Tech Brew Ride Home - (Bonus) Steve Case on Investing Outside of Silicon Valley

Episode Date: November 2, 2019

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. Sponsor: WeWorkRemotely Learn more about your ad choices. Visit megaphone.fm/adchoices

On April 4th, 2023, around 2 in the morning, a man was found stabbed multiple times on a sidewalk in downtown San Francisco. Hey, who did this to you? What happened next turned the story into a political firestorm. Reports have identified the victim as Bob Lee, the founder of Cash App. From Bloomberg Podcasts, this is Foundering, the Killing of Bob Lee, beginning April 16. Welcome to another weekend bonus episode of the Techmeme Right Home. I'm Brian McCullough. 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 in VC, try to find new ideas and new people in new places. So after doing the segment on the new Rise of the Rest Fund, too, 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. This is that conversation. Since this is going to 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 to $150 million. as with Fund 1. And as with Fund 1, a lot of big names are backing you, right? Yeah, that's right. We launched the Rive and Rest Initiative about five years ago,

started doing road trips around the country to see what's happening in cities like Detroit and Nashville, Indianapolis, Minneapolis, you know, really all over the country. We've done 43 of these cities. And about two years ago, we launched a fund, a seed fund that was $150 million fund to back the entrepreneurs in these cities. The thesis is that essentially all the 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, rest, we're trying to back entrepreneurs in those other places. So the first fund 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 Doher, Jim ryer, et cetera, et cetera, 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 hundred companies in these rise of the rest as cities. Are you intending to invest the same way? I think you said a similar thesis, or do you guys have a new playbook in mind for fun, too? The same playbook as Fund One. Our strategy with Revolution, we also have Revolution Ventures

and Revolution growth, though Rise of the Rest Seed Bund is one part of the overall revolution investment kind of efforts. But for the rise-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 100 of the entrepreneurs be backed in Washington, D.C.

So there's a 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 investing in these companies. So our typical investment through rise of rest is we'll typically invest in the first check of $500,000 as part of a larger round. And then we 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 an initial $500,000-ish check in partnership with regional investors. And then we write larger checks, sometimes a few million dollars into companies when they do the follow-on around. But it's all designed to really back these entrepreneurs and shine a spotlight on these cities that are rising. They're showing more momentum. Yesterday, I was in Detroit to launch this, and they're now down half a dozen 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 kind of 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, typically investing there, we're trying to get more venture capitalists to recognize their opportunities everywhere, great investments everywhere, great entrepreneurs everywhere, and to spend more time in other parts of the country identifying promising trends, identifying promising entrepreneurs and investing in them as well. Funny enough, that was going to 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? Yeah, I think a little bit. I mean, there's certainly more focused on and more discussion about the opportunities and other places. And some of the coastal venture funds are starting to invest in companies and 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 Riser-R-S, most people thought it was sort of a quixotic mission to back entrepreneurs in other places and we're skeptical that there really would be great companies that could. It would be great investments outside of places like Silicon Valley. There's still some of that skepticism, but it's a little bit less than it was five years ago. People are a little more open to the thesis and are expanding their periphery or their peripheral vision, I guess, if you would, to be at least open to the idea that there may be entrepreneurs in other places. Hopefully over the next five, ten years, 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 than 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, as sectors, tend to be relatively flat in terms of net job creation. The real leverage in terms of job creation are the startups. So we're only backing startups in places like, you know, California, New York, and not places like Ohio, Pennsylvania, Michigan, et cetera, you know,

we shouldn't be surprised that there are people in those communities 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 country. And we need to, you know, kind of offset that, at least in part by job creation in the middle of country. 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 San Francisco or New York, just because of a classic kind of econ 101 supply and demand dynamic. But over time, we think that gap will close, but it will be there for some period of time. And we also think there's really an imperative, the level of playing field in terms of entrepreneurial opportunity, job creation, economic growth. So everybody, everywhere in the country, kind of has a shot at building a company,

and everywhere sees the potential for job growth as opposed to just job loss. Well, and actually, you know, from the flip side of the equation, 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 to, 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. Yeah, there is no question that that's part of it. We're trying to kind of help take these cities to the next level, help the startup communities in these cities that are bubbling, you know, kind of get more attention, including locally. Get some of the big companies in those cities working with the startups, get some of the universities in those cities, you know,

partnering more with the entrepreneur. 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 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 more attention. We're also focused on the talent piece. There has been, you know, talent is pretty,

pretty clear the talent is equally distributed, but opportunity is not. So if you grow up in many parts of the country, you 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, 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, indeed create a 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 the city was in decline, lost 60% of its population, indeed not so 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 to the coast. We're trying to 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 purge is how these communities become a little more fearless, a little bit more open to risk-taking, a little bit more open to entrepreneurship, a little more open to crazy ideas and celebrate those entrepreneurs and have a city that is leaning into the future, not just kind of looking in their rearview mirror at the past.

So there's a lot of different things we're doing, but part of the tour is designed to 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. And the process, we do develop relationships with local venture capitalists, with local entrepreneurs, and that does lead to identifying, promising companies to back through the Revolution funds. But the tour is not really just about sourcing investments.

It's really inspiring entrepreneurship all across the country. 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 example, you keep mentioning Detroit. Do you tend to see things like maybe Detroit has a bunch of auto tech startups? Yeah, it's a mix of things. We have noticed in different cities, and it sort of, as you suggest, kind of, of predictable that some of the startups are building on the expertise in those cities,

sort of the historical industries in those cities. Pittsburgh, for example, because it was the kind of the power of the industrial revolution, kind of the steel capital, is really good at making things. In 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 Minneapolis, There's a lot of health tech startups. So 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 also in the health tech space.

We saw in Chattanooga, a company that we backed called Freight Waves. It 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 has emerged as a strong enterprise software city, in part because of the success of a company exact target. It was acquired by Salesforce for, I think it was $3 billion. Salesforce now is 2,000 employees in Indianapolis, second largest office outside of San Francisco. And some of the people that were part of that early exact target store, including the founder, Scott Dorsey, has started an accelerator and a venture fund,

and there's several dozen enterprise software companies up there. Raleigh Durham is strong because of some of the work around the research triangle. So each of these cities has a unique 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 the city, you mentioned, Detroit, is about mobility, that all the startups are going to focus on mobility. We've backed a couple of companies there. One, Shinole is in the watch business.

and other Bloomscape is in the, you know, e-commerce for plants for gardening, you know, a 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 companies that would not obviously be in Detroit, but they're thriving. And so it's a reminder to us,

while we should be looking in each city for what is unique about that city that entrepreneurs can build on, And they're also always the opportunity for entrepreneurs to come up with some crazy idea to disrupt some industry no matter where they might live. I saw an article where one investor was talking about 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 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? Now, we have invested. The Rydera Rest Fund is now invested in nearly 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 in some cases might not be minor league cities. So we are focused on cities with this strategy. We do believe cities are a place where people are going to cluster, and it 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 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, e-commerce platforms, Etsy, et cetera. It 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, quite successful or almost entirely a distributed workforce. That also creates the opportunities for people to kind of live wherever they want to be and still be part of a fast-growing company. But the primary focus, the rides a rest are on cities. Usually there's cities with a few hundred thousand people, so they're not the largest cities, but they're also not

the smallest cities, and that seems to be the sweet spot, at least for us right now, in terms of where we can have the most kind of impact. 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 either came here to New York City or went to places like Austin or L.A., 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 other places? 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. really realistically 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 now isn't moving there for kind of family lifestyle reasons. Oh, that's certainly a fair 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 at most companies is pretty short. People jump around a lot. You know, the cost of living is really quite exorbitant. You have to live pretty far from where you work unless you have a really good salary or, 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 of the next five or ten 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 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 want to 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. 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?

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 dollars went to three states. If you look at people last year, more than 90% of venture capital went to man, less than 10% to women, and less than 1% of venture capital went to African American. So just look at the data. It does matter where you live. It does matter what you look like. It doesn't matter who you know.

If you have an idea, you really have a shot of building a company. 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. The last Rise of Rest road trip we did, five cities, four of the five winners of the pitch competitions were women. So they're great entrepreneurs everywhere, and they bring different perspectives by getting out of some of the places where it tends to be a little bit of an echo chamber and kind of 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, it better reflects the diversity of America itself. I think that trend is also important.

My hope over the next decade is that it won't just be venture capitalists focusing on places like Silicon Valley. It won't just be backing predominantly kind of white men. But everybody everywhere who has an idea will have a shot, the American dream, and venture capitalists will spend more time on planes visiting these cities. There will 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.