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Venture capital is increasingly finding its way into St. Louis companies.
By Liese Hutchison
Where does a company go when it needs working capital for growth? Most people would respond “a bank.” That’s one place, but more and more entrepreneurs are also looking to and finding venture capital as a means of financing the growth of their companies. What is venture capital? It is a four- to seven-year equity investment that usually results in the investors being involved at the board level of a company.
“Banks loan money to people who have collateral and the ability to begin repaying the loan,” notes Andy Hoyne, a partner at Armstrong Teasdale who works with the St. Louis Angel Network. The Angel Network was formed earlier this year to help connect St. Louis-based, early stage technology companies seeking investment funding with accredited investors. “And technology companies typically don’t have collateral, or at least traditional collateral, and must often wait several years for revenues that can be used to repay a loan,” he points out.
The Angel Network helps connect investors and companies needing more money than friends and families can give, but less than a typical venture capital fund provides. “Venture capital firms in St. Louis have generally said, ‘We don’t want to get into a company unless the company needs several million dollars.’ We’re the gap between friends and family and $5 million,” Hoynes states. “The Angel Network is a connection service between companies looking for money at the pre-venture capital level and investors.” In 1999 so far, St. Louis Angel Network members have invested approximately $600,000 in five early stage companies.
Hoyne feels that St. Louis has made significant progress providing funding for early stage technology companies, but seed capital availability is still an issue. “I think it’s essential for the stability and growth of our regional economy that businesses are formed and nurtured. For that to happen, we need entrepreneurs who are forming companies. Technology companies need more doors to knock on for funding. We need other angel and venture funds that invest at a seed level to supplement and build upon the current level of activity.”
Gregory R. Johnson, general partner, Gateway Associates, agrees. “We definitely need more seed capital here and eventually more mainstream venture capital,” he says. Gateway Associates has managed venture capital funds since 1984 and raised more than $170 million to date. “Over the years, we have invested more than $37 million in Missouri companies, mostly in St. Louis,” Johnson states. “While much of our early investing was on the coasts, current activity is either regional or Missouri focused.”
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Definitions of Venture Capital Financing
A number of entrepreneurs self-finance their businesses in the initial start up. What follows are the typical stages for financing:
Seed—This small amount of capital, which usually doesn’t exceed $500,000, is provided to an inventor-entrepreneur to prove a concept and to qualify for start-up capital.
Start-Up—This capital is provided to companies completing product development and initial marketing.
Early-Stage—Companies that have expended initial capital, often in developing and market testing, use this capital to initiate full-scale manufacturing and sales. Start-up and Early-Stage financing ranges from $3 to $5 million.
Expansion-Stage—The working capital for the initial expansion of a company that is producing and shipping. Financing amounts range up to $10 million and are typically venture capital funds.
Mezzanine or pre-IPO—Up to $20 million is typically raised by investment bankers from institutional investors to provide cash to the company until it is ready for the IPO.
IPO- Initial public offerings of $25 million or more organized by investment bankers
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Some examples of recent venture capital funding in the St. Louis area include:
- Approximately $20 million to Stereotaxis, a medical technology company located in the Center for Emerging Technologies
- Approximately $85 million to Gabriel Communications, a telecommunication firm
- Approximately $2 million to StreamSearch.com, an Internet search company
- Approximately $3 million to Loansurfer.com, an Internet-based mortgage financing source
- Approximately $2.5 million to Haystack Toys, a toy company.
Recognizing the need for more venture capital in the metropolitan region, the St. Louis RCGA, the Missouri Venture Forum and Technology Gateway Alliance will present a forum for regional companies seeking venture capital. The inaugural InvestMidwest: Venture Capital Forum for High Growth and Technology Companies, will be held May 23 and 24, 2000.
The InvestMidwest Venture Capital Forum will bring together up to 250 of the region’s and the nation’s leading venture capitalists, investors, bankers and accounting and legal professionals to focus on venture capital needs and opportunities in the region. This group of financiers will hear 15 to 20 presentations from “deal ready” emerging growth businesses seeking funding.
The Danforth Foundation and the Kauffman Center for Entrepreneurial Leadership have committed significant capital underwriting investments as charter sponsors of InvestMidwest. The Forum will also be supported through corporate sponsors and funding from the Missouri Department of Economic Development.
“The primary objective of InvestMidwest is to provide access to capital for emerging, privately held companies, and to promote greater entrepreneurship, business growth and expansion in the region,” states Dick Fleming, RCGA president and CEO. Fleming notes that the forum will also enable the national venture capital community to experience the St. Louis market firsthand. “We are rapidly emerging as a community marked by a unique blend of growing small and mid-sized entrepreneurial companies and international corporate headquarters.”
“The St. Louis region is experiencing impressive entrepreneurial growth,” notes Tom Siegel, immediate past president, Missouri Venture Forum and vice president of Advantage Capital Partners. “Our challenge as a community is to support and nurture that growth well into the next century.” The Missouri Venture Forum is a nonprofit organization of more than 260 members that provides a means for investors, entrepreneurs and business advisors to make mutually beneficial relationships, designed to drive new business formation and growth through networking, education and information exchange. “This unique partnership between the Missouri Venture Forum, the RCGA and the Technology Gateway leverages our collective resources,” Siegel states.
Similar successful venture capital conferences have generated outstanding results for their communities:
- the Oklahoma Investment Forum has a record of more than $200 million in capital invested in its presenting companies and more than 5,000 new jobs created during its nine-year history
- the Arizona Venture Capital Conference has been responsible for raising more than $76 million in financing for Arizona businesses during its six-year history.
InvestMidwest presenting companies will be rigorously analyzed and chosen based on several factors: the company management team, marketing strategy, the proprietary nature of their products or services, market opportunity and financial information. The companies will receive presentation guidelines, guidance and expert coaching to ensure the professional level of all presentations.
“The effects from InvestMidwest will be dramatic,” Hoyne states. “The process of applying encourages those companies to say, ‘How can I be a better company.’ Just the fact that this opportunity is out there will motivate them to put out a better product.”
Liese L. Hutchison is an assistant professor in the department of communication at Saint Louis University and a free-lance writer.
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