the most ‘compelling emerging market’ may be America, outside of Silicon Valley – TechCrunch

Roughly eight years ago, investors Mark Kevam and Chris Olsen left Silicon Valley to open a venture firm, Drive capital, In Columbus, Ohio. This was not an easy decision. Leaving California was not fashionable at the time. In fact, while Olsen grew up in Cincinnati, the Yale grad landed a few years before college at Sequoia Capital – a dream job – and had no interest in going anywhere. Meanwhile, Kevme is a California native who attends UC Berkeley, drowned in the startup world (his father was) VC also), And closed four companies before landing themselves in Sequoia, where, in between their deals, he led the firm’s investment in LinkedIn.

Even after a series of developments that would inspire him to make the leap, the initial ride was bumpy. There was no enterprise community. Midwestern startups were still few and far between. More, Kevamme, first lured by his longtime friend in Ohio John kasich To take up an economic development job that he thought would be temporary would soon be considered a little too comfortable with the state Power players.

Now looking back, I wonder if they stopped. Yet that’s because they did it Columbus They are primed to include more VCs, they argue, of course. Indeed, Drive, which now manages $ 650 million and offers nine investors, is receiving interest from 7,000 startups each year, and some of its portfolio companies are beginning to break up. The very first company to draw a check from Drive, an eight-year-old, Columbus-based hospital software manufacturer called Olive AI, was one Valuation of $ 1.5 billion Only last month, there was a funding round led by Tiger Global. Another investment in the five-year-old car insurance startup Route, also appears promising. Root, which Went public in november, Currently boasts a market cap of $ 4.7 billion, and Drive holds 26.6% of the company. (Olsen says he has not sold the part.)

We chatted late last week with Kevam and Olsen about what they are building – and why the chancellors who are thinking about leaving California for Austin or Miami might pay more attention. You can listen to that conversation Complete here. Meanwhile, parts of our chat have been lightly edited for length and clarity.

TC: Everybody is threatening the trench to California. What is the logic of moving to Columbus? How does Mark convince her to meet Chris?

CO: The initial case made by Mark is: There is a huge amount of money spent on research. In Silicon Valley, the ratio of research dollars to research dollars is largely several VC dollars for very little research; Here is the opposite in Ohio. This is more like what Silicon Valley looked like in the late 1990s.

At first, I was like, “No, not falling for this. There’s no way I’m believing that data. It’s a terrible idea”. But I was a guy with a lot of numbers – still Am – and when I started looking at data, [I could see the] Ohio’s economy is larger than Turkey’s. The Midwest economy will be the fourth largest economy in the world. It is larger than Brazil. It is larger than Russia. It is bigger than India. And it has this legacy educational infrastructure that is producing more engineers from any corner of the planet. It was kind of like, wait a minute. If this thesis is correct, then perhaps emerging markets are doing The most compelling place for venture capitalists to invest. But perhaps the most compelling emerging market outside of Silicon Valley is the US.

TC: I think when you first launched Drive, you had your own pick of companies. Is this true and has changed in this new COVID era, when everyone is doing online deals? Who’s showing that you didn’t see a few years ago?

CO: It might surprise you, but when we first arrived here, we didn’t really have our pick of companies, because it was unusual to be a large-scale entrepreneurialist. In Ohio, there are not many of them. And so a lot of entrepreneurs were in non-obvious places. Unlike in Silicon Valley, where you have entrepreneurs signing up to this superhighway of capital, where you move from Y Combinator to Seed Investor and then A Investor, the infrastructure was not present here. What was a little surprising to us was how much work we did to generate investment opportunities in the Midwest and not because people were not here, but because such activity has not yet taken place.

We have had to spend a lot of time going to universities and placing new seed managers in the business and helping them fundraise and build all such infrastructure from scratch so that the next entrepreneur gets out of here [versus moves away], And it works. In our first year, we had 1,800 inbound interest [startups], Then it went up to about 3,000 and now it is up to about 7,000, which is what any other venture firms I’ve heard say they see in California. And I don’t think it’s because we’re great. I think it’s more [a reflection of the] The scale of opportunity is now here. One of the things we like to see more is that there are more capitalists coming here, because of course we can invest in it.

TC: You don’t worry that you’ve prepared for other VCs to come on the market and steal their deals?

MW: Not at all. I am an old man here, so I remember when Sequoia was started in 1972; My father worked with Don Valentine and National Semiconductor, and it was then Kleiner, Perkins, NEA. [just] A pair of firms. And what happens is you create this network effect. More capital, more people [who are building stuff in close proximity to you]. Right now, if we don’t invest in series A, then there are a pair of locals, but mainly, [that capital has] Got to come from the shores.

CO: My perspective is, ‘Come on [over] Because the worst thing that is happening right now is that I know there are multibillion-dollar investments that are still not happening because they are here. The problem we have right now is [that] Redpoint comes to a company in Ann Arbor, or the benchmark comes to this one company in Indianapolis, or, comes to Sequoia [for a deal here or there] But they are not making it their primary business. And while we show more venture capitalists here, “I do all this every single day,” I’m afraid the next opportunity we’re missing won’t get its financing. We are just out of whack here in terms of number of opportunities vs. number of venture capitalists. . .

[Also] Some of the best investments in Silicon Valley are made with venture firms that can partner and then entrepreneurs have a larger rolodex, a larger pool of capital, more diversity of thought – all things that help them grow their business Are required.

TC: You are competing with other hotspots like Austin for attention. Make a case specifically for Columbus.

MW: If you drive a day’s car a cycle around Columbus, you’re talking about 60% of US GDP over 50% or over 60%, and [access to] A large percentage of all top customers. Columbus is in the midst of all this. Then we can easily travel to Chicago and Indianapolis and Pittsburgh, Cleveland, Cincinnati; It is a quick flight to Minneapolis, and so on and so forth. And the Midwest is a great place for manufacturing companies.

TC: Drive’s team includes the director of engineering and several software engineers. Why?

CO: One of the things that you learn very quickly that is different about the Midwest is that it is not a city; It is a nation. And you have to set your infrastructure separately if you are going to make a successful investment in that country. [because] There is just a lot of land.

One of the things that we are able to do is look at venture capital and say, “Look, there are a lot of rot, repetitive tasks that venture capitalists do, and what if we can end those actions, so that We don not need to rent the entire phone book to boiler room of grade Ivy League to make cold calls and harass all the entrepreneurs and do all such stuff. We can do more homework in an automated fashion. “So that was the kind of idea that we had. And so we built this software platform that we can use right now to not only find out what entrepreneurs are most likely to turn into investments, but [who are] The people in our portfolio companies who have the highest probability of joining a certain startup, or, who have the highest probability of investing in that follow-up round of capital in the venture of capitalists.

TC: You had a chance to strengthen the VC model when you started your own firm. Is there anything you did in setting up the drive that was different from your experience in Sequoia?

MK: We were very lucky to have worked at Sequia. Sequoia is by far the best firm, in my opinion. And we often use the phrase, what will Sequia do? And we built a lot of things around it. But we were not Sequoia, so there were many things we had to do that Sequoia probably did 40 or 50 years ago, but not to do today. It involves building a lot of capabilities, which Chris mentioned earlier, building some infrastructure, helping lawyers understand how to find a Series A term sheet or headhunters.

We are also not in a situation where everyone is coming into the office [unlike at Sequoia]; They see so many amazing companies that just ring them. So we have to focus a lot on our outbound efforts. So I would say that 60% to 70% of what we have done, we have learned in Sequoia, but the rest of what we are doing here, we had to be specific to that.

TC: Geographically how big a net are you laying?

CO: At this point, it’s massive. If you look at our portfolio, we have companies in Denver, Washington, Atlanta, Toronto, Austin. I think what we are looking for is that it is a widespread phenomenon in which we are investing.

Before we invest in any of these cities, we need to go the same way we did in Columbus. And we had to meet with the landlords, because the landlords here are not made for startups. They are built for legacy companies, and they want to see five years of financial activity, and they want a massive security deposit. And it’s like, “Well, I don’t have that.” So also with headhunters. There are unprecedented headhunters in Ohio. They are completely different than those who are successful in Denver or Atlanta because those talent networks are very local.

But now it has been done and we have been invested in an infrastructure and we have got a density of companies in many cities, which I have just mentioned, now we can help and we can be very different from a venture firm Zooming in for quarterly board meetings. We’ve got a partnership now, where we’re investing people’s resources, and we’re in cities on a weekly basis.