113. The Next Great Startup Ecosystem is… Part 1 (Chris Olsen)

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Chris Olsen of Drive Capital joins Nick to talk about the next great venture ecosystem: The Midwest.  We review the following:

  • How Chris first discovered the opportunity in the midwest and the reaction of fellow Sequoia partners when he presented his findings
  • The research effort the launched that helped build the midwest thesis and what the key data points were
  • How they define the midwest at Drive
  • Why they chose to locate their HQ in Columbus, OH
  • Why the midwest is the fifth largest economy in the world, receives 25% of all research dollars, graduates more CS students that any other region or country and yet has received only 4% of the venture dollars
  • and we’ll wrap up part one w/ Chris’ response to those that suggest that every great startup must relocate to the valley

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*Please excuse any errors in the below transcript

Nick: Today #Chris Olsen joins us from Columbus, Ohio. #Chris is Co-Founder and General Partner at #Drive Capital. And #Drive launched their first $250 million fund in 2012, and recently launched a $300 million second fund. Prior to joining #Drive Capital, #Chris had been a partner at #Sequoia since 2006, where he focused on growth stage energy, financial and technology companies. #Chris, as a Chicago native, I’m very excited to talk about the midwest today. Thanks so much for sharing your time with us.

Chris: Thank you for having me, #Nick. I’m thrilled to be here.

Nick: Great! Can you start off with sort of your story and your path to venture capital?

Chris: Sure! So, you know, I came out of school probably the least qualified person to go into venture. I was, I was actually a professional squash player when I first came out.

Nick: Is that right?

Chris: And, you know, it was just my passion and it was what, what I followed and I had this unique approach. In college I dropped out of school to try and go on the, the professional squash tour. And I didn’t know how to, how to do that. So the methodology I used was that I picked up the phone and I called the guy who was the number one player in the world at the time. And I said hey, you’ve, you’ve never met me before but I’m this kid in America and I’m really passionate about squash, and I think you should let me live on your couch because if you did I think I could beat you by the end of this year. And he didn’t know what to make of me. And I think that was probably the reason why he agreed to meet for coffee. So we met for coffee and I convinced him to, to let me sleep on his couch, and I lived in London with him for a while. And over the course of the next four months, I ended up learning two of the most important lessons I had ever learned. Number one was that I was just never going to be a pro squash player. It just wasn’t in the cards. I didn’t have the right DNA and just these guys were amazingly talented athletes, and as much as I wanted that to happen, it wasn’t going to be there. But more importantly, I learned that if you pick up the phone and you cold call people, you’d be amazed who calls you back. And I took that, that approach towards what would then be my backup career which, which was venture capital. So I came back to school, I graduated with a degree in political science which, as you can imagine, cold calling Sand Hill Road firms with a political science degree, it wasn’t exactly the most popular thing, but I did get a bunch of them to meet with me. And I did get a lot of them to give me advice. And I got some of the, you know, at a very young age had the opportunity to get an, at least an understanding of what those guys were looking for. So none of them hired me. But they encouraged me to, to go out and figure out what business was all about. And I went from taking that into, there were these analysts programs on Wall Street which at the time were very, very good exposure for young people to get into the financial markets. And I got a job on Wall Street at an investment bank, completed my, my two year stint in the salt mines there, and then went back and cold called all the venture firms again on Sand Hill Road. And was fortunate enough to interview with a later stage firm there called #TCV. And in the course of some time at #TCV was able to, to really show that I had done pretty well at investing and ultimately got a lunch over at #Sequoia that took me there and, and then became a partner there for 6 years before, before founding #Drive. So a little bit of an unusual path, but a lot of what I, I used to initially get in, namely that, that cold call methodology, that proactive methodology is, is what I’ve relied on.

Nick: Well, I’m glad I cold called you. Next time you’re in Chicago we’ll have to, we’ll have to get a game of squash.

Chris: Absolutely!

Nick: Cool! So can you tell us a little bit more about your experience at #Sequoia and what, what you were focused on there?

Chris: Sure! So #Sequoia is I think a truly special place, in my opinion it is, it is the very best venture firm in Silicon Valley. And there are a couple of principles that the firm really, really builds it’s, it’s investment criteria and it’s model on back in the 70s that are very strong today. And one of them is always investing within a bicycle ride of the office. And now it’s, it’s a heck of a bike track being in Sand Hill Road, but the reason for that is when #Sequoia invests in companies, it’s, it’s a very involved partnership. It’s a very, you know, hands on relationship where they’re taking the board seats, they’re offering a lot of advice. So #Sequoia looks for founders who are defining markets. And they’re incredibly picky about their selection process and only committing their time to people that have these incredibly audacious ideas that will, will really define an industry. And they have a track record of doing it. Today the company’s portfolio, their grip is in, it’s almost just their public holdings represent almost 25% of the, the Nasdaq if, if not even more. So as a relatively young person in a venture career, it was a fabulous training ground. And you had the opportunity and a front row seat to board rooms and being a board member of a lot of companies there that are, are incredibly important and impactful businesses today. You know, I still think if, if you’re an entrepreneur in Silicon Valley, you should be talking to #Sequoia. They are absolutely the best.

Nick: Awesome! Well, today I’d like to focus on your experience at #Drive, and also the future of, of the startup ecosystem in the midwest. So #Chris, you’ve told an interesting story in the past about how you first identified the emerging opportunity here. And it all started with a conversation you had with a colleague at #Sequoia. Can you walk us through this experience and how it played out?

Chris: So it’s a story of some serendipity and some of the macro trends that we continue to see in technology. The macro trends were something we had observed at #Sequoia where we were seeing that while the majority of the market cap has been built in Silicon Valley over the last 15 years, in the next 15 years it would be built outside of Silicon Valley. And you’ve already seen that shift happen with the emergence of tech ecosystems in India and China and Israel. And so we were running around the world opening up funds and partnerships in all these far off places, chasing what we thought were the next emerging ecosystems. And simultaneous to that, one of my partners was invited by #John Kasich, who was the then newly elected Governor of Ohio, to come out and run economic development. And while he had never been to Ohio, he was a big fan of, of what was going on in the #Kasich administration and agreed to take up a six month sabbatical from #Sequoia. So while, that was #Mark Kvamme, and while #Mark was out here working projects with Ohio and the economic development groups, what I was out doing was visiting a company for #Sequoia. And we caught up over dinner one night. And I said to #Mark, I said, well, you know, you’ve been out here 6 months, I said, when are you coming back? He said, you know, I don’t think I am coming back, and in fact I think you should leave #Sequoia and you should start a venture capital firm out here that focuses on investing in midwest companies. And I told #Mark that was a totally crazy idea. And he said, well, what are you doing now?’And I said, well, we’re looking at going into Turkey and we’re looking at Brazil, we’ve just made some investments in Europe. And he said well, I just think that’s nuts because look I’m not, I’m not so young to have, without having history on Silicon Valley. So you know I was, I grew up there. And his father had taken him out to a cherry orchard and showed him where he was going to build his company. And that was, his father is the founder of #National Semi Conductor which, do you know your history on Silicon Valley, it’s one of the, the very early success stories that really minted the, the area of the Silicon Valley. And,

Nick: Wow

Chris: he’s like I look at the midwest today and I see in this position of economic development and meeting all these entrepreneurs, and I’m just telling you there’s something going on here. There are incredibly smart founders who are out here with cutting edge ideas, cutting edge products, that are changing their industries. But there’s nobody investing in them out here relative to the dollar amounts that you see in, in Silicon Valley, and I think it’s an overlooked opportunity. So I, I thought it was an interesting idea. And we, we’re a very good complementary team. He is, you know, very much the guy who is, has those, those visionary ideas. I’m very much a, a data driven, research oriented person. And so I started looking into the data and what he was kind of saying on the ground. And what was interesting was I initially looked at this and so I had all of the biases that everyone in Silicon Valley tells me today that, you know, you can’t find great teams here, it’s a small market, tech companies can only be built in Silicon Valley, that’s a special place, all of that stuff. And every piece of research we looked into said the opposite. And it suggested for example, California is the eighth largest economy. Well, the midwest is the fifth largest economy in the world. It’s bigger than Brazil, it’s bigger than Russia, it’s bigger than India, and it’s got a capital market system that we understand. It’s got this engine of incredible engineering talent with schools like UIUC, Carnegie Mellon and Michigan. In fact, you graduate more engineers in the midwest every year than any other corner of planet earth. And despite that, the venture capitalists ignore it. And so we looked at that and felt like this was a real opportunity. And I remember from some of my early days at #Sequoia talking to #Don Valentine, he’s the founder of the firm, and hearing his story. He said in 1972 everyone in Boston thought he was crazy because the whole world told him the only place you could do startups, the only place tech was happening was in Boston and it would never happen in California. There wasn’t enough infrastructure, there weren’t enough smart people. And I realized this is, this is a lot of parallels. And the same things that #Fred Wilson has done in the New York or what the #Index guys have done in Europe, or what the #Benchmark guys have done in, in Israel. We felt like that was, that was about tapping in the midwest. And what a fun thing, what an amazing thing to be a part of, to go out and, and start a firm that was investing in that theme. Because if we were right, it would have the opportunity to redefine all of tech investing in the United States over the next 20 years. So that was the kind of ambition that we had and, and that we were excited and, you know, to this day I keep looking for data that suggests that it’s not going to happen. And every single time we look for it we just continue to find more data, more information, more entrepreneurs were showing that this is, this is happening now here in the midwest.

Nick: Yeah. And you’ve written in the past about how you launched this significant research effort to assess the data and potentially build a new thesis around the midwest. And you mentioned some of the data points here. So sort of the macro economy as well as talent. What were the key data points that you were analyzing and, and what were the results?

Chris: Well, so we looked at the, the raw ingredients first and foremost. How many, you know, how many engineers are there in the midwest? And we started looking at all these companies. Well, you know, there are more engineers in Columbus at #Nationwide Insurance than there are at #Facebook. That’s a pretty remarkable pocket of talent to get out of. And that’s

Nick: Sure

Chris: And Columbus is an example. It’s not just nationwide, you know. #J P Morgan has it’s largest office in the world here. They have five, they hire five thousand engineers a year into #J P Morgan. Now the same thing that’s true of just those two companies, and I can go on about other Columbus companies, the same thing that you see happening here is happening in Indianapolis with firms like #Eli Lilli or in Chicago with the likes of #Boing and the whole host of Fortune 500 companies who are there. You know, these, these giants of industry have woken up to the amount of engineering talent required to innovate their businesses, and they’re hiring them at a rapid pace. So we looked at the number of engineers coming out of the universities, and we compared it to other areas. We looked at the macro economic size of the economy. We also looked at, it was an interesting analysis, we looked at the, the proximity to customers. So it’s our view that your, your investors are great, but if you really are building a serious business then you have to get your, your customers are going to be the ones who fund you for the next twenty, thirty years. Your investors might fund you for the first five or, or some short period of time, but long term if you’re building a great product that your customers will buy, you’ll be successful. And the proximity to all these customers out here is so fantastic that you look at examples where there were Silicon Valley companies like, you know, responses, and, and in the email market space we have responses, and then we had one called #StrongMail. And they competed against this company in Indianapolis called #ExactTarget. Well, you ask #Scott and you say #Scott how did you get the, the $2.7 billion outcome and all these Silicon Valley companies, how did you outrun them? And he said, look, I have the same engineering team that started in the very beginning. The guys who wrote my last line of code are the ones who wrote my first line of code. And secondly, I am so close to my customers that my CTO would go out and visit a customer every single day. That’s astonishing. That does not happen in Silicon Valley,

Nick: No

Chris: because there’s some geographical limitations. So this proximity to customers is really interesting. We also started looking at the exit data. And we said how many billion dollar companies have there been in the midwest over the past 5 years? And it was interesting if you, if you’d ask me to name them I would have said maybe there’s four or five. But actually there have been, there have been 52 of them. And those companies accounted for $400 billion in, in shareholder value. Now not all those companies are tech companies. Not all those companies are, are venture companies. But a lot of them are. More than half of them are. And it’s names that you hear about, you know, occasionally. You know, companies like #Bats Trading in Kansas City, or you look at even #Groupon for all of the, the challenges they’ve had, they’re still a multi billion dollar company, or #GrubHub or #ExactTarget, or go down the list, you know. There’s plenty of massive companies that are getting built out here. And what’s interesting is that, you know, these companies are overlooked by the venture community until they get to be those, those later stage businesses, until they get to have 20 or 40 million in sales. And then of course the firms will pay you attention. But, you know, we, we are kind of looking at that feeling like that was an opportunity for us to go in and identify those next batch of entrepreneurs who were starting those companies that were going to be those, those market making businesses, that have those core advantages from being built out here in the midwest. And that those would be the folks that we would want to invest in.

Nick: And #Chris, how are you defining the midwest and why did you choose Columbus?

Chris: So we define it as the geographic area from Pittsburgh to Kansas City and up to Minneapolis. And the reason that we picked Columbus was because if you look at where the entrepreneurs are coming from and where those investments are being made and where those companies are being built, it’s really in those, these, these city centers. So the same thing that you see in every American town where the current generation is pursuing downtown living in lieu of the suburbs is happening out here in all these midwest cities. And I’m staring out my window here in Columbus, you know, there’s, there are about 15 cranes I’m looking at building skyscrapers or high rise apartment buildings downtown. And this phenomenon is fantastic for startups because any time you take a giant population of young people and pack them in to a small geographic area, there’s some amazing things that come out of it. And, and you can look through history and, and see whether it was in, in Rome or in London or even in San Fransisco, and now more recently all these midwest cities, this is happening. And so to us, it was really important to be at the epicenter of the largest number of those, of those downtown urban areas. And if you get the maps out, which is what we did, and we looked at where is the highest concentration. Columbus is at the middle of the most cities. But within 200 miles of Columbus I can get to Indianapolis, Cleveland, Detroit, Ann Arbor, Pittsburgh, Cincinnati, and there’s no other place in the midwest where you’ve got that kind of, of the infrastructure there for, for finding and working with these startup companies. So that, that was the whole reason behind Columbus.

Nick: So, a couple of your findings as, as you articulated were that the midwest is the fifth largest economy in the world, receives 25% of all research dollars, and graduates more CS students than any other region or country. Why do you think that historically it’s received only 4% of annual venture capital dollars?

Chris: Well, I think it’s a couple of things. Number one is that if you, you look at where most of the venture capitalists go, it’s, they have a tremendous vantage point on the rear view mirror. And frankly, if you look over the last 20 years or 30 years, you’d see that there have been more venture outcomes in Silicon Valley than in any where else. So, so I understand why there is a, a capital concentration in those area codes, because I think a lot of, a lot of venture funds have what, what we would call a kind of a, a farming approach, where you set up shop, you say this is my, my turf I’m going to plow, and then you go and you meet every company you can in Silicon Valley and if you’ve got a, you know, an amazing field like you have in the Bay Area, then you’re, you’re bound to be finding great companies. I think our model is a little bit different. You know, our model is much more of a thematic approach where we are proactively taking that, that same methodology we had towards cold calling the, the squash players at the start of my career. We have that same approach today towards finding our entrepreneurs. So we have a set of themes about which we’re excited about. And then what we do is we proactively go out and we cold call every company in that theme. And so a theme for us right now as an example is data science. We think data science is, is going to transform all enterprise software and that’s a very rich theme for us. So we go out and we’re meeting with every data science  company we can on planet earth. And we’re calling folks in labs, we’re calling public companies, we’re calling small companies, we’re calling startups, we’re calling other investors. And we’re trying to find a vantage point on this market where we can say back to our partnership, you know, this is, this is the most important company in this space and this is why we’re going to make an investment in, in company X because they’re the market defining business. So what’s interesting about that is have you ever heard of me say geography. And the reason is at this point in kind of our methodology, we don’t look for, you know, the, the zip code a company is based. But once we’ve identified that company, then we’ll go out and, and we’ll work to create an investment opportunity that makes sense for that entrepreneur and simultaneously sets that company up for success. Well, in our first fund we’ve invested in 19 companies. Of the 19 companies that we’ve invested in, 16 of them were in these themes. 3 of them were companies that, you know, that they, the patterns were so good, you know, we had to invest because of the, you know, what was going on and who these entrepreneurs were. The rest were in these themes. And of the 16 companies that we’ve invested in, 10 of them were companies that were, sorry, 11 of them were companies that were already based in the midwest. They were, you know, early stage companies in Chicago or growth stage companies in Pittsburgh. And, you know, it’s amazing, they were in this inflection point where they had to choose. They were getting term sheets from the coast and they had to choose do I move my business from here to the coast where these, the VCs are telling me to move it, or do I build it here. And they, we were just asking, just pushing them to ask the question tell me why. Why should you build your company in Silicon Valley when you’ve already got a lot of advantages here? And every time we’ve done that, the entrepreneurs that we’ve met with and we work with have agreed and said actually my company would be better suited to be built here for all the reasons that we’ve already talked about. The other piece of the, the other batch of companies that we haven’t talked about yet, have been these, these market defining companies in our themes that we have moved from other places to the midwest. And in our portfolio we have companies that have moved here from, from Silicon Valley, from Baltimore, from Louisville, from all over. And, you know, that is, that’s something that’s really exciting to us. Because these are entrepreneurs who are proactively saying if I move my business to the midwest, I’ve a better shot at being successful. And in the course of doing that, if we run that forward, you know, for several funds here, what people are going to realize is that there is an incredibly large mass of entrepreneurs and startup companies who are here. And it’s not just our portfolio, it’s other folks. Because I know what we’re doing is replicated by a lot of people out here and a lot of other entrepreneurs who are choosing proactively to move into the midwest to build their companies.

Nick: Mmhmm. I’ve spoken with a number of investors that believe that all, all great tech companies must relocate to the Valley. You know, #Naval is pretty, pretty famous for saying that, but every successful founder I have talked to in the midwest has attributed their location to a big part of their success.

Chris: Sure! I mean, it doesn’t surprise me. I, look, I used to be that guy saying that you have to move your company to Silicon Valley.

Nick: Right

Chris: And the interesting thing is if you ask people well just tell me why, they parrot back to you the same things that people have told them before. And I used to do the same thing. But if people ask you things like okay well, where, where can you have access to the most engineering talent? It’s not in Silicon Valley. It’s, it’s here. Where can I get access to the greatest proximity to the customers? It’s not in Silicon Valley, it’s here. Not every company will be built here. I mean, there’s some companies that does make sense to be built in Silicon Valley. But, you know, the reality is if you look at the majority of companies that are, are driving the economy today, it’s companies that are looking at an industry that, an established industry, they’re adapting technology to do it better, faster, cheaper. And to them, there’s, there’s a lot of infrastructure and domain knowledge that sits in these industries out here. Whether it’s in healthcare or financial services or retail or go down the list,

Nick: Sure

Chris: And, you know, look at these companies that are getting built today. And it’s great if you’re building a next generation insurance company, you know, you need a lot of actuaries. Do you think there’s more actuaries in Silicon Valley or do you think there’s more actuaries here where you’ve got more multi billion dollar insurance companies than anywhere else. Like, my bet is here. So convincing these people to walk across the street into our companies versus convincing them to move out an entire team to Silicon Valley, I think is, is a relatively hard challenge to sign up for. And by the time it takes folks to do that we’ll have already shown our customers how great the products are that we can build.