“The second fund was remarkably easier than the first,” Chris Olsen said, reflecting on Drive Capital’s recent $300 million close. “When we were doing our first fundraise, it was two guys with a PowerPoint presentation, with an idea and a bunch of research.”
Those guys were Olsen and Mark Kvamme, former partners at Sequoia Capital, and the idea was a venture firm that would invest in Midwestern startups, pursuing what Olsen calls “the great opportunity of our lifetime.”
With deal flow to support this thesis, Drive persuaded about 90 percent of the LPs in Fund I to return for Fund II, Olsen said. “We could say, ‘We run across 3,500 companies a year in the Midwest.’ Investors could look inside the portfolio, they could see real revenues inside our companies, they could see a path to profitability in a lot of these businesses and real opportunities to make money.”
LPs in Drive Capital Fund II are “a typical mix of what you would expect for any institutional fund … predominantly university endowments, also a lot of private foundations, and it has one pension fund.” The Columbus, Ohio-based firm started fundraising last October and had a final close in August.
Drive’s first fund, which raised $250 million, is targeting 20 to 25 companies; the second fund might make as many as 30 investments. One has already been made, though it isn’t publicly disclosed. The company in question is relocating to Columbus from the East Coast.
“The whole pitch, the reason folks are moving here, is that they think there’s an unfair advantage,” Olsen said. “The market is already here,” with “tons and tons of startup companies that are getting to big valuations, multibillion-dollar valuations. They’re just overlooked by the other firms.”
One reason is the pool of potential employees: “There’s more engineering talent graduating from Midwest universities every year than any other corner of Planet Earth.” For a firm like Drive, which focuses primarily on technology and healthcare, “the big trend” is the geographical spread of the knowledge required to build these companies, formerly found only in Silicon Valley.
And it’s not just potential employees that the region offers: “the proximity to all of the customers” represents a “tremendous opportunity for a startup,” Olsen said, noting that the Midwest boasts more Fortune 500 companies than any other region.
“You look at where these industries were built: There are more insurance companies in Ohio than any other state. There’s a lot of people who know how to write policies and have connections to capital markets that are based here.”
That kind of “domain knowledge” is attractive for startups looking to get customers immediately, “whether it’s selling insurance or giving people healthcare or processing bank transactions.” It’s also easier to propose a partnership with a business as a local, rather than some “hotshot from Silicon Valley.”
While Kvamme came to Ohio in 2010 to work for Gov. John Kasich, Olsen was born and raised in Cincinnati. “I spent the first 18 years of my life getting out of Ohio,” he said. “I had no intention of getting back there.”
Olsen “always wanted to get into venture, even from high school.” Somewhat unfortunately, then, his chosen college, Yale, offered no undergraduate business degree, only a single accounting course. (He majored in political science.)
Undeterred, upon graduating Olsen flew to California, “rented a car and drove around to the venture capital firms and knocked on doors,” he recalled. “They all told me, ‘Go away, you don’t have any experience, you don’t know what businesses are.’”
Seeking business experience, Olsen entered the analyst program in UBS’s healthcare group, investment banking being an industry with a well-established pipeline from Yale. From there he moved to Technology Crossover Ventures, where he pursued private equity deals in tech and IT. Then in 2006, Sequoia called, offering his “dream job,” and Olsen was “suddenly working at the firm, one of the doors on which I’d originally knocked, that wouldn’t hire me in the first place.”
Now that Olsen is back in Ohio, he finds the region “dramatically different” from when he left. “It used to be that these were all big company towns, where the dream for every kid in high school was to get in the honors program of the state college and then go into the management-training program of Procter & Gamble or Nationwide Insurance or American Greetings Corp.” Today, ambitious young people idolize Mark Zuckerberg and Steve Jobs, and an earlier bias against startups as somehow unserious, not “a real job,” has given way to admiration for their innovative potential.
When Olsen describes Drive’s portfolio to people in Silicon Valley, “it’s easy for them to get excited about what’s going on here.” He singled out CrossChx, an identity management company founded by Ohio native Sean Lane. Drawing on experience in the National Security Agency, Lane developed a solution to the problem of disparate identities in the healthcare system, offering a unified picture of patients and their histories. Though he started CrossChx in Baltimore, Lane moved the company to Columbus, betting he’d have more success in the Midwest.
Drive often partners with coastal firms, such as Accel, Andreessen Horowitz and Greycroft Partners, looking for opportunities beyond their own backyards, companies without such high expenses. And in most cases, Olsen said, Drive works with a local firm that has “gotten the company through an initial seed round or early-stage round. We come in and do the following rounds.”
Given “the gravity of the opportunity” the Midwest represents, Drive has set itself a lofty goal, proclaiming its intention to find and back a concept worth $1 billion. “In our book, that’s the measure of success,” Olsen explained. “If you can build a billion-dollar company, you’ve changed an industry. That’s the standard we’re shooting for.”
The firm already has $500 million under management and one exit under its belt, a Chicago provider of pricing intelligence called Channel IQ, sold to Market Track LLC in June. But Drive doesn’t mind staying invested for a bigger impact.
“Great companies should exist for several decades,” Olsen said. “Our funds are 10-year funds that can be extended if they need to be. That’s what it takes to build these companies into what will hopefully be public offerings down the line.”
Photo of Chris Olsen, partner at Drive Capital, courtesy of the firm.