there is still a conservatism to the culture, it is lessening and, like Whittington, he’s encouraged by what he sees.

“There is an upswelling of innovation and entrepreneurship,” he said. “People are willing to take a risk; and if a venture doesn’t make it, those people who are experienced entrepreneurs will come back and start another venture.”

The Arch Angels’ Bickel said thoughtful investors work to analyze what went wrong before simply writing off an entrepreneur whose first gig didn’t work out. Poor management that continues to dump cash into a bad concept is not an acceptable reason for going belly up. But if the technology just didn’t work or the product failed to catch fire, that’s different.

Bickel recalls one CEO who received funding from the organization and admitted early on that he couldn’t get consumers to accept his product at a profitable price and decided he would have to shut down.

“He could have come back to us and said ‘I’m still developing the market’ and extracted more money from the group,” Bickel recalled. “He did not do that, so he got our respect.”

It’s that kind of respectable entrepreneur, Bickel said, who could be funded again. Innovation, money, failure and success often go hand in hand.

Everyone hopes the city can continue its progress. BioSTL’s Rubin notes the study conducted a decade ago spelled out what everyone already knew.

“It really wasn’t rocket science,” he said. “It was the kinds of things that other places had recognized as well, and it was clear we were lacking here.”

“We’ve come a long way,” he added, “but we have a long way to go.”