Bringing Silicon Valley VC to the Midwest

August 9, 2013, 1:00 PM UTC

Why two top venture capitalists left Silicon Valley for flyover country.

FORTUNE — Mark Kvamme never expected to still be in Ohio.

In early 2011, the veteran venture capitalist left behind his life in Silicon Valley — and a partner position with Sequoia Capital — in order to take an economic development job in Columbus. It was a favor to old friend John Kasich, who had just been elected the Buckeye State’s new governor. Six months, tops. Then a return ticket for the West Coast.

But Kvamme ending up remaining on the Ohio government payroll for nearly two years, during which time the state’s unemployment rate fell modestly from 9% to 8.4%. And those roots grew so deep that Kvamme is now co-founder of a new venture capital firm that will invest in tech startups based in Ohio and other Midwestern states. It’s called Drive Capital, and already has raised $181 million for a debut fund that is targeting a total of $300 million.

“At the beginning I was working four days a week in Ohio and then flying back to San Francisco, and had never considered starting something permanent here,” Kvamme explains. “But it became clear that there were so many great young companies here — particularly withe the fundamental shift to the cloud — but once they begin to grow they almost are required to find funding on the coasts. We are coming into a very underserved market.”

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Kvamme’s partner at Drive Capital is Chris Olsen, a Cincinnati native who also was a Silicon Valley-based partner for Sequoia Capital.

“As a kid, everyone wanted to go to Miami of Ohio and then go work in a management training program at Procter & Gamble (PG), which isn’t exactly your most ideal space for innovation, so that originally led me to California,” Olsen says. “Then Mark approached me last year when I was back visiting folks, and began telling me about all these companies that were off our radar at Sequoia — companies that, if we had found them, we’d try to move West. But Mark felt that if these entrepreneurs could access capital locally, they would stay and be able to access the ton of technical talent that a lot of people in Silicon Valley don’t realize is here.”

The Drive guys won’t talk fundraising, but sources say that they have presented prospective investors with data showing that there are around 50 billion dollar-plus companies within the geographic triangle of Chicago-Pittsburgh-St. Louis. Examples include Epic, a Wisconsin-based pioneer of electronic medical records, Indianapolis customer marketing automation company ExactTarget and, yes, Chicago’s Groupon (GRPN).

“Groupon was a very positive experience,” Kvamme argues. “How many companies that age are valued at $5 billion? Yeah, it got a little bit hyped with some of the valuations, but I think it proved that you can build big tech companies outside of Silicon Valley or Boston or New York. And it made sense for them to be in Chicago, because that’s where so many of the big retail companies are, and those were its first customers.”

Drive is based in Columbus, Ohio — a central location that allows the investors to drive to such markets as Pittsburgh, Cincinnati, Indianapolis and Ann Arbor. In the past month they’ve even gone as far as Des Moines. Expect the firm to invest in both startup and growth-stage tech companies, albeit not in traditional life sciences (where the region is fairly strong, thanks to such things as the Cleveland Clinic).

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So far it has made two investments: Roadtrippers (Cincinnati), a web-based roadtrip planning site; and CrossChx (Columbus), a healthcare security technology startup.

“As more and more technology moves to the cloud, a fundamental geographic shift is coming,” says Kvamme. “Our companies and others in the area are able to recruit very easily because the cost of living is significantly less than in Silicon Valley. “At the end of the day I’m an investor, and I wouldn’t have stayed if I didn’t think there wasn’t a great investment opportunity here.”

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