Drive Capital, Led By Sequoia Vets, Sees Midwest as Next Startup Hub
Chris Olsen thinks the Midwest is a better place to build a startup than either coast, and he intends to prove it.
The Cincinnati native was a partner for six years at the well-known Silicon Valley venture capital firm Sequoia Capital, before former Sequoia colleague Mark Kvamme recruited Olsen back to Ohio to start a new venture capital fund in Columbus.
That might be a head-scratcher to some coastal VCs, but to Kvamme and Olsen it makes perfect sense. They view the Midwest as an underappreciated startup hub that features good talent coming out of its universities, a lower cost of living than places like the San Francisco Bay Area, and a central location near plenty of companies’ potential customers.
The missing ingredient? Money, Olsen says.
They want their new $250 million Midwest-focused fund, Drive Capital, to help change the region’s startup equation. The idea is that more regional funding sources specifically targeting Midwest companies will lead to more entrepreneurs staying and building businesses here.
Drive Capital is certainly not the only sizable VC player in the region, but the new kid on the block has made its presence known early on. When Drive Capital closed the fund in January, it marked the second-largest inaugural fund raised nationwide in the previous year, according to Forbes. Its backing investors include Ohio State University and Silicon Valley Bank, Forbes reported.
The fund focuses on technology, tech-enabled services, and healthcare. It has put money in eight companies so far, Olsen says, including two in Wisconsin (Green Bay-based Aver Informatics and another undisclosed startup) and one in Michigan (Ann Arbor-based FarmLogs).
Xconomy caught up with Olsen recently to talk about Drive Capital’s investment strategy and his outlook for the Midwest. The following is an edited transcript.
Xconomy: Why start a $250 million venture capital fund in the Midwest?
Chris Olsen: We started this because we were interested when we discovered that there is a tremendous amount of innovation in the Midwest, and almost nobody is paying attention to it from a venture capital standpoint.
Twenty-two percent of U.S. GDP is in the Midwest. If it was a country, it would be the fifth-largest country. Twenty-five percent of all research in the U.S. on a dollar basis is in the Midwest. Only 4 percent of venture capital dollars are invested in the Midwest. We looked at that and felt like it was a huge opportunity. Those numbers, what they ended up doing, was confirming a lot of what we see every day, of lots of smart people coming from the Midwest.
X: Technology and tech-enabled services are two of your three investment themes, but isn’t the Midwest tech scene still far behind the coasts?
CO: That’s the perception, but my experience has been to the contrary. You look at the great minds in Silicon Valley [who have come from the Midwest], like [Google co-founder and CEO] Larry Page, who was a University of Michigan grad.
The reality is that they left because when they wanted to go start their company, there weren’t investors here to support their vision. We think if we give them the opportunity to build their business here, they’ll do it. This is a better place to do it. There’s tremendous access to talent. Everybody thinks that all this stuff happens at MIT and Stanford. The reality is those are nice places and a lot of smart kids go there, but they don’t have the density of the Midwest of all these engineering schools in these states. There are tremendous engineering programs that are driving the labor force that goes into these technologies.
X: You’ve invested in two companies in Wisconsin so far. What do you see as the state’s strengths?
CO: I think there’s really a couple things. First and foremost, I see a risk tolerance in the entrepreneurs there that is on par with the best minds that I’ve ever seen. They are the types of entrepreneurs who have dreams and a vision of building billion-dollar companies. I see a tremendous concentration of those types of people in Wisconsin.
The second thing I see is a tremendously educated and relevant talent force that comes from places like Madison, WI, and companies around there like Epic Systems. People get educations to build the products and services that are going to drive the types of companies that we invest in.
The third thing is I see it as a great place to live. How do you build a massive company? You need to attract not 10 people, not 20 people, but 1,000 people. How do you do that? It’s difficult if you’re not in a place that people want to live.
X: But what about the cold, snowy Wisconsin winters?
CO: From my standpoint, the winters are great. They’re an opportunity to focus on the business.
X: Do you see any weaknesses in Wisconsin’s startup community right now?
CO: Nothing jumps out at me. I wish there was more collaboration, I wish there were more venture funds, I wish there were more of everything. But I see the raw ingredients as already being there.
X: So far, you’ve invested in one company in Michigan. Why did you invest in FarmLogs?
CO: We invested in [co-founder and CEO] Jesse [Vollmar] because he’s got a technology platform in a massive industry, which is in the agricultural space. He’s on a shoestring budget with a product that helps increase their yields by 15 percent. Anytime you see that, it’s something that people will view as important.
X: Regarding the absurd valuations happening with Silicon Valley tech startups, are Midwestern tech startups a “safer,” cheaper bet?
CO: I don’t think so. Our valuations that we’ve invested in companies are at market rates. One of the frequent perceptions we run into is “the Midwest is great because it’s B-plus companies but half the price.” That’s not what we invest in. We invest in A-plus companies at market valuations; they just have to be based in the Midwest. If you are building a multibillion-dollar company, you’re happy to pay a higher price on the way in.
X: Culturally, the Midwest still gets bogged down in shame when it comes to failure, whereas failure is seen almost as a badge of honor in more evolved startup ecosystems. What can we do to enact a culture change, or is it perhaps already underway?
CO: I think where that adage holds is if you found somebody who took a risk, tried to build a company, and the market didn’t work in their favor. … Nobody gets penalized for that. I don’t think that’s any different here in the Midwest. If you had somebody here who built a great, tremendous business, took a risk to build it, but it didn’t work out because, let’s say, a disaster like Sept. 11 happened or the 2008 crisis, I don’t think any VC would hold it against them. If they’ve done something wrong, or they’re not hard-working, or they made a ton of horrible decisions, just as in the same way in Silicon Valley, those people are going to struggle to find financing.
X: You like to point out that, by your fund’s count, there have been 52 exits in the past five years by Midwest-based companies that exceeded $1 billion. Yet the Midwest still isn’t seen as a hotbed of fast-rising startups, so what will it take to get that recognition and reputation?
CO: I don’t know. At some point there’s a critical mass of exits that happen in a given period of time. … Some people see it sooner than others, and I’d put ourselves in that category. But I think other people are going to follow, and you’re going see more great funds here over the next decade.
X: What should the Midwest aspire to as a region?
CO: I don’t know. From an economic standpoint, I think the goal here should be to have an industry that’s comprised of a lot of long-term, sustainable businesses—companies that have the chance to be around five years from now, 10 years from now, to be a poster on the wall. Look at companies that used to be built here.
Many moons ago, this was the corner of the world that was seen as the most innovative, whether it was oil companies, automotive companies, manufacturing companies. Those were started here by entrepreneurs that have names like Carnegie and Rockefeller. I think what we should aspire to do is to find the next generation of those names and support them to build their businesses here.