Drive Capital's Success Story: A Second Act in Venture Capital

Venture Capital and the Midwest: Drive Capital's Story

The relationship between venture capital firms and the Midwest has historically been characterized by fluctuating interest. Investment activity tends to surge during prosperous economic periods, only to diminish when market conditions deteriorate. For Drive Capital, a firm headquartered in Columbus, Ohio, this pattern of engagement and detachment coincided with significant internal challenges a few years prior – a division between co-founders that threatened the firm’s existence but ultimately may have fortified its position.

Recent Liquidity Event

Drive Capital achieved a notable accomplishment in the current venture capital environment this past May. The firm successfully returned $500 million to its investors within a single week. This distribution included approximately $140 million in shares of Root Insurance, following the divestment of Austin-based Thoughtful Automation and another confidential holding.

While some might perceive this as a promotional tactic, limited partners were likely satisfied with the outcome. “To my knowledge, no other venture firm has demonstrated such substantial liquidity in recent times,” stated Chris Olsen, Drive’s co-founder and current sole managing partner, during an interview with TechCrunch from the firm’s Columbus office in the Short North district.

Overcoming Internal Challenges

This represents a significant recovery for a firm that faced critical questions just three years ago. This period saw the separation of Olsen and his co-founder, Mark Kvamme, both previously partners at Sequoia Capital.

The split, which came as a surprise to the firm’s investors, led Kvamme to establish the Ohio Fund. This new investment vehicle focuses on broader economic development within the state, encompassing areas like real estate, infrastructure, and manufacturing, in addition to technology investments.

A Contrarian Investment Strategy

Drive Capital’s recent successes are attributed to what Olsen describes as a deliberately unconventional strategy within an industry often fixated on “unicorns” and “decacorns” – companies with valuations of $1 billion and $10 billion, respectively.

“The prevailing narrative, whether in news reports or casual conversations in Sand Hill Road coffee shops, centers on the potential for $50 billion or $100 billion valuations,” Olsen explained. “However, the truth is that while these outcomes do occur, they are exceptionally rare. Over the past two decades, only 12 companies in the United States have reached valuations exceeding $50 billion.”

Conversely, he pointed out that there have been 127 initial public offerings (IPOs) valued at $3 billion or more, alongside numerous mergers and acquisitions (M&A) at that level. “Achieving exits at the $3 billion mark allows for consistent results, occurring on a monthly basis,” he added.

The Thoughtful Automation Exit

This reasoning informed the exit strategy for Thoughtful Automation, which Olsen characterized as “nearly fund-returning” despite its valuation being “below a billion dollars.”

The AI-driven healthcare automation company was acquired by New Mountain Capital, a private equity firm. The acquisition involved combining Thoughtful Automation with two other entities to create Smarter Technologies. Olsen stated that Drive Capital held “multiples” of the typical Silicon Valley ownership stake in the company.

Drive’s average ownership stake is around 30%, compared to the 10% often held by firms in Silicon Valley. This is frequently due to Drive being the sole venture investor across multiple funding rounds.

Sole Investor Advantage

“We were the only venture firm to invest in that company,” Olsen said regarding Thoughtful Automation, which had previously received backing from New Mountain Capital. “Approximately 20% of the companies within our portfolio have us as their sole venture capital partner.”

Successes and Setbacks at Drive

Drive Capital’s investment history demonstrates a mix of significant achievements and notable failures. The firm was an initial investor in Duolingo, providing backing to the language-learning platform before it generated revenue. This investment stemmed from a meeting between Olsen and Kvamme with founder Luis von Ahn in Pittsburgh, Duolingo’s home city. Currently, Duolingo is publicly traded on Nasdaq, boasting a market capitalization of approximately $18 billion.

Furthermore, Drive invested in Vast Data, a data storage solution valued at $9 billion as of late 2023, and realized profits from the recent distribution of Root Insurance shares, despite the company’s challenging performance on the public market following its 2020 IPO.

However, Drive also faced the substantial failure of Olive AI, a healthcare automation startup based in Columbus. Olive AI secured over $900 million in funding and reached a $4 billion valuation before ultimately selling off parts of its business in a distressed sale.

Olsen contends that what distinguishes Drive in these scenarios is its dedication to supporting companies that are established outside of Silicon Valley’s intensely competitive environment. To this end, the firm now maintains a workforce across six cities – Columbus, Austin, Boulder, Chicago, Atlanta, and Toronto – and prioritizes founders who would otherwise be forced to choose between proximity to their customers and their investors.

He suggests this is Drive’s key differentiator. “Companies initiating outside of Silicon Valley face a more rigorous standard. They must demonstrate a stronger business model to attract venture capital from firms within Silicon Valley,” Olsen explained. “A similar principle applies to our evaluations of companies in Silicon Valley; we demand a higher level of performance before investing.”

The firm employs a unique perspective. While many venture capitalists pursue companies focused on entirely new concepts, Drive tends to favor startups that apply technology to established industries. For instance, Drive has invested in a company specializing in autonomous welding and a firm developing what Olsen refers to as “next-generation dental insurance” – sectors representing a significant portion of the U.S.’s $18 trillion economy beyond the realm of Silicon Valley’s prominent tech companies.

The extent to which this strategy, or Drive’s current progress, will result in a larger new fund remains uncertain. The firm is presently managing assets raised during Kvamme’s tenure and, according to Olsen, has 30% of its existing $1 billion fund – announced in June 2022 – remaining for investment.

Regarding cash-on-cash returns to date, Olsen stated that with $2.2 billion in assets under management across all Drive funds, they all perform as “top quartile funds” achieving “over 4x net returns on our most established funds” and “continuing to appreciate from there.”

Meanwhile, Drive’s belief in Columbus as a viable tech center gained further credibility this week with the announcement of Erebor, a cryptocurrency-focused bank headquartered in Columbus, launched by Palmer Luckey, Peter Thiel, and other tech billionaires.

“When Drive was founded in 2012, many considered it a risky venture,” Olsen remarked. “Now, we are witnessing individuals I consider among the most innovative minds in technology – including Elon Musk, Larry Ellison, and Peter Thiel – relocating from Silicon Valley and establishing substantial operations in diverse cities.”