Drive Capital, Led By Sequoia Vets, Sees Midwest as Next Startup Hub

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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.

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Jeff Engel is a senior editor at Xconomy. Email: Follow @JeffEngelXcon

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  • Megan Burkett

    I just had this conversation with a friend who is trying to start a tech organization in Ohio but is very frustrated. he was looking at opportunities on the west coast. I am vigilant (as an Indiana-native and partner of Ohio executives) about the Midwest being the premier location to start a business. Not only is the cost of living better but the cost and benefits for small businesses are tremendous. I think we will see a paradigm shift in the next 3-5 years with young people staying or moving to the Midwest to innovate and entrepreneur supporters gravitating to “the middle.” I am curious, what do you foresee as potential setbacks or roadblocks?