Nov. 2, 2019

(Bonus) Steve Case on Investing Outside of Silicon Valley

Steve Case is obviously an internet and technology legend, as the founder of America Online. But as I said when I did a segment about it this week, I’ve always been fascinated with his Rise of the Rest Tour and Fund because, look, the whole basic principle of the project is to try new things, try to find new ideas and new people in new places. So after doing the segment on the new Rise of the Rest Fund II, I reached out to Steve to learn more about what he’s been learning as he’s been barnstorming the country to try to find exciting new companies outside of the major tech hubs.

Steve Case is obviously an internet and technology legend, as the founder of America Online. But as I said when I did a segment about it this week, I’ve always been fascinated with his Rise of the Rest Tour and Fund because, look, the whole basic principle of the project is to try new things, try to find new ideas and new people in new places. So after doing the segment on the new Rise of the Rest Fund II, I reached out to Steve to learn more about what he’s been learning as he’s been barnstorming the country to try to find exciting new companies outside of the major tech hubs.


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Brian McCullough: Since this is gonna come out on the weekend, it’ll be a few days since the news came out, could you just reiterate the news for us? You’re announcing a Rise of the Rest fund two, $150 million as with fund one, and as with fund one, a lot of big names are backing you, right?

Steve: Yeah, that’s right. We launched the Rise of the Rest initiative about five years ago, started doing road trips around the country to see what’s happening in cities like Detroit and, you know, Nashville, Indianapolis, Minneapolis, you know, all…really all over the county in 43 of these cities, and about 2 years ago we launched a fund, a seed fund that was a $150 million fund to back the entrepreneurs in these cities. The thesis is that essentially all of venture capital goes to a few entrepreneurs on the coast. The last year 75% of venture capital went to just three states, California, New York and Massachusetts. So with Rise of the Rest we’re trying to back entrepreneurs in those other places. So the first one was just about two years ago. It was a $150 million fund. We reached out to some of the most prominent individuals, not institutions just individuals, people like Jeff Bezos, Eric Schmidt, you know, Meg Whitman, Ray Dalio, John Doerr, Jim Breyer etc. etc. for that fund, and then the second fund we raised another $150 million, so the same as the first fund, and we’ll back another 100 companies in these Rise of the Rest cities.

Brian: Are you intending to invest the same way, I think you said a similar thesis, or do you guys have a new playbook in line for a fund too?

Steve: No, it’ll be the same playbook as fund one. Our strategy with… Revolution, we also have Revolution Ventures and Revolution Growth so Rise of the Rest seed fund is one part of the overall Revolution investment, you know, kind of efforts. But for the Rise of the Rest seed fund our strategy is to partner with regional venture funds. We’ve so far co-invested with more than 200 venture funds, and so we don’t…with the seed fund lead rounds, we don’t take board seats. We’re really partnering with investors in these different regions and then helping the companies kind of scale to the next level. We’ve built a whole platform of services to provide to these companies. We do things like summits. In a couple of weeks we’ll be doing a CEO summit with over a 100 of the entrepreneurs we’ve backed in Washington DC. So there are number of things that happen when companies and the CEOs of those companies are in the Rise of the Rest network. As a result, the regional investors really want us to be part of the rounds when they’re kind of investing in these companies. So our typical investment through Rise of the Rest is we’ll typically invest first check of $500,000 as part of a larger round and then we’ll work with those companies and then we’ll kind of double down with larger checks on some of the most promising companies. So it’s a strategy we call land and expand. We land with initial $500,000-ish check in partnership with regional investors and then we write larger checks you know, sometimes a few million dollars into companies, you know, when they do these follow on rounds.

But it’s all designed to really back these entrepreneurs and shine a spotlight on these cities that are rising, that are showing more momentum. Yesterday I was in Detroit to launch this and there…you know, now over half a dozen of companies in the Michigan area and it’s really promising to see what’s happening in a city like Detroit. That’s the story of a lot of cities around the country, but unfortunately most venture capitalists still are primarily kinda investing in their backyard. If they’re sitting in San Francisco, they’re investing in the Silicon Valley and the Bay Area. If they’re in New York City, they’re typically investing there. If they’re in Boston, they’re typically investing there. We’re trying to get more venture capitalists to recognize there are opportunities everywhere, there are great investments everywhere, great entrepreneurs everywhere and just, you know, spend more time in other parts of the country identifying promising trends, identifying promising entrepreneurs and investing in them as well.

Brian: Funny enough, that was gonna be my next question. I feel like you all were sort of ahead of the curve on this idea. Are you seeing on the VC side of the equation people beginning to follow your lead and moving the needle in terms of finding new companies outside of the big tech hubs?

Steve: Yeah, I think a little bit. I mean, there’s certainly more focused on and more discussion about the opportunities in other places and some of the coastal venture funds are starting to invest in companies in the other parts of the country. So we were encouraged by some of those kind of signals. At the same time and that was not really true five years ago. Five years ago when we first launched Rise of the Rest, most people thought it was sort of a quixotic mission to back entrepreneurs in other places and were skeptical that there really would be great companies that could be great investments outside of places like the Silicon Valley. There’s still some of that skepticism but, you know, it’s a little bit less than it was five years ago. People are a little more open to the thesis and are being…expanding their periphery or their peripheral vision I guess if you will, to be at least open to the idea that there may be entrepreneurs in other places. Hopefully over the next 5,10 years, you know, it won’t just be a discussion. The dollars will start flowing and there will be more entrepreneurs backed in more places, more great investments in these different cities and as a result there’ll be more job creation in these cities.

The other dynamic that’s driving this for us is the data is pretty compelling that the startups, young, high growth companies are the major job creators. It’s not actually small businesses and it’s not big Fortune 500 businesses. They…sectors tend to be relatively flat in terms of net job creation. The real leverage in terms of job creation are the startups. So if we’re only backing startups in places like, you know, California and New York and not places like Ohio, Pennsylvania, Michigan etc. you know, we shouldn’t be surprised that there are people in those communities that are feeling like in this technology disruption world they’re kind of being left behind. Indeed sometimes the companies in Silicon Valley are doing interesting disruptive things that result in job loss in the middle of the country and we need to, you know, kinda offset that at least in part by job creation in the middle of the country, and the only way to do that in our opinion is to back more startups in those places. So it starts as an investment thesis, we think there’s a valuation arbitrage…we know there’s a valuation arbitrage where valuations of companies in these rising cities are lower than if those same companies were in, you know, San Francisco or New York just because of the classic kind of econ 101 supply and demand dynamic. But over time we think that gap will close but it’ll be there for some period of time. And we also think there’s really an imperative to level the playing field in terms of entrepreneurial opportunity, job creation, economic growth so everybody everywhere in the country kinda has a shot of building a company and everywhere you see is the potential for job growth as opposed to just job loss.

Brian: Well, and actually, you know, from the flipside of the equation, you know, you’ve been going around the country for five years now and obviously part of the reason for a tour is to go to a place, see what the environment is, see what the startup energy is there and maybe uncover new companies. But is also part of your motivation and maybe the use of the tour to actually go to places and inspire some creative energy that you, you know, like show up in a town and be like, “Hey. You’ve got good ideas here. Why don’t you start companies here, do it here?”

Steve: Yeah, there is no question that that’s part of it. We’re trying to kind of help…to help take these cities to the next level, help the startup communities in these cities that are bubbling, you know, kinda, you know, get more attention including the local and get some of the, you know, big companies in those cities working with the startups, get some of the universities in those cities, you know, partnering more with the entrepreneurial community. So a lot of it is trying to build more of that network density, network effect. It is one of the great things about, you know, Silicon Valley. Some of it is getting more capital and we encourage people when we’re traveling around the country to invest in their local startups. The angel capital should come from their community and we’re also encouraging the growth of more regional venture funds that are in different parts of the country and can back these companies at the seed stage and also at the venture stage and of course we’re also encouraging the coastal investors to pay, you know, more attention.

We’re also focused on the talent piece. There has been…you know, talent is…it’s pretty, pretty clear that talent is equally distributed but opportunity is not. So if you grow up in many parts of the country or your graduate from one of the terrific universities in many parts of the country, instead of staying there you, in the last half century, you’ve left, you know, and you’ve gone to…usually to places like Silicon Valley. So we’ve seen this brain drain of some, you know, the creative talent that started in these cities. We’re trying to slow that brain drain and indeed create a boomerang of people who left coming back because they now feel like the opportunity there is significant. We’re starting to see that in places like Detroit where a lot of people left over the last half century because, you know, the city was in decline, lost 60% of its population, indeed, you know, not too long ago went bankrupt. So most of the people that would be part of the innovation economy that were born in Detroit or went to the University of Michigan or other places left to go, you know, to go to the coast. We’re trying to, you know, encourage them to come back and encourage people who are already there to stay there.

So there’s definitely a celebration aspect to this. And there’s also a cultural aspect that we also try to encourage is having these communities become a little more fearless, a little bit more open to risk taking, a little bit more open to entrepreneurship, a little bit more open to, you know, crazy ideas and celebrate those entrepreneurs and have a city that is leaning into the future, not just kinda looking in their rearview mirror at the past. So there’s a lot of different things we’re doing that is, you know, that are part of the tour is designed to, you know, understand what’s happening in these cities, do what we can to drive more collaboration, there’s a lot of convening aspects to what we do. In the process we do develop relationships with local venture capitalists, with the local entrepreneurs and that does lead to identifying promising companies to back through, you know, through the Revolution funds, but the tour is not really just about sourcing investments. It’s really inspiring the next wave of entrepreneurship all across the country.

Brian: Do these non tech hub cities, the startups you see there, do they tend to have maybe different startup themes like depending on historical or legacy reasons? Like for instance, you keep mentioning Detroit. Do you tend to see things like maybe Detroit has a bunch of auto tech startups?

Steve: Yeah. No, it’s a…it’s a mix of things. We have noticed in different cities and it’s sort of…as you suggest, kind of, you know, kind of predictable that some of the startups they’re building on the expertise in those cities, sort of the historical industries in those cities. Pittsburg, for example, because it was the…kind of a…powered the industrial revolution, kind of the steel capital is really good at making things and Carnegie Mellon, the university there is particularly good at robotics. So there’s a lot of startups that are focused on robotics and hardware. In places like…in Minneapolis there’s a lot of health tech startups. The largest health insurance company, United Health is based there, Mayo Clinic is not too far from Minneapolis. Baltimore, because of Johns Hopkins and also now Under Armour there’s a lot of…also in the health tech space. We saw in Chattanooga a company that we backed called FreightWaves that was focused on a Bloomberg-like data platform for the trucking industry. Much of the trucking industry is headquartered in Chattanooga. So that makes a lot of sense. Indianapolis is in a…it emerged as a strong enterprise software city in part because of its success of a company ExactTarget was acquired by Salesforce for maybe $3 billion dollars. Salesforce now has 2,000 employees in Indianapolis, second largest office outside of San Francisco and some of the people that were a part of that early ExactTarget store include the founder, Scott Dorsey, who started Accelerator and a venture fund and there’s several dozen enterprise, you know, software companies there.

Raleigh Durham is strong because of some of their work around the Research, you know, Triangle. So each of these cities has a unique backstory and entrepreneurs can build on that. At the same time, we have seen time and time again that because creativity can happen anywhere, it doesn’t mean that just because a city…you mentioned Detroit is, you know, is about mobility that all the startups there are gonna focus on mobility. We backed a couple of companies there. You know, one, Shinola is in the watch business. Another, Bloomscape is in the, you know, ecommerce for plants, for gardening, you know, business, StockX is a stock exchange for things. It was one of our early Rise of the Rest seed investments. Just raised money at a billion dollar valuation from Google and others. So those are the companies that would not obviously be in Detroit but they’re thriving and so it’s a reminder to us, you know, that while we should be looking in each city for what is unique about that city that entrepreneurs can build on, there are also always the opportunity for entrepreneurs to, you know, come up with some crazy idea to disrupt some industry no matter where they might live.

Brian: I saw an article where one investor was talking about, you know, going out to I think what was referred to as NFL cities, cities that are big enough to have an NFL team but maybe wouldn’t traditionally have had a startup scene. But that’s still…there’s still a bias there towards major cities, towards infrastructure. To what degree have you guys or are you going to be looking at communities that maybe are only big enough to say have a minor league ball team or communities even smaller than that?

Steve: Now we have invested…the Rise of the Rest fund has now invested in nearly a 130 companies in about 70 cities over 30 states and they vary in size, and some are relatively small cities that would not be NFL cities and, you know, in some cases might not even be minor league, you know, cities. So we are focused on the cities with this strategy. We do believe cities are a place where people are gonna cluster and that requires…you need a certain dynamic in terms of a creative community for startups to flourish. But we also recognize that even in more rural, you know, places there are opportunities particularly as broadband moves to those communities which is still a challenge but there’s a lot of focus on that including in Congress that can enable people in rural areas to participate on platforms, ecommerce platforms, Etsy etc. doesn’t really matter where you are. And also as more and more companies move to much more distributed workforces…companies like WordPress for example, are quite successful almost entirely distributed workforce. That also creates the opportunities for people to kinda live wherever they wanna be and still be part of a fast growing company. But the primary focus of the Rise of the Rest are on cities. Usually they’re cities with a few hundred thousand, you know, people. So they’re not the largest city but they’re also not the smallest cities and that seems to be the sweet spot. At least for us for right now in terms of where we can, you know, have the most kind of impact.

Brian: One more trend question. Obviously this is completely anecdotal, but I can’t tell you the amount of friends in the tech industry that I know who have moved from the Bay Area specifically over the last three years or so. I mean, a lot of them, you know, came here to New York City or went to places like Austin or LA and I know those aren’t the cities that we’re talking about as much, but I was curious as you’re going around the country, are you seeing sort of a Silicon Valley diaspora? Are you seeing and meeting with startups that maybe started in Silicon Valley and have moved to other places?

Steve: Yes, there’s some of that. There was…more now than there was five years ago but it’s still early in terms of that evolution and then it goes back to this issue of the boomerang of talent, that a lot of the people who were in one of these cities, grew up there, went to school there did decide to leave and it wasn’t…and really realistically it was the right thing for them to do because there wasn’t much opportunity there and they felt like they should move someplace else where there was more opportunity. Now as these cities are rising and their startup communities are developing, there is more opportunity and that is leading more people to consider moving there and that now isn’t moving there for kind of family lifestyle reasons although that’s certainly a fair, you know, thing to consider, but because the opportunities in those cities now are comparable to the opportunities they might have in a place like Silicon Valley. Silicon Valley is awesome and will continue to be awesome but it does have some challenges. The tenure of most companies is pretty short. People jump around a lot. You know, cost of living is really quite exorbitant. You have to live pretty far from where you work unless you have a really good salary. There are, you know, traffic issues, other kinds of issues that are leading people to say, “You know, maybe even though, you know, Silicon Valley is sort of this wonderful cauldron of innovation, maybe it’s time to consider moving someplace else.”

It’s only recently that they felt they could make that decision and their career would advance as opposed to kind of retract if they made that call. Our expectation over the next 5 or 10 years is there’ll be more of that, and even some of the data from LinkedIn is sort of evidence of that. They came out with a report just a couple of weeks ago and said, “Now more people are leaving San Francisco than going to San Francisco.” I think that trend will accelerate as these cities rise up as strong startup communities and our hope is that over time we really will be able to level the playing field. People can decide where they wanna live, they can start companies wherever they choose to start companies as opposed to feeling like they have to be on the coast otherwise, they aren’t able to participate in this whole innovation economy.

Brian: Final question. You know, we’re always talking a lot about greater diversity in, you know, both startup founders but also even the markets that startups are looking to serve. And I’m wondering by going outside of the traditional areas…not fishing in the same pools that everyone has been fishing in. are you seeing a greater diversity both in founders and in maybe the customers and markets that these new startups are looking to target?

Steve: Absolutely. And this has been particularly encouraging in the last several years. If you look at the overall venture capital data…I mentioned earlier that if you look at place, 75% of venture capital has always went to three states. If you look at people, last year more than 90% of venture capital went to men, less than 10% to women and less than 1% of venture capital went to African Americans. So just look at the data. It doesn’t matter where you live, it doesn’t matter what you look like, it doesn’t matter who you know, if you have an idea, you really have a shot at building a company. You know, it’s a little bit different in these Rise of the Rest cities. So far about 45% of the companies we backed are either founded by women or people of color. That the…you know, the last Rise of the Rest road trip we did, five cities, four of the five winners of the pitch competitions were women. So there are, you know, there are great entrepreneurs everywhere and they bring different perspectives and by getting out of some of the places where it tends to be a little bit of an echo chamber and kinda hitting the road and seeing what really is the best of America we’re able to not just identify entrepreneurs building interesting things but more of a diverse mix of entrepreneurs that better reflects the diversity of America itself. I think that trend is also important. My hope over the next, you know, decade is that it won’t just be venture capitalists focusing on places like Silicon Valley, it won’t just be backing predominantly kinda white men, but everybody everywhere who has an idea will have a shot at the American Dream and venture capitalists will spend, you know, more time on planes visiting these cities, there’ll be more and larger regional venture funds backing the entrepreneurs in these cities and we’ll have a more vibrant and more inclusive innovation economy. I think that will be great for innovation, great for entrepreneurship and also great for America.

Steve CaseProfile Photo

Steve Case


Steve Case is one of America’s best-known and most accomplished entrepreneurs and a pioneer in making the Internet part of everyday life.

He currently serves as Chairman and CEO of Revolution LLC, a Washington, D.C.- based investment firm he co-founded in 2005, where he partners with visionary entrepreneurs to build significant “built to last” new businesses. The mission is to establish Revolution as the premier firm outside of Silicon Valley.

Steve’s entrepreneurial career began in 1985 when he co-founded America Online (AOL). Under Steve’s leadership, AOL became the world’s largest and most valuable Internet company, driving the worldwide adoption of a medium that has transformed business and society. AOL was the first Internet company to go public and among the best performing stocks of the 1990s, delivering an 11,616% return to shareholders. Steve also ensured that AOL led the industry on issues such as making the Internet a safe place for children, bridging the “digital divide” and investing in online philanthropy.

At its peak, nearly half of Internet users in the United States used AOL. In 2000, Steve negotiated the largest merger in business history, bringing together AOL and Time Warner in a transaction that gave AOL shareholders a majority stake in the combined company. To facilitate the merger, Steve agreed to step down as CEO when the merger closed.

Steve’s passion for helping entrepreneurs remains his driving force. He was the founding chair of the Startup America Partnership—an effort launched at the White House to accelerate high-growth entrepreneurship throughout the nation. He is also a Presidential Ambassador for Global Entrepreneurship, was the founding co-chair of the National Advisory Council on Innovation & Entrepreneurship and a member of President Obama’s Council on Jobs and Competitiveness where he chaired the subcommittee on entrepreneurship. Steve is a leading voice in shaping government policy on issues related to entrepreneurship, working across the aisle to advance public policies that expand access to capital and talent.

In 2010, Steve and his wife, Jean Case, joined The Giving Pledge and publicly reaffirmed their commitment to give away the majority of their wealth to philanthropic causes.

Steve was born and raised in Hawaii and retains active ties to his home state, but has lived in the Washington, D.C. area for more than 25 years.