Just what the returns are is a secret the university isn’t sharing. Two years after the OSU Office of Investment raised concerns, saying the fund was “very much unproven” and carries “a variety of other risks and unknowns,” it is unclear how much the university has sunk into the fund or how the investment is performing.
When asked for copies of quarterly or annual financial reports from Drive Capital, the university provided a heavily redacted report from Sept. 30, 2013, saying the information is exempt from disclosure because it is a trade secret.
“After issuing that report, Drive Capital changed its procedures: the company now permits investors access to such documents via a view-only, password-protected website,” wrote OSU attorney Lauren Lubow in response to a Dayton Daily News public records request. Since no documents are handed over to the university, OSU said no public records exist.
Kent State University media law professor Tim Smith said universities too often hide behind the “trade secret” exemption in the Ohio Open Records Law.
“An investment portfolio performance isn’t a trade secret,” he said. “You either made money or you didn’t make money.
“The fact is they do have documents and at a public university they’re obligated to share them.”
Kvamme and his business partner Chris Olsen told the Dayton Daily News that public entities often are shut out of top performing venture capital investment opportunities because of disclosure issues. Details about investment picks and returns need to be kept secret to maintain a competitive advantage, according to Kvamme.
Olsen said, “There were more venture dollars invested last year in the state of Ohio than there were in the past 10. So I think in every respect the investment that they’ve made has gone well.”
Drive Capital-backed companies — more than nine at this point — employ 700 people, including a little more than 200 in Ohio, Olsen said.
“As a private investment firm, we don’t disclose publicly what the returns are,” he said. “Ohio State does have a disclosure policy…They can disclose at whatever level they’re comfortable disclosing.”
In an email, university spokesman Rob Messinger said the university would not disclose actual returns.
“As a matter of policy, we don’t detail specifics about our investments with particular funds,” he wrote. “Instead, we report results for our entire pool of investments.”
Ohio State reported in April to the Board of Trustees that the long term investment pool stands at $3.5 billion. A more complete investment report to trustees is planned for this summer, Messinger said.
He noted that OSU has invested less than half of the $50 million committed to Drive Capital.
The decision to commit $50 million to Drive Capital generated controversy and extensive internal debate on campus two years ago. Former president E. Gordon Gee and Chief Financial Officer Geoff Chatas backed the deal while then Chief Investment Officer Jonathan Hook and then interim president Joseph Alutto raised concerns.
Venture capital funds provide money and business expertise to start-up and early-stage companies in exchange for a slice of ownership. Such investments can be very lucrative or bring about staggering losses.
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 five 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.
As OSU considered committing to Drive Capital, Gee pledged to reach out to other Big Ten universities for Kvamme and worked to smooth out concerns raised within Ohio State. Gee stepped down as president before the Drive Capital deal was inked but his relationship with Kvamme continued and records show Gee wanted to solicit Kvamme for a $1.5 million donation to fund an OSU initiative Gee wanted to head in post-retirement.
Drive Capital is backing at least nine Midwest-based companies that provide software and mobile apps for sectors such as agriculture, casual restaurants, tourism and health care.
A March 2013 memo from the OSU Office of Investment listed a dozen concerns for the proposed investment in Drive Capital. 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.
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 at the time.
According to filings with the Securities and Exchange Commission, Kvamme and Olsen have raised $224.5 million from 18 investors in Drive Capital Fund I and $75.5 million remains to be sold. Meanwhile, the duo created a second investment pool — Drive Capital Ignition Fund I — which generated $4.76 million from 17 investors.
“Obviously, we knew of Mark’s reputation and success in Silicon Valley in the past but we didn’t have anything that really said here is what the numbers were, so it wasn’t a typical underwriting process for us,” said Hook, who resigned from OSU a year after he was overruled on the Drive Capital investment. “It was decided by higher ups to go forward with it and that was certainly their perogative.”
Hook said it’ll take five to 10 years before the public knows how the Drive Capital investment panned out.
“If there is a home run and one of the companies is sold for a great return, whenever that happens, I’m sure that will be noted very quickly,” Hook said. “But the ones that don’t do as well, I think it’ll be very hard to find out information.”
Kvamme noted that Columbus-based CrossChx, which got early backing from Drive Capital, is now raising money from other venture capitalists, including Vinod Khosla, founder of Sun Microsystems. This marks Khosala’s first investment in a Columbus-based company, Kvamme said.
“Again, it’s fairly early. This is a long-term venture,” he said. “One thing we did not know when we raised this fund is the importance of this fund in the Midwest. It’s one of the larger funds ever raised in the United States and to have that in Columbus, Ohio, is a huge asset. And it’s a reason why we have several companies in Columbus and also in Cincinnati.”