Can a Silicon Valley insider save Ohio’s economy?

Kvamme (pronounced KWAH-me) is a partner at venture capital powerhouse Sequoia Capital, and he might easily be mistaken for a guest speaker flown in to inspire the local business set. But the Silicon Valley native — and son of tech industry icon Floyd Kvamme — is an Ohio fixture now. In January of last year he accepted an offer from John Kasich, an old friend and the state’s newly elected Republican governor, to revamp Ohio’s economic development agency, a temporary gig that by June of 2011 had evolved into a $1-a-year, full-time post as the state’s jobs czar. His mandate: to Think Different about how to reverse Ohio’s generation-long economic decay.

It is a daunting and high-profile task. Ohio shed some 400,000 jobs in the recession, and President Barack Obama and rival Mitt Romney already are debating about the quality of the economic recovery in this pivotal battleground state. Not surprisingly, Kvamme’s plan is to run Ohio’s newly privatized jobs agency something like an investment firm. Working with Kasich, he peeled the nonprofit out of a bureaucratic morass, branded it JobsOhio, and set up shop in a sleek, open-space office with a commanding view of the statehouse in downtown Columbus. Instead of doling out grants and other incentive packages favored by most economic development arms, JobsOhio will mostly be handing out loans to pump up key industries — some you’d expect, like autos and advanced manufacturing — and some you wouldn’t, like polymers and biohealth. Kvamme’s also trying to jump-start an entrepreneurial renaissance by flagging promising startups for his VC buddies on the coasts. It’s a strategy born of a Silicon Valley mindset. And it just might work.

This is the story of a risk taker and a dreamer who gave up the fast pace and prosperity of the Bay Area for one of the toughest jobs in America, helping revive the sluggish Ohio economy. The move has not been easy. It accelerated the demise of Kvamme’s already shaky 26-year marriage. Four months after he took the post he was nearly killed when he crashed his motocross bike off a 20-foot jump, breaking most of the bones in his face and requiring nine hours of surgery.

But Kvamme, who remains a special limited partner at Sequoia, sees his new role as part of a higher calling. While still in his twenties he scribbled a list of life goals. Now 51, he can put check marks next to most of the items on that list: raise healthy children (he has four), become CEO of a company and take it public, master some foreign languages (French and Norwegian). The last item, “help a million people,” seemed more elusive until Kasich offered him a chance, through JobsOhio, to do just that.

In his Burberry trench coat and Prada driving mocs, Kvamme cuts an unlikely figure on the streets of Columbus. On a dull late-January day, Kvamme, who bears a resemblance to actor James Woods — with a laugh like Eddie Murphy’s — is outside only to walk from the JobsOhio office to the neighboring building, where the governor’s suite claims the 30th floor. He nevertheless uses the opportunity to join a conference call with Sequoia. (He remains on the boards of his nonpublic portfolio companies.)

Once upstairs, Kvamme is back in JobsOhio mode. He joins three top aides to Kasich in a windowless conference room to puzzle through a problem particularly offensive to him: Internet service outside the state’s major metropolitan areas is decidedly 20th century. The fix Kvamme favors is getting behind a fledgling Ohio firm called Agile Network Builders. The company wants to build a statewide network of fiber-grade wireless broadband by hanging transmitters from the towers that the state uses to broadcast emergency signals. It can get the job done in a matter of months. But it needs startup capital, a resource in woefully short supply. (The entire state saw $176 million in venture investment in 2011; California got 96 times that amount, according to Dow Jones VentureSource.) Kvamme initially proposes tapping up to $12 million in various government loans and another $3 million in equity he’ll help the company round up from his VC network — an approach he later drops in favor of raising all the money privately, a project that’s still in process. “This is how you get things done,” Kvamme says. The whole meeting takes 40 minutes.

Kvamme aims to make that kind of agility a hallmark. His agency is preparing to — get this — issue up to $1.5 billion in bonds to lease Ohio’s liquor business from the state, with plans to operate it at a $100 million annual profit. It would be the single largest financing deal of his career. Most of that money will be doled out in loans, not the typical state model of taxpayer-funded grants and rebates, so that if Kvamme pulls it off, Ohio in the not-too-distant future could have something no other state has: a billion-dollar economic development fund.

Kvamme isn’t supposed to mention what the concept calls to mind, since it sets fellow Republicans on edge, but he can’t help himself. He notes that Temasek, Singapore’s state-owned investment arm, started with the same amount of money and, through aggressive investing, helped transform the nation into a global player. He wants to repeat the trick for Ohio by building manufacturing hubs that include entire supply chains, so the logistics costs are cheap enough to more than make up for pricier American labor.

The approach certainly is appealing to executives — if Kvamme and Kasich can get the numbers to work. Jeff Fettig, CEO of Whirlpool (WHR), based in Benton Harbor, Mich., is already bringing some production in Germany and China back to the state. “We’ve already made a big investment in Ohio, so we’d rather have a supply chain enabling us to be competitive all the time than a one-time grant from the state,” Fettig says. “The bet is to grow from strength.”

More: John Kasich’s Obama-like approach to creating jobs

Back in the early ’80S, before Silicon Valley was full of young workaholics obsessed with building businesses, Kvamme stood out: He started working at Apple (AAPL) when he was 19. At the time he was still carrying a nearly full course load at the University of California at Berkeley, where he was majoring in French economics and literature. His father, Floyd — who co-founded National Semiconductor, went on to head sales and marketing at Apple, then became a VC at Kleiner Perkins — helped get him the gig and encouraged him to manage his time by blocking out every single hour of the week.

Growing up surrounded by the nascent industry, Kvamme hadn’t paid much attention to it. Seeing it up close, he was suddenly enthralled by technology’s transformational potential. In the engineering group at Apple, he says, he fell in love with the computer, and he spent the 1980s at the front lines of the PC revolution making and marketing both hardware and software. In the 1990s he and two other Apple alums founded CKS, a marketing and consulting firm that advised Fortune 500 companies — including McDonald’s (MCD), Citibank (C), GM (GM), and Nabisco — on, among other things, how to adjust their business models for the coming Internet revolution. And while he’s always been animated by a boyish enthusiasm — “Mark’s buoyancy makes people feel good,” Sequoia partner Mike Moritz says. “Nothing is impossible for him” — he’s also a realist. In the wake of the 2008 financial collapse, he and other Sequoia partners counseled their portfolio companies to batten down the hatches. “He was instrumental in that reformation,” says Dick Glover, CEO of Funny or Die, the comedy website that was Kvamme’s brainchild with one of his sons, then a teenager and an aspiring comedian.

Kvamme recognized a kindred bluntness in Kasich when they first met in 1996. CKS went public in 1995, and Kvamme’s stake was valued at $47.7 million after the offering. He recalls the first words Kasich, then chair of the House Budget Committee, said to him on a balcony of the U.S. Capitol: “You’re from Silicon Valley. Are you rich?” Kvamme raised money and made introductions for Kasich during the Ohioan’s short-lived presidential bid three years later, but their first meaningful collaboration came in the wake of the 9/11 attacks. Kasich, out of Congress and working at Lehman Brothers, wanted to help the country respond. With Kvamme, by then at Sequoia, he arranged a meeting at the Pentagon between Defense Secretary Donald Rumsfeld, his senior lieutenants, and a handful of tech industry titans, including Larry Page, Sergey Brin, and Marc Andreessen. It kicked off a classified project to match military needs with emerging technologies from startups — and gave Kvamme his first view of what venture capitalists could achieve working with an unfettered government.

Kvamme does not, however, have that kind of free rein in Ohio. It’s a point Kasich leans forward to make while we’re somewhere above northwest Ohio in the governor’s 1982 Hawker Beechcraft King Air, flying back from a ribbon cutting in Toledo. JobsOhio, he tells me sharply, “will do what we as a group decide and what the governor thinks is in the best interest of the people of the state.”

Indeed, the agency has had to adjust its ambitions to accommodate the people — and politicians — of the state. Kvamme originally wanted to fund it with private money and take equity stakes in some startups — big risk, big reward, an approach that naturally appeals to him. Republicans in the legislature balked. Since a backlash in the 1850s over soured state investments in privately built canals and railroads, the practice has been off-limits in Ohio, and it’s unclear whether a quasi-public agency could pull it off legally. In crafting the statute establishing the group, Kasich purposefully left the door open for it to take ownership positions down the line.

The push and pull between Kvamme and Kasich has been constructive by all appearances, if occasionally awkward. Kvamme’s approach is to go bold, frequently in favor of smart but intrusive government action, the way the Singaporean government did with Temasek. That’s dangerous talk for a self-described conservative working for a governor elected on Tea Party steam, but Kvamme isn’t shy about goring free-market dogmas: defending the Wall Street bailout, the auto industry rescue, and the federal guarantee of a loan to Solyndra — all bêtes noires of the new right. It’s a view shaped by his history studies at Berkeley and the realization that “we’re not a democracy, we’re a republic,” in which elected leaders should have a wide berth to set the course. “Mob rule doesn’t work,” he says. Just look at the government by referendum in California.

Kasich himself recognizes a role for government to help get things going — “Laissez faire is fine,” he says. “Laissez faire in a vacuum is not” — but within tighter limits. When I ask him about a proposal Kvamme is working on to backstop brownfield development with state loans, Kasich says he’s “very, very reluctant” to support it. (He ended up coming around.)

“That’s a very hard relationship,” says Wilber James, a close friend of both Kvamme and Kasich and co-founder of RockPort Capital, a Boston-based venture firm that had a 7.5% stake in Solyndra. “The risk-reward thing is very different for Mark than it is for John. And I think the hardest thing for Mark is learning that he’s working for John Kasich and he’s got to act accordingly.”

More: Ohio’s housing hangover

Yet as the two tack toward what Kasich calls a “big idea” for bringing jobs back to Ohio, the early returns are offering the kind of good news that’s been too hard to come by in the past 40 years, when the state’s share of national economic activity fell 38%. In 1970, Ohio’s portion of the GDP was 5.3%; by 2010 it had dipped to 3.3%. Last year the state appeared to turn a corner, adding nearly 38,000 jobs, and the unemployment rate has now dropped below the national average to 7.4%. With the auto recovery gaining traction and natural-gas drilling poised to boom in the eastern part of the state, Kasich and his team inherited some momentum. The state has yet to lure a new big-fish employer, and it lost Chiquita Brands (CQB), an iconic Cincinnati company, to North Carolina last year. But Kvamme says that outcome proves the state is driving a hard bargain with its incentive dollars and points to other deals struck to retain Ohio companies flirting with relocation, including American Greetings and Diebold.

Not everyone is sold on Kvamme’s brand of job creation. “There’s no question Mark’s bright and knowledgeable,” says Dennis Murray, a Democratic state senator who is suing to challenge the constitutionality of JobsOhio, “but there’s no good reason to conduct economic development behind closed doors.” Kvamme believes it will be at least a year and a half before he knows whether the enterprise is succeeding. In the meantime, he’s encouraged because its initial wins are resonating. “It’s like any adventure,” Moritz says. “I think the compass is set in the right direction, and they’ve embarked on the journey. But you don’t know for some time whether you’re going to reach port safely and successfully.”

There’s a dimension of Kvamme’s mission that won’t be measured in employment reports. He wants Ohioans to learn it’s okay to fail — not to wallow in defeatism when they come up short but to understand that stumbling is a critical step toward reinvention. “If you have a low tolerance for failure, you’re stuck to the way things have been done, and you won’t change,” he says.

Kvamme learned how to be a VC by watching the first three companies he backed go belly-up. It took breaking his neck in a 2008 skiing accident to realize, during his convalescence, that he was ready to move beyond venture capital. In his recovery from the motocross crash last spring, he grasped finally that his marriage was over.

It may require a preternatural sunniness to see the seeds of a resurrection in the pit of an economic implosion, but Kvamme is here sowing his own. He has purchased a 42-acre soybean farm outside Columbus and an ultramodern condo downtown. He muses aloud about buying the Ringside, a plucky dive bar in an alley across from the statehouse, and turning it into a hangout for politicos. And he has a new girlfriend, a 33-year-old investment banker. He’s talking about reconnecting with his parents, from whom he is estranged. His relationship with them grew rocky as he entered adulthood, and unraveled after he married. He eventually told his father he didn’t want his trust fund. (Floyd Kvamme declined to comment.) Nearly a quarter-century has passed since he last spoke to his mother, and his attempts to reconcile with his father have so far fallen flat.

He thinks there may be a chance to try again, now that he’s finalizing his divorce. “The funny thing about people is they kind of get fixed in the way they think about everything, and they just don’t want to move out of their comfort zone,” Kvamme says. He’s talking about his parents, but he could just as easily be describing his challenge here. We’re standing on the motocross course he’s just built on his farm, and it looks like a mess: all torn-up mud and jagged track. The grass will regrow over most of it, and once the rain smooths the track, he’ll be riding again.

This story is from the June 11, 2012 issue of Fortune.