Venture Capital Checkup: Young companies illustrate improving entrepreneurship climate

Weight, blood pressure, wellness questions — a visit to the doctor’s office today generates a lot of data.

Although this provides crucial insight into a patient’s well-being, it’s only a snapshot. Relying on this episodic information alone can leave caregivers blind to daily changes or concerning trends that develop between visits.

Blake Marggraff wants to fill in those blanks.

The concept came to him while he was a student at Washington University in St. Louis. It’s an automated text messaging system that collects data from patients each day and sends it to their caregivers, helping clinicians spot patterns and identify problems during the times between in-person visits.

In 2015, he founded a company based on this idea: Epharmix. But to make it a reality, he needed funding.

As a California native who grew up near Silicon Valley, it would seem natural for Marggraff to take his idea back home. Instead, he’s found early success in St. Louis, raising $5 million from local and national investors and building a strong leadership team. Just as important, the startup found early clients in the region’s health care industry, which has helped the company find its footing and begin to expand.

“Because this is an excellent spot to obtain health care customers, we decided to keep Epharmix in St. Louis,” Marggraff said. “We’ve grown from nothing to a couple dozen customers, tens of thousands of patients under contract across twelve states, and seven-figure revenue.”

Marggraff’s experience highlights how the startup ecosystem in the St. Louis region — and across Missouri — is on the up-and-up.

In 2012, St. Louis startups garnered only $35 million per year in venture capital, which nowhere near reflected the size of the region’s market. In contrast, the amount of venture capital flowing into similar Midwestern cities at the time ranged anywhere from $200 million to $750 million.

Thanks to concentrated efforts by the region’s investment firms and innovation districts, funding invested in St. Louis startups in recent years has reached more than $260 million annually and continues to grow, said Elise Miller Hoffman, a principal at Cultivation Capital, a technology and life sciences fund based in St. Louis.

“We cannot just try to mimic Silicon Valley in order to grow our startup ecosystem,” Hoffman said. “We need to think strategically about what our strengths are as a state and build upon those strengths when we’re creating these ecosystems to support our entrepreneurs.”

Hoffman said two of the region’s biggest strengths are a central location and low costs.

“It’s cheaper to have a company here in St. Louis and the Midwest. It’s also 45 percent less capital required to maintain your ownership levels in a company,” she said. “So that’s one reason we say, ‘Hey, Bay Area, you’re doing amazing things. But we’re going to try to capitalize on those markets that don’t have as much venture capital.’ ”

Although the venture capital situation has improved in Missouri, finding investors remains a challenge. It’s just no longer an insurmountable challenge.

That’s what Abby Cohen discovered when she co-founded a health information technology company in 2012. Like Marggraff, Cohen was a student at Washington University when the entrepreneurship bug bit. Her company, Sparo Labs, offers digital pulmonary rehabilitation classes for homebound patients and a medical device that measures lung function.

While in college, Cohen entered several student business competitions, several of which she won. To move beyond the seed funding stage, she then set about the long and highly competitive process of raising venture capital. The key, Cohen said, is finding potential investors with a background or interest in your startup’s field and building those relationships.

Andrew Brimer and Abby Cohen, co-founders of Sparo Labs. Photo by Janet Prenger.

“No one’s going to give you $500,000 or more after meeting you one time,” she said.

The partnerships she developed have paid off: Sparo Labs raised more than $1.8 million by 2018.

The young company also has benefited from the local higher education community.

“Where we’ve seen our greatest success is actually from hiring students or new college graduates,” Cohen said. “That’s been a big piece for us that has kept us here, the university talent that we’ve pulled out of Wash U, Rolla, et cetera, who really want to stay here.”

This is a trend Hoffman has seen among startups across the region.

“When it comes to talent, we want to have a thriving, vibrant startup community that brings in talent. And here in St. Louis, to me that means bringing in folks to our top-notch universities,” Hoffman said. “They come for the education, and they stay because they want to be a part of the St. Louis startup ecosystem.”

To take the local startup scene to the next level, Cohen and Marggraff encourage established companies to support young businesses by becoming “angel customers.”

“Set aside a small number of dollars as an angel customer for a company and agree to be patient with that company as its early team learns,” Marggraff said.

He said taking a chance on a startup as a customer can create a win-win scenario regardless of the startup’s long-term outcome. If the startup eventually fails, Marggraff said, it will still have made progress toward solving the customer’s problem while tapping into talent within the community. If the startup succeeds, the early customer gains a preferred, deep relationship with a partner that has the potential to continue being even more innovative than a big company might have the flexibility to be.

Cohen shared the sentiment, saying an angel customer relationship not only helps the customer and the startup, but the whole region as well.

“There can be sort of this gap where maybe you get capital from the area, but you don’t necessarily get your customers from the area, and then that’s not really actually great for the region,” she said.

With the growth in venture capital and the success of young companies like Epharmix and Sparo Labs, Hoffman said Missouri is positioned well to be home to the next wave of entrepreneurship.

Now, people just need to know about what’s happening here.

“What we need to do now is really come together as a region and understand how we can come together collaboratively and tell our story,” Hoffman said.

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