Plopping a half-billion dollars of venture capital in Columbus is just the latest of many chapters changing the Midwest story heard by investors from the coasts.

Drive Capital LLC launched a $300 million fund last month, adding to $250 million that’s been invested in 19 Midwestern startup businesses. Among 800 domestic VC firms in 2015, average funds under management was $207 million, according to the National Venture Capital Association.

Silicon Valley ex-pats Mark Kvamme and Chris Olsen founded the firm in Columbus in 2013 and say they are gradually eroding the flyover-country narrative of the region. Their second fund has more limited partners from outside the Midwest than in it, Kvamme said.

“Three years ago, most of our buddies in Silicon Valley thought we were completely nuts,” Kvamme said when the fund launched. “They’re starting to come around, that maybe we had a good idea.”

Many investors in venture funds still cling to the myth that only funds in Silicon Valley or New York City earn big returns, said Venky Ganesan, managing director of San Francisco-based Menlo Ventures and the VC association’s chairman. The myth has helped his firm but holds back entrepreneurship.

“People need to challenge these myths and be open to the thought of the next great company coming from Columbus, Ohio,” he said.

“Until Drive and Mark came on board I was probably in that camp that said, oh, there can’t be that many interesting companies in the Midwest,” Ganesan said. “After Mark and Chris, it’s been eye-opening.”

About 30 percent of Menlo’s investments are outside Silicon Valley, Ganesan said, and he’s been seeking Midwestern opportunities.

“It’s not doing it out of charity,” he said. “It’s a great opportunity to make money here.”

Perceptions of the Midwest are changing, said NVCA CEO Bobby Franklin, visiting Columbus for the annual VentureOhio awards dinner.

“I sure hope it is,” he said. “It is too important for our country.”

The industry supports the idea of startups leaving the coasts for affordable places, Franklin said. Also, Ohio is “taking a lead” promoting diversity in technology, based on gender, ethnicity and geography, he said.

Foreign appeal

California venture firms manage 55 percent of available U.S. capital, and 40 percent of startups that attracted investments in 2015 were based in the state, NVCA reports. Some 20 percent of venture-backed startups were in New York state and Massachusetts. No other state had more than 4 percent.

“There’s been a great opportunity (in the Midwest in general) for a long time,” said Chris Adams, partner with Francisco Partners, a San Francisco private equity firm. “We have more companies in our portfolio in the Midwest than in California.”

Adams led the firm’s investment in skyrocketing Columbus health IT provider CoverMyMeds LLC. Private equity goes to later-stage companies than venture capital.

Indeed, tech industry players over several interviews rattled of similar lists of Central Ohio’s amenities for entrepreneurs: Venture capital for several stages, supportive state government, economic development packages, a skilled work force, research universities churning out workers and technology, affordability, and proximity to corporate customers and the majority of the U.S. population. Columbus’ $140 million Smart City Challenge win also came up.

Add to that list: Kosher restaurants and a thriving Jewish community, said Jay Levine, a Washington, D.C.-based attorney for Columbus’ Porter Wright Morris & Arthur LLP. He often recommends Ohio when helping Israeli tech companies move or establish an office in the U.S.

“Ohio is an incredible business environment to place your flag,” Levine said. “It has all the strategic partners you’re going to want. (And) when you want to plant foreigners over here, it’s a very accepting community.”

Bragging doesn’t hurt

The emergence of Drive Capital has helped broadcast those attributes and attract the attention of out-of-state VC firms and entrepreneurs.

“The reality is, there’s still not enough venture capital for the opportunity, and what venture capital there is, is centered around the coasts,” Ganesan said. “To have strong funds in the region is very, very important. … We need more Drive Capitals in the Midwest.”

More funds investing at early stage in a region helps grow companies to a stage that Francisco is interested, Adams said.

“It gets us international attention,” said Victor Thorne, a Columbus serial entrepreneur and investor. “It transforms what we talk about.”

Drive is the type of fund that finds and attracts top talent and relocates entire companies to Columbus, said Peter Kleinhenz, venture partner at Columbus-based Fletcher Spaght Ventures and a long-time Central Ohio investor.

“Ventures don’t thrive on technology, they thrive on people,” Kleinhenz said.

Drive employs data analysts for market research, collaborates with other venture funds in the region and makes genuine connections between startups, customers and investors, Thorne said.

“It makes me much more comfortable than 15 years ago when I had to go to Chicago with my first startup,” he said.

There is one drawback about Midwesterners, Menlo’s Ganesan said: Too polite.

“They consider telling about themselves to be bragging, which is not true of people in the Bay Area,” he said. “It has actually handicapped entrepreneurs.”

Source: Columbus Business First, Carrie Ghose
Photo: Mark Kvamme (Dan Trittschuh)