Top Venture Capitalists Leave Silicon Valley, Bet Their Careers On Midwest

May 7 2014, 5:16am CDT | by

In San Jose or Mountain View there would be nothing notable about venture capitalists Mark Kvamme and Chris Olsen in a glass-walled room debating whether or not to write a multimillion-dollar check to Aver Informatics, a startup that shows businesses where health care is cheapest. But the trainloads of coal crawling by outside are a stark reminder: This isn’t California. It’s Columbus, Ohio, a city that had rarely hosted these sorts of discussions before Kvamme and Olsen arrived.

At a time when more than half of the country’s venture capital–some $33 billion annually–is going to startups in California, two alums of Sequoia Capital, Silicon Valley’s most successful VC firm, are making the mother of all contrarian bets: that West Coast money is getting dumb chasing the next Facebook and overlooking opportunities in the heartland. Investors think the two are onto something–in January Kvamme and Olsen’s Ohio-based Drive Capital closed a $250 million fund, the second-largest inaugural fund anyone has raised anywhere in the country in the last year.

The math behind their thinking is straightforward. The Midwest makes up 19% of the country’s GDP and comes up with 19% of its patents, yet the region draws only 5% of America’s venture capital. That discrepancy suggests that midwestern entrepreneurs are starting fewer businesses not because they don’t have good ideas but because they don’t have access to the people who fund good ideas. “Ultimately, when we looked at the data, it was very, very compelling,” Olsen says. “I think people will look back and say that was so obvious that the Midwest was about to emerge because the numbers had swung so far against it.”

Kvamme, 53, is as California as they come. The son of legendary VC Floyd Kvamme, he grew up in Sunnyvale and got a programmer job at Apple as a 19-year-old Berkeley student, then left to found four companies, one of which, advertising agency CKS Group, went public in 1995 with a $218 million valuation. He merged it with another company in a $340 million deal three years later and then became a partner at Sequoia, where he invested $5 million in LinkedIn the year the networking giant launched (a stake now worth $2.6 billion).

But in 2010 Kvamme started taking trips to Ohio to advise John Kasich, an old banker friend who was running for governor. On one of those trips Kasich invited Kvamme to his home in the Columbus suburbs, poured him a big glass of wine and extended a job offer: Leave sunny California, come to gray Ohio and take a $1 salary to run Ohio’s economic development agency.

Kvamme’s marriage was falling apart, and he’d always wanted to try his hand at public service, so he accepted on the condition that he could commute from Menlo Park. He took a leave from Sequoia and told his partners he would be back in six months. “And then something strange happened–I kind of fell in love with the place,” Kvamme says. “The opportunity that I saw in Ohio and the rest of the Midwest, I really felt like there was something happening here.”

Crisscrossing Ohio on state duties, he stopped at places like the Brandery, a startup accelerator in Cincinnati, and ran into unknown, underfunded entrepreneurs like James Fisher, founder of Roadtrippers, a website that attracts 3 million travelers a month who want directions between two points with the most interesting restaurants, parks and sites marked along the route. It was the sort of company Kvamme had backed in Silicon Valley, and he sensed someone could make a lot of money funding similar startups in the Midwest.

He called Olsen, a Cincinnati native and 35-year-old rising star at Sequoia, who told Kvamme he would start a fund only if they went in together. Kvamme agreed, and leveraging connections in California and Ohio they set about persuading investors like Santa Clara-based Silicon Valley Bank and Columbus-based Ohio State University to put money behind a couple of well-pedigreed guys making a big bet. “It’s not just that, hey, we love these guys, we’d back them anywhere they’d go,” says Sulu Mamdani, partner at Silicon Valley Bank. “They have put together a really compelling thesis around opportunities that we buy into.”

Not everyone bought it. “We have seen many states try to do something like this,” says Jonathan Hook, Ohio State’s chief investment officer, who argued against the school’s $50 million investment in Drive but was overruled by the university’s president and CFO. “Usually it doesn’t come off as successfully as they hope. I think the fund was too large.”

With a quarter-billion dollars in the bank Drive is now putting the money to work. Its first two checks: $2.5 million to Roadtrippers and $5 million to CrossChx, a software company that links fingerprints with medical records, preventing identity thieves from gaining access to health information that they could use to, say, fill prescriptions of painkillers.

Signing checks is the easy part. Luring top talent to work for their companies–and not head to Silicon Valley–is tougher. Last month Kvamme piled seven of his eight employees into an RV for a recruiting trip to schools like Carnegie Mellon, Ohio State and the University of Michigan. They brought along all of the companies they are backing, including FarmLogs, an appmaker based just off the Michigan campus that combines information about the weather, fertilizers and crop yields to let farmers make smarter decisions, like which square meter of their field needs more of a certain fertilizer. Five percent of U.S. row-crop farmers use the app, and the company is constantly searching for new talent.

Recruiting is not the only challenge in the Midwest. The region’s entrepreneurs, more cash-strapped and risk-averse than their Silicon Valley rivals, often sign bad agreements or sell huge stakes in the seed-funding stage. “Since there has been no capital, investors have been able to extract terms,” Kvamme says. In order to further motivate diluted founders Drive comes up with ways to restructure the ownership, like buying extra shares and giving them back to the founders as stock options.

The only way to give midwestern entrepreneurs and investors more confidence, Olsen says, is to build companies that produce huge exits. There have been a few: Indianapolis-based e-mail marketer ExactTarget sold for $2.6 billion last year to Salesforce.com, and Chicago’s Groupon and GrubHub are both publicly traded with multibillion-dollar market caps. Olsen and Kvamme are staking their careers on the belief that their money will feed the next Midwest giant.

“The opportunity is taking the raw ingredients that are here and just energizing them with a little more capital, a lot more know-how and really spending time pulling talent back to the Midwest,” Olsen says. “When that happens, you’re going to see great companies emerge here.”

 
 

Don't miss ...

 

<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.

 

blog comments powered by Disqus

Latest stories

US reporter requests privacy after release
Washington, Aug 28 (IANS/EFE) The US journalist, who was freed this week by the miltants in Syria after two years in captivity, Wednesday thanked everyone for their efforts to secure his release and asked for privacy to be with his family.
 
 
Congo confirms six Ebola cases
Brazzaville, Aug 28 (IANS) Six cases of the Ebola virus have been confirmed in Democratic Republic of Congo (DRC), Health Minister Felix Kabange Numbi said Wednesday.
 
 
IMF chief faces investigation in corruption case
Paris, Aug 27 (IANS/EFE) International Monetary Fund (IMF) chief Christine Lagarde has been put under investigation in France for "negligence" after being questioned for hours in a corruption case, judicial sources said Wednesday. She denied wrongdoing.
 
 
Whale tourism affecting marine animals' behaviour
London, Aug 27 (IANS) Boat trips to watch whales and dolphins may increasingly put the survival of marine mammals at risk, conservationists have warned.
 
 
 

Latest from the Network

Huntington-Whiteley loves making creative decision
London, Aug 28 (IANS) Supermodel Rosie Huntington-Whiteley has enjoyed indulging her creative tendencies since leaving Victoria's Secret. Huntington-Whiteley has revealed that working with British high street store...
Read more on Celebrity Balla
 
Holmes offers $1,000 reward for return of Suri's pet
Los Angeles, Aug 28 (IANS) Actress Katie Holmes has reportedly offered a $1000 reward for the safe return of her daughter's pet dog following its disappearance. Suri's new new Chihuahua, Honey, went missing Sunday....
Read more on Celebrity Balla
 
Shooting instructor killed as girl accidentally shot in US
Washington, Aug 28 (IANS) A shooting instructor was killed after a nine-year-old girld accidentally shot in the head at a gun range in the US, media reported Thursday. The deadly incident occurred Monday morning at a...
Read more on Politics Balla
 
Bella Thorne splits from Tristan Klier
Bella Thorne has split up with her boyfriend of more than two years, Tristan Klier. The 16-year-old actress confirmed that they recently decided to part ways after being asked about their relationship status on Twitter...
Read more on Celebrity Balla
 
Ashton Kutcher is glued to Mila Kunis
Ashton Kutcher refuses to leave Mila Kunis' side as her due date approaches. The 'Two and a Half Men' star, 36, has been spending as much quality time as possible with the pregnant 'Black Swan' actress, who is expecting...
Read more on Celebrity Balla
 
Charlize Theron feels more sensual with age
Charlize Theron thinks women only ''come into their prime'' in their 40s. The 39-year-old 'Prometheus' star, who is dating Sean Penn, 54, says 20-year-olds ''have no f**king concept'' about life and believes the beauty...
Read more on Celebrity Balla
 
Heather Morris is engaged
Heather Morris has got engaged to Taylor Hubbell. The 27-year-old actress, who has an 11-month-old son, Elijah, with her longtime beau, is thrilled to be planning their wedding after he recently proposed. A source close...
Read more on Celebrity Balla
 
Australia to help US in Iraq air strikes
Canberra, Aug 28 (IANS) Australia has expressed willingness to contribute its Super Hornet fighter jets to help US-led air strikes in Iraq. Defence Minister David Johnston said Wednesday night that Australia was...
Read more on Politics Balla
 
Kidnapped US journalist's mother pleads IS to release son
Washington, Aug 28 (IANS/EFE) The mother of a US freelance journalist, who was kidnapped in Syria by the Islamic State(IS), Wednesday released a video in which she urged the jihadist group to "be merciful" and release...
Read more on Politics Balla
 
Bieber compares himself to Princess Diana
Los Angeles, Aug 28 (IANS) Troubled singer Justin Bieber has compared himself to the late Princess Diana after he reportedly experienced a minor car collision when he was infuriated about being pursued by a...
Read more on Celebrity Balla