OSU told to avoid risky fund

E. Gordon Gee encouraged $50M investment in ‘unproven’ venture capital fund.

Ohio State University officials moved ahead with a $50 million investment in a risky new venture capital fund formed by former JobsOhio president Mark Kvamme despite initial warnings from OSU investment staff members, according to records obtained Friday by the Dayton Daily News.

E. Gordon Gee, who was OSU president at the time, acted as an advocate for the investment, pledged to reach out to other Big Ten universities for Kvamme and worked to smooth out concerns raised by university insiders.

OSU Chief Financial Officer Geoff Chatas received the following June 25 email: “I spoke with (then provost) Joe Alutto today and told him we had to honor the Kvamme agreement. He agreed. We are back on solid ground. Make that happen quickly. I hope you are having a great vacation. G” Gee signed emails with G.

Gee retired July 1, shortly before the deal with Kvamme’s Drive Capital was finalized. Gee and Kvamme could not be reached for comment Friday.

Emails show the relationship between Gee and Kvamme continued after Gee stepped down. Kasich announced in October that Gee would lead a multi-university effort to study college costs and affordability. One month before the announcement, OSU’s top fundraising official sought clearance for Gee to solicit Kvamme for $1.5 million to fund a $3 million center for his new role.

A March 2013 memo from the OSU Office of Investment listed a dozen concerns for the proposed investment in Drive Capital, Kvamme’s new Ohio-based venture capital firm with business partner Chris Olsen. Among the concerns: Drive Capital is a new firm raising a first-time fund, the fund’s target size “seems large for a first-time fund focused on the Midwestern U.S.” and the team’s track record, details of which were redacted in OSU records.

Investment officials concluded the fund was “very much unproven,” “carries a variety of other risks and unknowns” and didn’t meet the university’s traditional underwriting standards. Officials wrote that such an investment would have to be considered under the premise of supporting a societal objective, such as economic development.

Chatas said the March 2013 memo didn’t raise “red flags.”

“The memo said it doesn’t fit in our traditional bucket but it would fit in our economic development bucket,” he said.

Interim president questioned investment

Alutto, now OSU’s interim president, questioned why the university would go with a $50 million investment, instead of half that.

After months of internal debate and rigorous background research, Ohio State decided $50 million would allow the university to gain lead investor status, which in turn would let OSU negotiate better terms with Drive Capital, Chatas said. The investment is a reasonable percentage of the university’s $3.1 billion long-term portfolio and it fits with Ohio State’s mission as a land grant university to keep jobs and money in Ohio, he said.

Ohio State University released 118 pages of emails and other heavily redacted records on Friday afternoon to newspapers that had asked for the documents under the state open records laws.

According to filings with the Securities and Exchange Commission, Kvamme and Olsen have raised $181 million of $300 million for Drive Capital Fund I. The minimum investment is $1 million. The $50 million investment will more than double the $22 million OSU had previously invested in venture capital funds, according to university investment reports.

Kvamme, a native of California, was a venture capitalist at Sequoia Capital in Silicon Valley where he helped launch Linkedin, MarkLogic and FunnyOrDie.com. He arrived in Ohio less than three years ago to serve as Gov. John Kasich’s development director for $1 a year in pay. He later shifted to run JobsOhio, Kasich’s new private economic development agency, but resigned in November 2012 to start Drive Capital.

Emails show that Gee was involved from the beginning. An Oct. 8 email from Olsen to Gee notes that Drive Capital had called Gee sometime in September. “It will not be possible for us to do this without the support of Ohio State. But, with leadership like yours, I know we can make it happen,” Olsen told Gee.

Gee responded less than 24 hours later: “I am anxious to be of any help or support to you and Mark. We need your ideas and energy. Ohio is a great place. Go Bucks! Gordon.”

A short time later, Chatas told Chief Investment Officer Jonathan Hook to meet with Kvamme. Starting in January, Chatas and others began drafting an agreement with Drive Capital but Hook’s staff prepared the March memo that raised questions.

Hook continued to be concerned well into the summer months as his bosses decided to close the deal. In early June, Hook asked Chatas if there was a chance to revisit Drive Capital and the size of the commitment, “or is that a done deal?”

Jerry Polk, one of Hook’s private equity analysts, said in a July 24 email that tweaks to the proposal “don’t change our opinion of the investment…”

Drive Capital is focused on start-up companies in eight Midwestern states. All but one state are home to Big Ten schools. Kvamme provided Gee with a list of Big Ten schools to reach out to — Gee said he would work with Chatas to see how “we can best get other institutions to join with us.”

Venture capitalists starting a new fund often turn to large pension funds or big university endowment funds that are known to have an appetite for venture capital.

“You don’t get invited to make a pitch. Big institutions have an allocation to private equity so you approach them when you’re raising a fund. We tend to raise a fund every three to four years. We go to institutions that have an allocation,” said Bob Pavey, a long-time venture capitalist with Morgenthaler and an Oakwood native.

Smaller players usually need a relationship with the venture capitalist to get a chance to invest, said Joe Nelson, Kenyon College vice president of finance. “Most of the very best funds are closed and you have to kick the door down to get in,” said Nelson, who oversees a $340 million portfolio that includes $13.3 million in venture capital funds. Kenyon was not approached to invest in Drive Capital, Nelson said.

Pavey, Nelson and others say Kvamme setting up a fund in Ohio could be good for the state. He worked at Sequoia Capital, which is arguably the top venture capital fund in the country, Pavey said. Kvamme’s father, E. Floyd Kvamme, is a partner emeritus at Kleiner Perkins Caufield & Byers, a high-tech VC firm and helped found National Semiconductor in 1967.

Mark Kvamme probably “learned venture capital at the dinner table” as well as at Sequoia, Pavey said.

“For a man with that kind of track record to come to Ohio, is something we ought to be pleased about,” he said.

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