Two ex-Sequoia VCs: the most ‘compelling emerging market’ may be America, outside of Silicon Valley

Roughly eight years ago, investors Mark Kvamme and Chris Olsen left Silicon Valley to open a venture firm, Drive Capital, in Columbus, Ohio. It wasn't an easy decision. Leaving California wasn't exactly fashionable at the time. In fact, While Olsen had grown up in Cincinnati, the Yale grad had landed at Sequoia Capital a couple of years out of college - a dream job - and had no interest in going anywhere. Meanwhile, Kvamme is a California native who attended UC Berkeley, grew up immersed in the world of startups (his dad was also a VC), and cofounded four companies before himself landing at Sequoia, where among his deals, he led the firm's investment in LinkedIn.

Even after a series of developments would lead them to take the leap, the early ride was bumpy. There was no venture community. Midwestern startups were still few and far between. More, Kvamme, first lured to Ohio by his longtime friend John Kasich to take an economic development job that he thought would be temporary, was soon deemed a little too cozy with the state's power players.

Looking back now, it's a wonder they stayed. Yet it's because they did that Columbus is primed for more VCs to join them, they convincingly argue. Indeed, Drive, which now manages $650 million and features nine investors, is receiving interest from 7,000 startups each year, and some of its portfolio companies are beginning to break out. The very first company to attract a check from Drive, an eight-year-old, Columbus-based hospital software maker called Olive AI, was assigned a $1.5 billion valuation just last month in a funding round led by Tiger Global. Another investment, in the five-year-old car insurance startup Root, also appears promising. Root, which went public in November, currently boasts a market cap of $4.7 billion, and Drive owns 26.6% of the company. (Olsen says it hasn't sold a share.)

We talked late last week with Kvamme and Olsen about what they are building - and why VCs who may be thinking about leaving California for Austin or Miami might pay more attention. You can hear that conversation in full here. In the meantime, following are some excerpts from our chat edited lightly for length and clarity.

TC: Everyone is threatening to ditch California. What's the argument for heading to Columbus? How did Mark convince you to join him, Chris?

CO: The early case that Mark made is: there's an enormous amount of money that's spent on research here. In Silicon Valley, the venture dollars ratio to research dollars is massively too many VC dollars for too little research; the opposite is true here in Ohio. This is more what Silicon Valley looked like in the late 1990s.

At first, I was like, Nope, not falling for it. There's no way I'm believing that data. It's a terrible idea" to move. But I was very much a numbers guy - still am - and when I started looking at the data, [I could see the] economy of Ohio is bigger than Turkey. The economy of the Midwest would be the fourth-biggest economy in the world. It's bigger than Brazil. It's bigger than Russia. It's bigger than India. And it has this legacy educational infrastructure that's been producing more engineers than any other corner of the planet. It was kind of like, wait a minute. If this thesis is right, maybe emerging markets are the most compelling place for venture capitalists to invest. But maybe the most compelling emerging market is America, just outside of Silicon Valley.

TC: I imagine that you had your pick of companies when you first launched Drive. Is that true and has that changed in this new COVID era, when everybody is striking deals online? Who is showing up that you didn't see a few years ago?

CO: It might surprise you but we actually didn't have our pick of the companies when we first got here, largely because it was unusual to be a venture capitalist. In Ohio, there just aren't a lot of them. And so a lot of entrepreneurs were in non-obvious places. Unlike in Silicon Valley, where you have entrepreneurs sign up on this superhighway of capital, where you go from Y Combinator to the seed investor and then to the A investor, that infrastructure didn't exist here. What was a little bit surprising to us was how much we ended up having to work to originate investment opportunities here in the Midwest and not because people weren't here but because that kind of activity just hasn't been built yet.

We've had to spend a lot of time going into the universities and putting new seed managers in business and helping them fundraise and sort of building all of this infrastructure from scratch so that the next entrepreneur is out here [versus moves away], and it works. In our first year, we had inbound interest from 1,800 [startups], then it went to about 3,000 and now it's up to about 7,000, which is more than I've heard any other venture firms say that they see in California. And I don't think it's because we're great. I think that's more [a reflection of the] scale of the opportunity that's here now. One of the things that we would love to see more of is more venture capitalists coming here, because there's certainly more opportunity than we can invest in.

TC: You don't worry that you've teed up the market for other VCs to come and steal your deals?

MW: Not at all. I'm the old guy 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 couple of firms. And what happens is you create this network effect. And the more capital, the more folks [who are building stuff in close proximity to you]. Right now, if we don't invest in a Series A, there's a couple of local folks, but primarily, [that capital has] got to come from the coasts.

CO: My attitude is, Come on [over] because the worst thing that is happening right now is that I know for sure there are multibillion-dollar investments that are not getting made still because they're based here. The problem that we have right now is [that] a Redpoint comes in and invests in one company in Ann Arbor, or Benchmark comes into this one company in Indianapolis, or, Sequoia comes in [for a deal here or there] but they aren't making this their primary business. And until we see more venture capitalists showing up here saying, This is all I do every single day," I fear that that next opportunity that we're missing won't get its funding. We're just out of whack in terms of the number of opportunities versus the number of venture capitalists here . . .

[Also] some of the very best investments in Silicon Valley are done with venture firms that can partner and then entrepreneurs have access to a larger Rolodex, a larger pool of capital, more diversity of thought - all the things that they need to grow their business.

TC: You're competing with other hotspots like Austin for attention. Make the case for Columbus specifically.

MW: If you put a circle around Columbus, a one-day car drive, you're talking about 60% of the GDP of American, over 50% or 60% of the population, and [access to] a huge percentage of all the top customers. Columbus is in the middle of it all. What we're able to do then is easily travel to Chicago and Indianapolis and Pittsburgh, Cleveland, Cincinnati; it's a quick flight to Minneapolis, and so on and so forth. And the Midwest is a spectacular place to build companies.

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

CO: One of the things you learn very quickly that's different about the Midwest is, it's not a city; it's a nation. And you have to set up your infrastructure differently if you're going to be successful investing into that nation [because] there's just a lot of ground cover.

One of the things that we have been able to do is to look at venture capital and say, Look, there are a lot of rote, repetitive tasks that venture capitalists do, and what if we could eliminate those tasks, so that we don't need to hire the boiler room of Ivy League grads to cold call the entire phone book and annoy all the entrepreneurs and do all that kind of stuff. We can do more homework in an automated fashion." So that was kind of the idea that we had. And so we built this software platform that we're able to use now to not only identify which entrepreneurs have the highest probability of turning into an investment but also [who are] the people for our portfolio companies who have the highest probability of joining a certain startup, or, which venture capitalists have the highest probability of investing in that follow-on round of capital.

TC: You had the chance to reinvent the VC model when you started your own firm. Are there any things that you did in setting up Drive that were different than what you'd experienced at Sequoia?

MK: We were very fortunate to have worked at Sequoia. Sequoia is by far the best firm out there, in my opinion. And we often use the phrase, What would Sequoia do? And we built a lot of things around that. But we weren't Sequoia, so there were many things that we had to do that Sequoia had maybe done 40 or 50 years ago but today doesn't have to do. That includes building a lot of these capabilities Chris had mentioned before, building some of the infrastructure, helping lawyers understand how to do Series A term sheets or finding headhunters.

We're also not in a situation where everyone is coming into the office [unlike at Sequoia]; they see a lot of wonderful companies that just ring them up. That's why we had to be very focused on our outbound efforts. So I'd say that 60% to 70% of what we've done, we learned at Sequoia, but the rest we had to make specific to what we're doing here at Drive.

TC: How big a net are you casting geographically?

CO: At this point, it's massive. If you were to look at our portfolio, we have companies in Denver, Washington, Atlanta, Toronto, Austin. I think what we're finding is that this opportunity is a broader phenomenon that we're investing in.

Before we will invest into any of these cities, we've had to go in the same way we did into Columbus. And we've had to meet with the landlords, because landlords out here are not built for startups. They're built for legacy companies, and they want to see five years of trailing financials, and they want a massive security deposit. And it's like, Well, I don't have that." So too with the headhunters. There are phenomenal headhunters in Ohio. They're totally different than the ones who are successful in Denver or in Atlanta because those talent networks are very localized.

But now that done that and we've been invested in an infrastructure and we've got a density of companies in a lot of the cities that I just mentioned, now we can help and we can be very different from a venture firm that's just going to zoom in for quarterly board meetings. We've got a partnership now that's expanded where we're investing people resources, and we're in the cities on a weekly basis.