Drive Capital's second act – how the Columbus enterprise agency discovered success after a break up

[ad_1] The enterprise capital world has all the time had a hot-and-cold relationship with the Midwest. Buyers rush in throughout increase instances, then retreat to the coasts when markets flip bitter. For Columbus, Ohio-based Drive Capital, this cycle of consideration and disinterest performed out in opposition to the backdrop of its personal inside upheaval a number of years in the past — a co-founder break up that would have ended the agency however could have in the end strengthened it.

At a minimal, Drive achieved one thing newsworthy in in the present day’s enterprise panorama this previous Could. The agency returned $500 million to buyers in a single week, distributing almost $140 million price of Root Insurance coverage shares inside days of cashing out of Austin-based Considerate Automation and one other undisclosed firm.

It might be seen as a gimmick, positive, however restricted companions have been presumably happy. “I’m unaware of every other enterprise agency having been in a position to obtain that type of liquidity not too long ago,” mentioned Chris Olsen, Drive’s co-founder and now sole managing accomplice, who spoke to TechCrunch from the agency’s workplaces in Columbus’s Brief North neighborhood.

It’s a significant turnaround for a agency that confronted existential questions simply three years in the past when Olsen and his co-founder Mark Kvamme — each former Sequoia Capital companions — went their separate methods. The break up, which shocked the agency’s buyers, noticed Kvamme ultimately launch the Ohio Fund, a broader funding automobile centered on the state’s financial growth that features actual property, infrastructure, and manufacturing alongside know-how investments.

Drive’s current success stems from what Olsen calls a intentionally contrarian technique in an business preoccupied with “unicorns” and “decacorns” — firms valued at $1 billion and $10 billion, respectively.

“In case you have been to simply learn the newspapers or take heed to espresso outlets on Sand Hill Highway, everybody all the time talks concerning the $50 billion or $100 billion outcomes,” Olsen mentioned. “However the actuality is, whereas these outcomes do occur, they’re actually uncommon. Within the final 20 years, there have solely been 12 outcomes in America over $50 billion.”

In contrast, he famous, there have been 127 IPOs at $3 billion or extra, plus lots of of M&A occasions at that stage. “In case you’re in a position to exit firms at $3 billion, you then’re in a position to do one thing that occurs each single month,” he mentioned.

That rationale underpinned the Considerate Automation exit, which Olsen described as “close to fund-returning” regardless of being “under a billion {dollars}.” The AI healthcare automation firm was bought to personal fairness agency New Mountain Capital, which mixed it with two different firms to kind Smarter Applied sciences. Drive owned “multiples” of the standard Silicon Valley possession stake within the firm, mentioned Olsen, who added that Drive’s typical possession stake is round 30% on common in comparison with a Valley agency’s 10% — actually because it's the sole enterprise investor throughout quite a few funding rounds.

“We have been the one enterprise agency who invested in that firm,” Olsen mentioned of Considerate Automation, which was beforehand backed by New Mountain, the PE agency. “About 20% of the businesses in our portfolio in the present day, we're the only enterprise agency in these companies.”

Portfolio wins and losses

Drive’s observe document contains each huge successes and in addition huge stumbles. The agency was an early investor in Duolingo, backing the language-learning platform when it was pre-revenue after Olsen and Kvamme met founder Luis von Ahn at a bar in Pittsburgh, the place Duolingo is predicated. At the moment, Duolingo trades on NASDAQ with a market cap of almost $18 billion.

The agency additionally invested in Huge Knowledge, a knowledge storage platform final valued at $9 billion in late 2023 (and is reportedly fundraising proper now), and Drive made cash on the current Root Insurance coverage distribution regardless of that firm’s rocky public market efficiency since its late 2020 IPO.

However Drive additionally skilled the spectacular failure of Olive AI, a Columbus-based healthcare automation startup that raised over $900 million and was valued at $4 billion earlier than ultimately promoting parts of its enterprise in a fireplace sale.

What units Drive aside in each instances, Olsen argues, is its give attention to firms constructing exterior Silicon Valley’s hyper-competitive ecosystem. Towards that finish, the agency now has workers in six cities — Columbus, Austin, Boulder, Chicago, Atlanta, and Toronto — and says it backs founders who would in any other case face a selection between constructing close to their clients or their buyers.

It’s Drive’s secret sauce, he suggests. “Early-stage firms which can be based mostly exterior of Silicon Valley have a better bar. They need to be a greater enterprise to garner a enterprise funding from a enterprise agency in Silicon Valley,” Olsen mentioned. “The identical factor applies to us with firms in Silicon Valley. For us to spend money on an organization in Silicon Valley, it has a better bar.”

It applies a unique lens, seemingly. Whereas many VCs chase firms making an attempt to give you one thing fully novel, Drive has a penchant for startups making use of tech to conventional industries. Drive has invested in an autonomous welding firm, for instance, and what Olsen calls “next-generation dental insurance coverage” — sectors that arguably symbolize America’s $18 trillion financial system past Silicon Valley’s tech darlings.

Whether or not that focus, or Drive’s momentum, interprets into a giant new fund for Drive stays to be seen. The agency is at the moment managing property that it raised when Kvamme was nonetheless on board, and in line with Olsen, it has 30% left to take a position of its present fund, a $1 billion automobile introduced in June 2022.

Requested about cash-on-cash returns up to now, Olsen mentioned that with $2.2 billion in property below administration throughout all of Drive’s funds, all are “prime quartile funds” with “north of 4x internet on our most mature funds” and “persevering with to develop from there.”

Within the meantime, Drive’s thesis about Columbus as a respectable tech hub obtained additional validation this week when Palmer Luckey, Peter Thiel, and different tech billionaires introduced plans to launch Erebor, a crypto-focused financial institution headquartered in Columbus.

“After we began Drive in 2012, individuals thought we have been nuts,” Olsen mentioned. “Now you’re seeing actually the individuals I consider as being the neatest minds in know-how — whether or not it’s Elon Musk or Larry Ellison or Peter Thiel — transferring out of Silicon Valley and opening large presences in numerous cities.”