COLUMBUS, Ohio — They seem like an odd couple. JD Vance, author of “Hillbilly Elegy,” his best-selling memoir about growing up in the post-industrial Midwest and his journey of escape. And Steve Case, the billionaire co-founder of America Online.
But Mr. Vance joined Mr. Case's investment firm this year to scour the Midwest for small but promising startups, particularly for a new seed fund. The company, Revolution, plans to raise up to $100 million for this fund's investments, it revealed in a deposit last month with the Capital Market Commission.
They are by no means the only notable investors looking for opportunities in the region.
Four years ago, Mark Kvamme, a leading Silicon Valley venture capitalist, left the heart of the tech industry to become a tech investor here in the heart of the Midwest.
After a slow start, his firm raised $550 million and invested in 26 companies. Her bet is that middle America amounts to an undervalued asset, rich in markets, new business ideas and budding entrepreneurs. The Midwest, the thinking goes, is not only untapped, but an antidote to the hot West Coast tech market.
“Silicon Valley is kind of crazy right now,” Mr. Kvamme said.
The money, power and influence of tech companies on the West Coast has reached new heights. Apple, Alphabet, Microsoft and Amazon are now the four most valuable companies in the country.
Venture capital, the financial fuel for new companies, is also concentrated on the coast. More than 50 percent of all venture capital money spent in the United States goes to companies in California alone, according to National Venture Capital Association.
But some investors, led by people like Mr. Kvamme and his company, Drive Capital, see a lot of potential in the center of the country. Focusing on the Midwest is no longer considered the crazy idea it was by skeptical West Coast venture capitalists when Mr. Kvamme and Chris Olsen, another Silicon Valley transplant from Sequoia Capital and co-founder of Drive Capital, made the move in 2013.
Every major Midwestern city now has clusters of startup accelerators and incubators, usually housed in renovated redbrick industrial buildings.
And some big bets were successful: CoverMyMedsan Ohio start-up whose software simplifies drug prescribing was sold to McKesson this year for $1.1 billion, and Salesforce bought Accurate targetmarketing software maker in Indiana, for $2.5 billion in 2013;
Such offers are still rare. But local entrepreneurs and big investors are looking to the Midwest for start-up investments ranging in the tens of millions of dollars, far more than local angels and venture capitalists. And they are starting to attract venture capital from Silicon Valley for subsequent rounds of funding.
The rationale for investing in the Midwest combines cost and opportunity. A top-tier software engineer who gets paid $100,000 a year in the Midwest might well make $200,000 or more in the Bay Area. The Midwest, optimists say, also has an abundance of tech talent, with excellent engineers coming from the region's major state and private universities.
But they also point to technological changes. As technology transforms non-tech industries like health care, agriculture, transportation, finance and manufacturing, Midwest investors argue that being close to customers will be more important than being close to the source of the technology.
“The value will come from marrying industry knowledge with technology,” said Drive Capital's Mr. Olsen. “There's an arrogance in Silicon Valley that we don't need industry expertise. This will be less and less true in the future.”
But expanding the geography of innovation-fueled economic growth will require capital. Today, three-quarters of all venture capital invested in America goes to California, New York and Massachusetts, the National Venture Capital Association estimates. Ohio has less than 1 percent and the 12-state Midwest region less than 10 percent overall, according to data compiled by the State Institute of Science and Technology.
“There are two Americas,” Mr. Case said. “One with abundant capital and opportunity — in Silicon Valley and pockets across the nation. But not in the other America, and that other America is most of the country.”
Mr. Case served on White House advisory boards on jobs, innovation and entrepreneurship during the Obama administration, and that experience, he said, shaped his thinking about investing in the Midwest. Since 2011, his firm has raised more than $1 billion for two funds, Revolution Ventures and Revolution Growth, which generally make investments of $4 million to $50 million, including in Midwest start-ups.
Both Mr. Case and Mr. Vance, whose careers spanned the Marines, Ohio University and Yale Law School and then a Silicon Valley venture firm, see building as a social virtue as well.
Referring to the problems documented in his book, Mr Vance said that “at least a partial solution is to get more investment capital into this part of the country”.
The company also sponsors road trips in a colorfully painted bus it calls Rise of the Rest, also the name of Revolution's new $100 million investment fund. Mr. Case and his team members leave Revolution's base in Washington, DC to visit and champion emerging startup communities in cities across the country. Since 2014, there have been six such tours, with the most recent ending last month after stops in central Pennsylvania. Ann Arbor, Mich. Indianapolis; Columbus; and Green Bay, Wis.
The days are filled with meetings with local entrepreneurs, investors, business executives, government officials, educators and social service workers. Each day ends with a competition, where eight to 10 startups present their companies and business plans.
The winner in each city receives a check for $100,000, a personal investment from Mr. Case. So far, it has distributed more than $4 million in local competitions.
The day in Colombo was typical. There were seven stops, including three launch hubs, with Mr Case and Mr Vance listening and speaking at each location.
Mr. Case and Mr. Vance talk about the need to create “network density” by bringing together more entrepreneurs, customers, partners and investment capital. Travel can and does bring in investment candidates for the Revolution, but start-up evangelism is the main issue.
There are encouraging signs in Columbus. The city's start-up clusters are bustling with activity. In the Idea Foundrya two-story renovated factory, one tenant is o Clever Columbus work. Last year, Columbus won several locations — including San Francisco. Austin, Tex. Denver? and Portland, Ore. — to win a $50 million federal Department of Transportation “smart city” grant. This was seed funding for a public-private partnership to develop technology to tackle problems from self-driving car traffic management to reducing infant mortality.
The Kauffman Foundationwhich studies startup activity, reported last month that Columbus ranked third among 40 metropolitan areas in “growth entrepreneurship,” the share of startups that employ 50 or more workers within 10 years.
CrossChx, a five-year-old start-up with an 80-person payroll, is one of them. The company, which makes healthcare software, has raised $35 million in venture funding in three rounds. Drive Capital spotted the company, led the early funding, and has since been joined by Bay Area investors such as Khosla Ventures and Silicon Valley Bank.
In Ohio, that $35 million equates to $70 million in the Valley in terms of being able to recruit talent and maintain operating costs, said Sean Lane, CrossChx co-founder and CEO.
“I'm not sure we would have made it if we were in the valley,” Mr Lane said.
CrossChx is one of more than two dozen companies in Drive Capital's portfolio. To date, none have folded and grossed more than $150 million. After three years — its first fund began investing in 2014 — the company's earnings look good on paper. But it's too early to declare her Midwest bet a success.
This will take a few more years and the proof will be whether it delivers high returns to its limited investors. “And if two guys from Silicon Valley and Sequoia can't do it,” Mr. Olsen said, “the capital is not going to come here.”
