I had the privileged of seeing Andy Jenks, Partner at Drive Capital speak last week at Ohio State’s Venture and Startup Summit. Drive are the big dogs in town with over half a billion dollars in capital and investments into some of the top companies in the Midwest. I really enjoyed Andy’s speech and thought there were some insightful nuggets in there that were worth sharing.
The Midwest startup ecosystem is flourishing right before our eyes…
Now this is something Andy and I agree upon! The Midwest has all the ingredients to be a successful startup ecosystem. High quality universities, low-cost of living, and a strong corporate base combine to form a potent cocktail for growing new enterprises. The Midwest is also slowly, but surely starting to get some startup momentum. Successful startups inject new capital into an ecosystem and unleash the next generation of entrepreneurs in that area. In 2013, ExactTarget was acquired by SalesForce for $2.5 billion. In 2017, CoverMyMeds was acquired by McKesson for over a $1 billion. In 2018, Duo was acquired by Cisco for over $2 billion. Acquisitions like these will seed the next wave of great startups in the region.
… but investors on the coast still have a bias against the region despite their claims to the contrary.
This was disappointing to hear, but maybe not completely surprising. Despite increased media attention and success story after success story, Jenks claimed that coastal investors are still not willing to give Midwestern startups a fair shake. The cynical part of me would call this blatant geographic bias. The more optimistic part would point to the fact that venture investing is a relationship business and being located closer to the startups you are investing into means you can better support the entrepreneurs you are partnered with. The truth probably lies somewhere in the middle. The fact is that if a startup wants to raise serious institutional money from the coasts, they need to have better metrics and more traction than a similar startup in the bay area or New York would need to raise the same amount.
Getting the most out of your board
I love this one. Andy mentioned that he tells all of the founders of boards he serves on to “give him homework.” I think this is a great mentality from a board member, but even more so I think this should be a mindset that all founders should adopt. You don’t have to spend much time in the space to see that unhealthy founder-board relationships are pretty pervasive throughout the startup landscape. Too often founders look at their boards in an antagonistic light. This is a recipe for disaster as founders begin to withhold information from the board and then by the time these issues surface, it is too late for the board to help. The best boards have a symbiotic relationship with a company’s founding team. The board’s purpose is to support and advise the founder, not hound them or tell them how they can do their job better. I love the accountability that assigning each board member a task to complete before the next meeting brings. I think this is a great way to keep your board aligned and engaged, while generating value for the company from the most knowledgeable, experienced, and well-connected people at the table.
Focus on the market first
One of the most interesting parts of the presentation was Andy’s discussion about how Drive develops their investment theses. Drive takes a very market-driven approach to investing. They spend a lot of time building what they call “market maps”. These market maps chart out all the different aspects of a particular market and help Drive determine how they want to attack a particular market and what sort of companies they would be interested in investing in. There is a debate in venture about what matters more, the market or the team. What Drive would tell you is that markets need to be big enough to support the sort of outsized return they need to generate on their successful exits. Proponents of the market first approach will also point to the fact that a good team in a bad market will not be successful, but a bad team in a good market may still be successful despite themselves. My response would be that the absolute best teams have the ability to build markets that never existed before. My personal view aligns much more closely to that of Peter Thiel’s strategy, find a niche that you can attack, build a defensible position, and then build the market from there. To be honest, I think that much of the debate depends on what stage you are investing in. For larger, later-stage shops like Drive, it makes 100% sense to focus on market sizes because when you are deploying hundreds of millions of dollars at a time, every company you invest into needs to have a market large enough to support a billion (or even multi-billion) dollar enterprise. When you are investing in the the earliest stage companies, I believe it makes more sense to invest in the best possible teams. The best teams will be able to pivot when others won’t and may even be able to build a multi-billion dollar market where one never existed before.
There are things we need to still do better on
One of my favorite parts of Andy’s speech was that it was relatively pragmatic in nature. A lot of the presentations around the Midwest startup ecosystem can take on a very ra-ra tone, which makes sense. The great companies being built here continue to be overlooked and it is important to bring attention to them and the growth of the region as a whole. However, as promising as the Midwest’s trajectory is, not everything is perfect. Jenks highlighted a few ways that we need to improve if we really want to take the next step towards being a bonafide startup ecosystem. He urged investors and entrepreneurs alike to aim higher, raise more, and attack bigger markets. I like this. I will be the first to tell you that venture funding is not for everyone, but if it is right for your company, you are joining a game of fastballs and home runs, not grounders to left field (is it weird how many baseball metaphors I use when I am not even a big fan of the sport? I need to start working in more soccer references. Something to think on…). I want to invest in companies working on big ideas. Capital B BIG ideas. I want to invest in companies working on solving world hunger, traffic, cancer, the melting ice caps, and water shortages. And I think that the Midwest is the ideal place to build these sort of companies.
We need only to dream a bit bigger.