Thursday, February 06, 2014

Steve Case on what 'Rise of the Rest' tech hubs means for Silicon Valley

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.

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