Jan 27, 2014
Steve
Case on what 'Rise of the Rest' tech hubs means for Silicon Valley
Billionaire investor Steve Case , a co-founder
of AOL, believes that venture investment east of the Mississippi will surpass
funding in Silicon Valley in 2014 for the first time and says that will be good
for the country.
Billionaire AOL co-founder Steve Case
believes that 2014 will mark the first time that venture investments east of
the Mississippi will surpass Silicon Valley's totals.
And he thinks that
will be good for the Valley and the rest of the country.
Case has been putting
his money where his mouth is through investments he has made through his
Washington, D.C.-based VC firm Revolution LLC.
He is also chairman of Startup America
Partnership, a position that has given him a chance to study what is
happening at venture hubs around the country.
Below are excerpts
from an interview I had with Case last week about his theories on what he calls
the "Rise of the Rest," the emergence of innovation and venture
strongholds around the country.
Click here to read excerpts I published last week about Case's thoughts on
the controversy around Google buses and the growing income divide, Uber and
other sharing economy company run-ins with the government and the prospects for
immigration reform.
Why
do you think the country and Silicon Valley will be better off if there are
more venture and innovation hubs?
If we have a more
broadly dispersed innovation economy, it reduces the risk of being over-reliant
on any particular region, or any particular sector.
Having diversity in
distribution is very important. We saw this 10 years ago not just in terms of
sort of the so-called Internet bubble in Silicon Valley, but we have also seen
it more recently with the financial services industry imploding five or six
years ago. That put lot of pressure on a lot of business sectors in New York.
If you have a broader
distribution of innovation, both in terms of sectors as well as regions, it
gives the nation more resilience, which I think is important.
Does
that mean you think Silicon Valley will decline in importance in the future?
I'm a big fan of
Silicon Valley. Obviously it is the most important entrepreneurial ecosystem in
our country, and really in the world. I have every expectation it will continue
to be.
At the same time, we
are beginning to see an acceleration of this "Rise of the Rest"
phenomenon. I think that will accelerate over the next decade.
What
is driving the "Rise of the Rest?
It is now easier and cheaper
to start companies. You can outsource a lot of things. Instead of buying your
own servers, for example, you can use Amazon Web Services cloud servers.
It is also easier to
access capital. The new legislation that passed Congress a year and a half ago,
the Jumpstart Our Business Start-ups (JOBS) Act, legalizes crowdfunding. As
that moves into place over the next year or so, it will get even easier for
entrepreneurs, wherever they might be, to get their initial capital.
All those factors are
resulting in entrepreneurs in different parts of the country realizing they can
start companies if they want to, where they are as opposed to feeling like they
have to move someplace like Silicon Valley, New York or Washington, D.C. I
think that is a good trend.
You
base part of your theory on historic trends, right?
Yes, it really is
reflective of a part of America’s own history over
the last 250 years. America was itself a startup just 250 years ago. It was
just an idea. Now it is the leader of the free world, in large part because it
has the leading economy and because over the last 250 years it has been the
most innovative entrepreneurial nation in the world.
The cycles of
innovation and entrepreneurism over our 250-year period has led to the rise and
sometimes to the fall of different regions of the country.
Sixty years ago, for
example, Detroit was essentially what Silicon Valley is today. It was the most
vibrant entrepreneurial region in the country, arguably in the world. The
technology of the day was the automobile and it was on fire, growing like
crazy. But that peaked and over the last 60 years it has lost 60 percent of its
population. It is now bankrupt because it lost its entrepreneurial mojo.
But the good news on
Detroit, and I think it is true in some of these other regions, is it is
fighting its way back. If it is going to get back to where it once was, it is
going to be on the back of new entrepreneurs that have started there,
particularly in the downtown Detroit area.
Do
you think that innovation will continue to be focused around regional hubs? If
so, where do you think that is most likely?
Yes, and I think 2013
venture data reflects this. Overall venture funding was up 7 percent last year.
But some regions were up by a lot more than that.
Where I am, in
Washington, D.C., venture funding grew 104 percent. New York has emerged in the
past decade as a very strong market. Other places in Colorado, Denver and
Boulder and places like that are showing real signs of momentum. I mentioned
what is happening in Detroit. Chicago is another that has emerged as a very
strong market in the past five years or so.
The story is playing
out in multiple regions, each recognizing that they bring a certain skill set
and trying to figure out the best way to differentiate what they are doing.
They are not just trying to replicate what other people are doing,. They are
trying to do something unique to their region.
In D.C., for example,
one area — not surprisingly — is businesses and technologies that have some
relationship to the government, and a lot in the security area, in the privacy
area, and increasingly in the healthcare area and the education area.
There are a lot of
interesting things happening in those sectors of the economy and D.C. plays a
unique role because the government is both a regulator and, in some of those
industries like healthcare and education, as a principal buyer of educational
services and healthcare services.
Each region is a
little bit different. The Startup America Partnership that I chaired for the
past three years launched in 32 different regions. Each of them chose to act
differently and prioritize differently, based on their own sense of what was
best for their particular region.
But if you take a step
back, you see many of these regions emerging in ways that people wouldn’t have
thought possible even 10 years ago. That was certainly the case for D.C. When
we started AOL here 28 years ago, nobody would have imagined that D.C. would
have developed as a start-up community the way it has over those ensuing years.
Are
you seeing any signs of froth or bubble in the start-up economy?
Yes, but I think it is
in pockets. I think there are certainly certain companies and certainly certain
sectors where things do seem rather buoyant. But there are also many sectors
and particularly many regions where that is not the case at all. So I don’t
think it is a broad-based phenomenon.
I think you have to be
much more selective in times like this. I remind people, including venture
investors in Silicon Valley, that there are lot of great companies all across
the country. Often, in fact, you can invest in those companies at a lower
valuation than if that same company was in Palo Alto.
That’s because — in part — there is less competition in
terms of the number of investors trying to invest. I think of Silicon Valley as
a big lake with a lot of fish in it, but also lot of people fishing.
Some of the other
innovative regions around the country are certainly smaller lakes — in some
cases they are actually just ponds. But it is sometimes easier to catch a great
fish in a smaller lake than in a bigger lake because less people are fishing in
it. I think most venture investors based in Silicon Valley and San Francisco
will continue to invest predominantly in that region. That kind of makes sense
because there are a lot of opportunities, and it is more convenient for them.
But my bet is that
over the next decade most of the top venture firms will start developing
regional strategies, and will start recognizing that there are entrepreneurs
all across the country that with some capital and some mentoring and opening
some doors can really build some great companies.
That will result in
more distribution of venture capital across the nation, which I think is good
for the country and also will result in more entrepreneurs having opportunities
and more job creation in each of those regions. So there are a lot of positive
benefits that come from this.
What
are you focused on at Revolution this year?
Our focus is largely
outside of Silicon Valley. It isn’t because we don’t love Silicon Valley. We
just think there are a lot of people investing there and we are trying to
invest in the places where there is not only less attention but also great
entrepreneurs with great ideas who have a potential to build a great company.
We actually believe in
2014 for the first time ever venture investments east of the Mississippi will
be greater than venture investments in Silicon Valley. We think there is
opportunity there so that is our focus.
We have two parts of
Revolution. Revolution Ventures is a $200 million fund that invests in
early-stage companies, typically $5 million or $10 million investments.
Revolution Growth is a $450 million fund that invests in later stage, typically
$30 million, $40 million investments.
We have two separate
funds with two separate teams, but both of them are really focused on the
"Rise of the Rest" trend and also focused on the second Internet
revolution, really looking for companies or industries that are beginning to
leverage the Internet to really drive significant transfer of information.
We have done some
investing in health care, some in education, some in the clothing, apparel
business and a lot in e-commerce. There are a bunch of different sectors that
we are interested, but we are particularly interested in the companies as I
said in these regions that are emerging,
particularly in D.C.
because we do believe that D.C. is going to play a more important role in the
future than it has in the past. D.C. is going to be the center of a lot of
innovation, particularly in areas like education and healthcare. There is a lot
of talent in this region.
The policy aspects are
going to become more important and that is going to happen we are sitting here
in D.C.
Our friends in
California we expect will continue to invest primarily in California. So we are
increasingly all across the nation and have put together a regional strategy.
As you look at companies that have a policy connection, a D.C. connection, if
you will, including in areas like education and healthcare, Revolution is
positioned to be a partner and bring some of that perspective because we are
based in DC and have been here for three decades.
