Square

Can St. Louis become the next tech hub?

April 8, 2014: 12:20 PM ET

Square co-founder Jim McKelvey is leading the charge to revitalize the Missouri city.

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FORTUNE -- Last month, a group of 12 New York venture capitalists took a chartered jet to St. Louis, as part of a 36-hour tour of the city's tech ecosystem. For most of them, it was the first time hearing St. Louis even had a tech ecosystem.

It does, though it's in its infancy. Organized by Enstitute, an apprenticeship program, and the local chamber of commerce and supporters, the trip was meant to pique the interest of coastal investors, while injecting a bit of their startup expertise into the region, if only for a weekend. The investors listened to pitches, toured TREX, St. Louis's downtown co-working space and tech incubator, and attended InvestMidwest, a regional investing conference.

Given the enormous wealth created by tech startups in Silicon Valley, it's no surprise to learn that yet another city is eager to remake itself in the Valley's image. That's why, in addition to Silicon Alley in New York and Boston's CyberDistrict, there's also a Silicon Beach, a Silicon Prairie, and a Silicon Roundabout, and a dozen or so other places whose "Silicon" nicknames haven't yet caught on beyond that particular area. Pushing the entrepreneurial spirit of the Valley (and with it, the economic benefits) is the next logical step from all the self-imposed "vibrancy" of recent years in declining rust belt cities. But simply flying the innovation flag isn't enough to inspire founders to start companies. And even if they do start companies, they need a support system of investors, mentors, potential clients, and a pool of talent to hire from in order to become successful. The intention is great; the rest is trickier.

MORE: Jack Dorsey: The pride of St. Louis

St. Louis's tech ecosystem is young. (It doesn't even have a cheesy "Silicon" name yet.) But it has a savvy advocate in Jim McKelvey, co-founder of mobile payments company Square. McKelvey started Square with Twitter (TWTR) co-founder (and St. Louis native) Jack Dorsey, whom he'd met working at St. Louis-based Mira Publishing.

Now he's on a mission to make St. Louis into a hub for innovation after a long dormant period. "For the last 100 years, it's been pretty quiet around here," he says. "The 1904 World Fair was sort of the peak, and too many people made too much money 100 years ago, and all their children and grandchildren basically decided to be rich and not do much," he says, half-joking.

"That has turned around pretty starkly in the last five years," he says. "We're seeing all these programs hitting, and they all interact with each other.

Those programs include his own, a program called LaunchCode that helps coders get the relevant work experience they need to get good technical jobs. Since its start in October, 58 students ranging from unemployed mothers, Starbucks employees, and military vets have done LaunchCode apprenticeships and 27 have been placed in jobs at companies like Scottrade, Panera (PNRA), and Enterprise. The program's current crop of apprentices has 225 people enrolled after three months.

Likewise, Enstitute, an apprenticeship program founded in New York, launched in St. Louis in conjunction with the trip. There are also new accelerators cropping up, like SixThirty, the fintech-focused program started by McKelvey, and a grant program and business plan competition run by the city called Arch Grants.

MORE: Tech jobs aren't just for Silicon Valley

The city's advocates tout the eagerness of corporations like Mastercard (MA) and Monsanto (MON), and institutions like Washington University to get involved. Some of the city's notable startups, like Lockerdome, a social network, and Hatchbuck, a sales and marketing SaaS platform, also participate.

Still, it's early. While the New York investors didn't whip out their checkbooks after one brief visit, many viewed it as a first step toward potential deals in the region. Nihal Mehta, a partner with Eniac Ventures, says he agreed to mentor some companies which were relevant to his fund's mobile thesis. He noted that it would be wise for existing coastal startups to set up engineering offices in St. Louis, because the talent is inexpensive and plentiful. Beyond benefitting the startups, it could help catalyze the ecosystem in St. Louis.

"It took New York awhile to get there, he says, "and it's certainly only happened in the last six years, after the '08 financial collapse. St. Louis also needs that awakening, where people are graduating and all they want to do is create startups. That happens through inspiration."

Jacob Brody, a seed-stage investor with Mesa+, says he's interested in backing Midwestern companies because of the opportunity with enterprise software in regional industries like agriculture and logistics. "There are a lot of industries not being served by startups being built on the coasts," he says. But before he can invest, he needs to build up a vetting network of contacts in the area. "We need to know local entrepreneurs we can trust, who can send us deals," he says.

MORE: Fastest-growing cities for tech jobs

Greycroft Partners Principal Ellie Wheeler says she didn't see any startups at the Series A stage in St. Louis, which is where Greycroft invests. But once Greycroft makes one deal in a city, others tend to follow, because that founder's network becomes part of the firm's network. "We start seeing more deal flow from the region and getting to know people there," she says. That's been the case in London and Chicago, two cities where the firm has multiple investments but no office. Recently, Greycroft invested in ThisClicks, a Minneapolis-based company.

Jay De Long, a VP with the St. Louis Regional Chamber, says deal opportunities in the region offer favorable valuations, qualified talent, and low burn-rates. He notes that, because of the lack of risk capital, many startups have grown revenue organically.

It takes many generations of successful deals and exits for ecosystems to flourish, and St. Louis is still in the first phase. But McKelvey says he can sense a notable difference from five years ago. "I'm feeling an energy that I haven't seen," he says. Before, conversations about St. Louis would always focus on the cost of living. "They'd lead with the, 'Oh it's cheap to live here.' And that always bothered me," he says. But now, the answers are varied. People say they came to St. Louis because of its strength in life sciences, or to work with one of its small, but growing startups.

Come to St. Louis they have: In the last decade, young people have moved to St. Louis in droves compared to the prior 30 years. Net migration of 25-29-year-olds grew from a loss of 28 people for every 100 in the 1970s, to a gain of 35 people for every 100 in the 2000s.

As the website NextSTL put it, "Millennials are saving St. Louis." If all goes well, a thriving tech ecosystem might keep them there.

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