Is Silicon Valley Still the World’s Greatest Wealth-Generation Machine?
The first thing you might notice about Chris Olsen’s profile on the Drive Capital website is the photo of his daughter crying in front of moving boxes.
That picture was taken the day Olsen and his family were supposed to move from San Francisco to Columbus, Ohio. Olsen had left his job at Sequoia Capital to take a risk with investor Mark Kvamme and co-found Drive Capital, a new venture firm based in the Midwest.
Nine months and 230 pitch meetings later, Kvamme called him and said that the major investor they were counting on had changed their mind and would not be investing in Drive after all.
“I turned around to deliver the blow to my wife and she happened to snap this shot of my daughter at that very moment,” Olsen writes on the Drive Capital site. “The photo perfectly captured my emotions.”
Olsen headed to Ohio anyway. Years later, he still thinks about that moment and says raising $250 million for the firm’s debut fund was “surprisingly hard.” Even though Olsen and Kvamme were both experienced investors who hailed from Sequoia, it proved difficult to sell potential backers on their investment thesis that the Midwest is a hotbed for innovation.
“I can’t tell you how many [limited partners] said to us, ‘Chris, Mark, we love you guys. If you stay in Silicon Valley, it’s easy for us to invest. But you’re going to the Midwest which is frankly a place where no venture firms have been successful,” Olsen tells Term Sheet.
That first fundraise happened five years ago. Just last week, Olsen and his partners raised $350 million for their third venture fund. In this wide-ranging conversation, Olsen discusses the state of innovation in the Midwest and why he believes Silicon Valley is no longer the king of wealth creation.
TERM SHEET: Describe your investment thesis.
OLSEN: The nuance is not we’re not a geographical firm. It’s not like we just throw out the net and meet with all the companies based in the Midwest. That’s not how we invest. We invest on a thematic basis into industries that have multi-billion potential, and we only invest in the market-defining company. We invest in categories including robotics, insurance, healthcare, and artificial intelligence.
Our thesis though is that those companies are more likely to be built in the Midwest than anywhere else because the raw ingredients for success are more accessible to them — access to engineering talent, access to proximity to potential customers. All of those things are crucial to them being successful. The fundamental difference between us and the regional funds is that we’ve invested in companies from other places and we’ve moved them here. Entrepreneurs are moving here because they believe that if they put their company in the middle of the country, they’ve got a better shot at being successful.
The Drive Capital IQ Test is meant to find out if someone is a good fit to join a startup. The first half is a personality assessment and the second half tests your logic and reasoning skills. Why did you develop it and what kinds of insights does it give you about a person?
The challenge for our startups [that are based in the Midwest] is that you need to convince a population of people that joining a startup is not that dangerous. If you’re in Silicon Valley, everyone works at a startup. It’s more popular to say that you work at a startup than at a big company. What we found is that if we can get people to understand and learn more about startups, they can understand the difference between dangerous and scary.
It may not feel very scary to work at a big name company, but it’s actually pretty dangerous if you’re at a company like Best Buy or Sears. Working at a startup might be scary because the balance sheet is a lot skinnier, but it’s not actually that dangerous because you’re signing yourself up to develop skills that will be more valuable tomorrow. The test is designed to show people based here that they might be excellent candidates to join startups.
You’ve been the largest shareholder in the insurance startup Root Insurance. What other sectors are you watching closely?
Robotics is at the top of the list. We’ve made investments in five different robotics companies. We’re close to making our sixth. It’s an incredibly exciting time where machine labor can now start to displace physical labor. In the IT era, you’ve seen technology displace knowledge labor. Now you’re able to displace manual labor. The thing that’s incredibly appealing is that there are entire new industries being built on the backs of these robotics companies that were previously deemed impossible.
MIT published a report that says Americans have valid concerns about whether robots will take their jobs. Outside of Silicon Valley, there’s a general fear of technology like artificial intelligence and autonomous vehicles. What is the sentiment in Ohio and what conversations are you having with your founders about how their technology may affect the general population?
We’ve certainly seen history frame new technologies in a way that’s uncertain and scary. I think robots are the equivalent of what cars were to the horse-and-buggy era. What emerged out of the invention of the automobile is a tremendous increase in jobs and sectors that we previously didn’t even know existed all the way to point where you think about services like Uber and Lyft that are now applying mobile technologies to vehicles. That’s a concept that no one could’ve even imagined in the past.
As much as this will be disruptive to some of these rote, repetitive or potentially dangerous tasks that we’ve asked humans to do, there’s an opportunity for robots to displace that labor. And then it frees up human labor to work on the things that are likely to drive entire new industry.
Silicon Valley is still touted as the greatest wealth-generation machine in the world. Do you really believe this will shift and wealth will be generated elsewhere in a decade?
I think it already has. I think if you look at where the majority of the market cap is built by technology companies, it’s no longer in Silicon Valley. Right now, you have to aggregate a lot of other markets to do this, but it used to be clear that Silicon Valley built more value than anything else. Just think about the most valuable companies in the world and where they’re based. The most valuable e-commerce company in the world? Not based in Silicon Valley. The most valuable digital media and streaming music company in the world? Not based in Silicon Valley. Those are kind of remarkable things to think about. When you pull back and take a global perspective on things, you start to realize this has already happened. I think it’s a matter of time before it becomes a popular sentiment.
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- 1Password, a Canada-based password manager, raised $200 million in Series A funding. Accel led the round, and was joined by investors including Slack Fund.
- Punchh, a San Mateo, Calif.-based customer marketing solutions for physical retailers, raised $40 million in Series C funding. Adams Street Partners and Sapphire Ventures co-led the round, and were joined by investors including AllianceBernstein.
- AMP Robotics Corp, a Louisville, Colo.-based company focused on artificial intelligence and robotics for the recycling industry, raised $16 million in Series A funding. Sequoia Capital led the round.
- Virtual Kitchen Co, a San Francisco-based food tech and logistics company focused on building delivery-optimized kitchens, raised $15 million in Series A funding. Andreessen Horowitz and Base10 Partners co-led the round.
- Hypernet Labs, a Palo Alto-based provider of computing power, raised $10 million in funding. 500 Startups led the round.
- Refundit, an Israel-based provider of mobile solutions that allows travelers to reclaim VAT refunds digitally, raised $9.8 million in funding. Amadeus Ventures led the round.
- FanAI, a Santa Monica, Calif.-based performance sponsorship data platform, raised $8 million in Series A funding. Marubeni Corporation led the round.
- GeoQuant, a New York-based developer of a platform for measuring political risk in real time, raised $4.5 million in Series A funding. Fitch Ventures led the round, and was joined by investors including, Aleph VC and XL Innovate.
PRIVATE EQUITY DEALS
- Leonard Green & Partners, Arsenal Capital Partners, and Novo Holdings agreed to recapitalize WCG, a provider of solutions aimed to improve the quality and efficiency of clinical research. Financial terms weren't disclosed.
- Encore Consumer Capital made an investment in Murry’s Inc, a Greenbelt, Md.-based maker of frozen French toast sticks and bites. Financial terms weren't disclosed.
- FFL Partners made an investment in Orthodontic Partners, a Grand Rapids, Mich.-based orthodontic services organization. Financial terms weren't disclosed.
- Roche will acquire Promedior, Inc, a Lexington, Mass.-based clinical-stage biotechnology company. The deal values Promedior to up to $1.39 billion.
- Plixer acquired Great Bay Software, a Dover, N.H.-based provider of endpoint visibility solutions. Financial terms weren't disclosed.
- Partners Group agreed to sell its minority equity stake in Action, a Europe-based non-food discount retailer. The stake will be acquired by Hellman & Friedman. The deal values Action at 10.25 billion euros ($11.3 billion).
FIRMS + FUNDS
- HarbourVest Partners, a Boston-based private equity firm, raised $3 billion for its fifth co-investment fund.
- Norwest Venture Partners, a Palo Alto, Calif.-based venture and growth equity investment firm, raised $2 billion for its new fund, Norwest Venture Partners XV, LP.
- The American Hospital Association raised $50 million for its venture capital fund, AHA Innovation Development Fund, LP.
- Anthemis hired Mark Dowds as a managing director and promoted Briana van Strijp, GC Naoshir Vachha, and Ruth Foxe Blader to partners.
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