There is a sea-change taking place in venture capital. At present, about 60% of total venture capital deal volume, and 70% of total deal value are allocated to New York, Massachusetts, and California. However, the VC and startup landscape is beginning to undergo meaningful structural shifts. Here in St. Louis we are proud to be home to one of the nation’s fastest-growing startup scenes. While deal volume and value have decreased on the coasts for the last six consecutive quarters (through Q3 2016), Middle America continues to enjoy strong relative VC deal flow.


The growth of startups in our region is buoyed by a steady increase in larger-scale VC funds, a great funding-exit channel match, and vibrant public-private partnerships. Based on empirical and qualitative factors, we believe the venture capital ecosystem outside of the coastal regions will continue to gain strength, and that this geography is vastly undercapitalized. Funds like ours see opportunity in an undercapitalized environment, and we believe that our region’s startups are strong fits with exit channels in the region, and beyond.

The Lewis & Clark Ventures thesis, that great companies and talent exists in the Midwest, is a bet on our region’s ability to create value and draws upon our team’s firsthand experience in growing and exiting companies in and around St. Louis. As our Fund I completes its first year of deploying capital, and our Plant Sciences Fund starts to pick up speed, we collectively realized that extant venture capital datasets fail to capture the vibrant, and important, Midwest entrepreneurial ecosystem. With this in mind, we decided to research for those of us working or interested in the VC and startup landscapes outside of the regional hotspots that dominate the popular industry reports such as the Venture Capital Dispatch, MoneyTree, and the Venture Monitor. This report intends to shine a light on the changing landscape of 2016 through the lens of investments made, funds raised, and exits achieved, while developing some working hypotheses about the region in 2017 and beyond through an industry-agnostic lens.



Aggregate data from 2016 suggests a mild downturn in the entire venture investment lifecycle across the United States. A slow year in investments is mirrored by an anemic year for the IPO exit market. Fortunately, this weakness does not appear to suggest a new-normal, but rather a mild downturn as increasingly large inflows of capital are being funneled into venture funds. Notwithstanding the importance of these trends, those of us working BTCs need to disaggregate data, as the coasts have been much more sharply affected by the VC downturn than our region.

From quarterly highs in Q2 2015, we have seen a meaningful decline in both aggregate deal volume and total deal value in the United States. While this may not be the much-discussed bursting of the VC bubble, we have seen significant decreases in the volume of national deals. Between Q3 2015 and Q3 2016, there was a 22% decrease in the total number of VC deals in the United States at large, while the BTCs region experienced only an 11% decrease. This resilience increased the region’s relative importance in aggregate data. Over the last three years, the BTCs region accounted for 16% of national deal volume, but in 2016 this figure jumped to 18.5% of total deal volume. We believe that this growth may signal that a long-term correction is taking place toward a more efficient, less regionally-myopic VC market.


This shift is taking place across a variety of channels, but there are a few salient drivers in our dataset. We see that the companies funded BTCs come from different verticals than those on the region’s coasts. While the long-term, nation-wide, trend towards funding IT companies is certainly prominent BTCs, there is a larger focus on the B2B and healthcare spaces, with less representation of businesses that don’t fit within traditional sector boundaries. The forces driving this differentiation are not just VCs, but also the human capital and institutions that exist in the region which help drive the creation of startups.


While the raw numbers behind our region’s startups are interesting, they don’t tell the whole story of how our region differs from that of the coasts. Qualitatively, the technologies being developed and funded on the nation’s coasts are more targeted at disrupting existing industries and revolutionizing experiences of consumers, while companies BTCs fit much more readily into existing channels and business models. This implies that there is potentially less opportunity for unicorn valuations and IPOs BTCs, as startups that tend to support mature business channels do not necessarily capture their entire value chain. It also gives us a competitive advantage in leveraging strong B2B relationships and creating long-term value for entrenched players which helps insulate startups from the fluctuation of public markets.



With a better understanding of the larger forces at play, it’s worthwhile to explore some meaningful happenings BTCs over the last twelve months. 2016 saw the region raise 28 traditional venture funds ranging from $2MM to $600MM in size targeting direct equity investments along with venture debt. These new funds total about $2.8Bn in new assets under management (AUM) for BTCs-based VCs.This is a mere fraction of the over 200 funds raised nationwide this year; nevertheless, it’s a significant fundraising year for the region. Activity in the BTCs region comes both from established regional players and brand new VCs. We would be remiss not to mention our own inaugural $130MM Fund Family as one of the important new BTCs fundraises of 2016, and we have also seen Madison, Wisconsin’s HealthX Ventures close its first fund at $20MM to target digital healthcare companies, among other newcomers to BTCs VC. Alongside the birth of new funds, some of the region’s largest VCs, like Drive Capital and Foundry Group, raised new funds last year of $300MM and $500MM, respectively. Mirroring the VC fundraising reality on the coasts, the largest five funds BTCs raised in 2016 accounted for nearly 2/3 of total assets raised, with a number of smaller players entering the space.


This capital is already being put to good use funding regional startups, and below we explore some notable financings that took place in 2016. While the BTCs region hasn’t produced any financing the size of Uber’s recent $5.6Bn round, we have seen significant capital raises by companies. These companies—ranging in focus from internet security-as-a-service, to the development of highperformance lubricants and property management tools—demonstrate the varied nature of the BTCs region’s entrepreneurial ecosystem.

These BTCs companies, shown below, have in total raised about $575MM in venture financing. They have left stealth to become aggressively acquisitive, leveraged long operating histories and future potential to raise venture capital, completed successful Phase II FDA trials and have attracted large coastal VCs. We believe that the six deals conducted by the LACV team in 2016 are some of the most exciting, but here we have focused on the deals conducted at later stages to illustrate other exciting companies that are reaching significant scale in the region.

These later stage VC deals in the region are important components of the work taking place here, but the data tells an interesting story about the future of the region. The United States VC market as a whole is weighted towards Early Stage VC deals, followed by Later Stage, and Seed stage deals. This is mirrored BTCs, but we also see some divergence in deals done BTCs. We see that there is a similar percentage of Later Stage deals being done, but a greater proportion of Seed deals conducted. This is a product of the seed-stage focus of the smaller funds, and a deeper deal pipeline in the seed stage as opposed to later stages. This could be a long-run phenomenon in the region, but we generally believe that we will reach the coastal steady-state in deals by stage as the middle of the country continues to support companies through their lifecycle.



2016 was a less-than-spectacular year for venture-backed exits. The IPO market didn’t see a single VC-backed offering in January, with only six listings in the first quarter, and a total of 39 over the course of the entire year. This marks a 49% YOY decrease, and a nearly 70% decrease from the IPO market’s high-water mark in 2014. The IPO market’s weakness is a product of several factors, including market volatility and the increasing regularity of significant late-stage private placements. Complementing the generalized weakness in the IPO market is a downturn in the number, but not size, of the M&A market. The M&A market drove the lowest number of exits during the past half-decade; however, the median disclosed deal size in 2016 nearly doubled that of 2015. This shift toward larger deal sizes is most likely a secondary effect of the increasingly large VC rounds being allocated to startups, but the nationwide decline in the raw number of M&A exits is not as easily explained.


Within this environment of relatively sparse IPO opportunities, and megadeals on the M&A side, we would expect to see a weakened BTCs exit marketplace. We have recorded data about the exits that took place in our region this year, and below we outline some of the insights we have gleaned from this year’s data.

Throughout 2016, we mostly see common-sense results that fit with the conclusions reached so far in this report. Of the 149 exits that occurred BTCs, 95% were through the M&A channel, while only seven exits came via IPO. Fitting with the previous idea that BTCs companies generally are of smaller valuations, the average disclosed exit size of $98.06MM for acquisitions and $35.72MM for IPOs, was significantly smaller than figures recorded in the national aggregate data of $418MM and $81.6MM, respectively. The sector breakdown of these exits largely fits with the historical funding trends discussed above, pointing to a strong match between investments being made in the region, and exit channels for startups. This investment-exit matching can help explain recent increases in the importance of the region in national exit data. Indeed, while the region has historically only drawn about 16% of total investment deal volume, it accounted for 20.5% of all US M&A exits in 2016, and nearly 18% of IPOs. This impressive showing is yet another confirmation that the region presents strong opportunities for VCs with an eye toward investments with strong exit potential through the M&A channel.


In 2016, the BTCs region had strong exit representation in the healthcare and IT spaces, with some action throughout B2C and B2B organizations. This follows logically, as historical investments made by VCs BTCs build the exit opportunities of today. Disaggregating the data, we see that five of the seven BTCs IPOs came through the healthcare sector, with the other two from the IT and B2C sectors, respectively. We expect to see continued strength in the number of exits BTCs moving forward, thanks to the strong funding-exit match explored above, along with a resistance to the national megadeal trend, leaving the door open for smaller, less cumbersome acquisitions in our region. The companies highlighted below are some of the larger acquisitions that took place BTCs, and strong examples of the high quality companies that are growing in our region. The largest acquisition that took place in 2016 BTCs was the $665MM acquisition of Selexys by Novartis following the successful completion of their Phase II trials for the SelG1 drug. Outside of Selexys, our highlighted acquisitions, span healthcare, cyber security, pharmacogenomics, and biometrics with acquirers coming from both the United States and abroad.



The BTCs region has demonstrated a resiliency to the weakness in the fundraising market for startups and a maintenance of strong exit opportunities, while taking advantage of the record-breaking amounts of capital flowing towards VC funds nationwide. We believe that this relative strength is not a fluke, but a product of the fundamental nature of the BTCs VC market. VC-backed companies BTCs in general raise smaller rounds and have stronger sectoral fits to the exit market. Our exit channels tend to be more resilient to market downswings as acquirers can more easily raise acquisition capital for smaller BTCs acquisitions, and IPOs make up a smaller percentage of the total VC-backed exit market BTCs. The major historical weakness of our ecosystem was the systemic lack of venture capital, but this appears to be correcting with the new funds born throughout the region this year. We expect that this resistance to volatility will be sustained in the long run due to the stickiness of its causal factors.


2016 could have been a momentary speedbump in the funding and exit markets for VC-backed companies, but uncertainty appears to be the name of the game in markets for the coming year. Meaningful domestic governmental changes appear to be on the horizon, and geopolitical instability remains significant throughout the developed and developing worlds. As we enter 2017, it is not obvious how these forces will affect the United States’ venture capital markets but, after a bumpy 2016, we expect this increased volatility to have some effect. This spells good news—or, perhaps, less bad news—for the BTCs market. If volatility causes flights to relative safety within national VC markets, there could be increasing flows towards BTCs companies with their lower valuations and clear exit channels. We could also see increased regulatory barriers for foreign capital on both the funding side and exit channels, hindering the nascent international interest in our region.

Whether or not the flight to safety occurs, we hope to see an increasing focus on the regional investment of BTCs-based capital. Historically, VCs based in the BTCs region have invested a disproportionate amount of their capital in their home state, along with California, New York, and Massachusetts, while relatively less BTCs excluding their own state. The below table gives some examples of this relative regional myopia that exists BTCs. Our systemic oversubscription to homestate investments is beginning to change with the birth of BTCs-focused VCs with investment theses that allow for regional flexibility.


Moving into 2017 and beyond, we expect the fundamental opportunities BTCs to draw increasing investment from both regional and national VCs. Our fund’s thesis, that exceptional startups and talent exists throughout the BTCs region, has proven to be remarkably accurate over our first year and a half of capital deployment. We anticipate another relatively strong year for the region, but it remains to be seen what sort of national trends will take place with the multifaceted weakness shown in VC markets through 2016.