IVCA Feature: Part One Highlights of the 2014 IVCA/NVCA Luncheon: Mark Kvamme has bet his career on the Midwest’s entrepreneurial ecosystem

The topic of the keynote talk at the Illinois Venture Capital Association (IVCA) and National Venture Capital Association (NVCA) Luncheon on May 21st, 2014 was “Let’s Hear it for the Midwest”. The featured speaker was Mark Kvamme of Drive Capital which is based in Columbus, Ohio. In accordance with the theme, Kvamme remarked, “...there was a study that looked at successful investments in companies. It turned out that the Midwest tech companies had the highest rate of return of any region. We have the GDP, the customers and the success.”
 
Introductory remarks kicked off the luncheon, from IVCA Executive Director Maura O’Hara, in addition to the sponsor representatives Bill Chapman of Baker Tilly and Matt Richards of Ropes & Gray. The 2014 IVCA/NVCA luncheon was sponsored by legal firm Ropes & Gray, LLP and accounting/advisory firm Baker Tilly.
 
The featured speaker was Mark Kvamme of Drive Capital, formerly a partner with Sequoia Capital. Mr. Kvamme founded Drive Capital with Sequoia colleague Chris Olsen – their thesis in raising a $250 million dollar venture fund is that the Midwest has great growth companies with great management. Examples of Midwest companies the firm has invested in include Channel IQ of Chicago, Roadtrippers in Cincinnati, FarmLogs of Ann Arbor, Michigan and CrossChx of Columbus, Ohio.
 
The title of Mr. Kvamme’s talk was “The Case for Outsized Returns from Venture in the Midwest”.  The following are the highlights of his presentation.
 
Origins of the Internet
 
“The internet was basically invented in the Midwest. DNS and Web browsers were formulated here. Why didn’t it stay in the Midwest? Well, by 1990 all of the capital was in California, so Jim Clark of Sequoia Capital flew to Urbana/Champaign and moved Marc Andreessen [of Mosaic, the first widely used web browser] to Silicon Valley. Through the 1990s to the early 2000s, everyone felt you had to do tech in California.”
 
What Has Changed
 
“In 2008, when the Cloud came out, all that craziness that you had to do could be done by somebody else. Dropbox manages over a billion files, but they don’t have servers. What they have is a bunch of people on laptops in their offices. So all of a sudden, the need for an infrastructure – like the one in Silicon Valley – could be freed up. You didn’t need to go there anymore.”
 
The Midwest
 
“The feeling is, that in the next ten years, 90% of innovation will be done outside the Silicon Valley. The problem is the Venture Capital firms, and the Limited Partners totally forgot the Midwest. What is really interesting about the Midwest, is that we generate 22% of the GDP and if the Midwest were a country, it would be the fifth largest in the world. There are 150 companies of the Fortune 500 here. What Silicon Valley lacks is customers, the Midwest has customers.”
 
Can You Make Money in the Midwest?
 
“If we’re going to have a vibrant VC community in the Midwest, you have to have exits. And this is related to the 22% GDP. If you took the last five years, there were 52 billion dollars in outcomes in the Midwest, creating close to 400 billion dollars in value. If you compare that to Silicon Valley – taking Facebook out – the Midwest did better.”
 
The First Fund
 
“Our first fund for Drive Capital was for $250 million. It took over 300 meetings to accomplish it, I was told if it was Silicon Valley it would have taken 24 hours. We had to sell people on the potential of the Midwest. But 60% of our funds came from outside the Midwest, which tells you something.”
 
Knocking Down Two Myths About Midwest Investing
 
“The first myth is that you can’t make money in the Midwest. In association with that there was a study that looked at success through investments in companies rather than funds. It turned out that the Midwest tech companies had the highest rate of return of any region. We have the GDP, the customers and the success.
 
The second myth is that there is no tech talent in the Midwest. Hogwash. Most of these name tech successes began in the Midwest, and they moved them to Silicon Valley. And are there computer scientists here? 25% of all CS degrees in the U.S. are actually given in the Midwest. Carnegie-Mellon, University of Michigan and University of Chicago are top schools here, to name a few. And you have engineers in all these amazing organizations.”
 
Entrepreneurs in the Midwest
 
“Because we don’t have the level of funders here, as opposed to Silicon Valley, entrepreneurs in the Midwest tend to sell way too early. In fact, Silicon Valley tends to cherry pick from the Midwest because they know they can get a better price here. If you have the capital behind an entrepreneur, and the market opportunity, you can attract world class talent.”
 
Jesse Vollmar, Farmlogs.com
 
“Jesse Vollmar came from a family of farmers, and he decided that he didn’t want to work with his hands, he wanted to work with his brain. He got his computer science degree at the University of Michigan, and then went to California. He began farmlogs.com there. As the company started to grow, he realized that he had difficulty attracting talent. It’s hard to hire a person in Silicon Valley.
 
Plus, nobody in Silicon Valley understood his customer, the farmer. So he picked up his company and moved back to Ann Arbor, Michigan. In a very short period of time, he has 10% of the nation’s farms on his system. He’s adding 1000 fields a day, and it’s a multi-trillion dollar business. He figures to achieve 20% of the nation’s farms soon.
 
When Drive Capital met Jesse, we saw what he was doing, we saw the digital technology he was using in very inventive ways, and Chris and I made the decision to invest while we were in the meeting. We wrote a term sheet right there. That is the one thing I learned from Silicon Valley – when you see it and you know it, you have to run hard. By the way, when we came in, farmlog.com only had 2% of the fields.”
 
Concluding Remarks
 
“We need more funds. We need more $250 million funds. We need two or three funds in all the major cities of the Midwest. If there is a takeaway from this presentation, I want you to think about how great an opportunity it is to be here. This is a great place to invest. We have the people, the capability and the talent to build the new generation of tech companies. If we’re one of the biggest GDPs in the nation, why can’t we be the number one technology creator in the country?”
 
Q&A
 
QUESTION: Are there other people in Silicon Valley talking about establishing a VC fund in the Midwest.
 
Mark Kvamme: I wish there were. There have been a few in Chicago. The Venture business is a cottage industry. By putting some partners here, it will always just be a satellite. It does a disservice to the region to have business just as a satellite office. If a firm could just move here, I’d love to have that. Location has a lot to do with it. Many funds just want to invest regionally. We need more trading partners here. As some funds from Silicon Valley have told us, our Series “B” level companies would have to be two times better than a company we find in Silicon Valley, because of the distance.
 
QUESTION: How do we get the opportunities out there to notice us here?
 
Kvamme: I think if we create a fund that shows good successes, that will begin to open the door. Drive Capital had its annual meeting last week, and all the LPs left pretty happy with what they were seeing from our entrepreneurs. The Midwest is like Silicon Valley in the late 1970s, with the fledgling company atmosphere. We have to have some success with some younger funds, and we have to see that success at a fund level, just not at a company level.
 
QUESTION: How do we compare to other regions outside of Silicon Valley, like the Northeast, Southwest, Texas, etcetera?
 
Kvamme: Hopefully what happens here is what happened in New York City in the early 2000s. Back then, everyone was saying you couldn’t do VC in New York, it doesn’t work. Union Square Ventures began in 2003, and their success says the rest is history. Now there are five or six VCs in New York, and they have population density.
 
The Southwest and Texas do not have population density. There are a few Austin VCs, but a lot of Austin Venture investments are outside of Austin. There is less engineering horsepower.
 
I am betting my career on it. I think the Midwest is the best region.
 
QUESTION: You’ve done eight deals in the Chicago. Could you describe the process of those deals? What did the term sheets look like, relative to what people are used to seeing around here?
 
Kvamme: That’s a very good question. The terms that local VCs offer around here are terrible. We restructured every single first round. We had one that was 3X participating preferred with an eight percent compounding dividend. That’s not good for the entrepreneur. It’s okay when you’re raising a hundred grand or 500 grand, but if you’re trying to raise 20 million dollars, it just doesn’t work. The problem is also that the guys that come after these deals want the same thing, so we’ve restructured all of them.
 
What we believe at Drive Capital – and we learned this from Sequoia – is that we need very friendly entrepreneurial terms. And the reason why is that you are partnering with that entrepreneur. I’ve found that a lot of firms here locally and throughout the Midwest, is that they think the entrepreneur works for them. Not true. I work for them, they don’t work for me.
 
Our term sheets are one page, with eight key bullet points. We believe we need to partner with that entrepreneur, and we don’t have a lot of preference on top of it. I think the mistakes that people have made here is what I call, ‘spread sheet investing.’ On a spread sheet it looks great, but you don’t make any money on terms. I’ve never seen anybody make money on terms. You make money on the equity percentage you have in the company when it becomes a huge success.
 
That’s what we believe in, and that’s what we’ve seen from the very beginning.
 
Click here for Part Two of the IVCA/NVCA Luncheon, a panel discussion on “Federal Issues Affecting Venture and Private Equity.” The next IVCA Toolkit Event is June 5th, 2014, regarding “Developing Top C-Suite Talent.” Click here for more details.