What Silicon Valley Is Missing Out On: The Rise Of The Rest

Steve Case, former CEO of AOL , is looking for new startups to invest in but he’s not headed to Silicon Valley.  This summer, he visited Cincinnati, Detroit, Pittsburgh, and Nashville on a bus tour aptly called “The Rise of the Rest.”  What he found, he says, is a resurgence of American entrepreneurship and venture capitalists, who are glued to the Valley, should perk up.  Opportunities abound in the heartland.

Last week, I spoke with Case about what the Valley is missing out on and how entrepreneurship in America’s “other” cities is gaining traction.

Esha Chhabra: What was the intent of the Rise of the Rest bus tour?  To truly find companies, drum up media attention, or something else?

Steve Case: It was built on a momentum, a crusade, a movement- whatever you call it.  We wanted to shed spotlight on American entrepreneurship: the idea of getting on a bus, and driving through the heartland of America.  After all, the story of entrepreneurship is tied to the heartland.  60 years ago, Detroit was the Silicon Valley of today.  Pittsburgh was the steel capital.  They were the main event. Now can they can re-emerge.  It’s fascinating to see communities like Pittsburgh where there’s a specialized focus on robotics, because of the local ties with Carnegie Mellon.

Chhabra: What did you learn on this tour?  Any key takeaways?

Case: Firstly, the rest is rising.  And how pivotal the role is of startups in rebuilding communities.  We all knew they were important in building products and services.  But what’s striking is neighborhoods, which 5 years ago were in a desperate state, now have hope and optimism because startups are moving in and making it a place that people want to work and live.  So you see restaurants, shops cropping up.

Secondly, it’s not just about technology.  We’re also seeing other kinds of businesses that play to the unique strengths of the city.  So there’s a broader array of startups and entrepreneurs.  Not just tech-centric.

Chhabra: What do these cities still need to build a vibrant start-up community?  Was there one constant theme that you noticed?

Case: Each city lacks different things but here are some consistent themes:

1. A strategic focus from leaders in the community: politicians, entrepreneurs who’ve been successful, leading business people to lend support.
2.  A need for more capital to get started.  They just don’t have the same level of access to capital as the Bay Area.  That’s beginning to change because of firms like Revolution and crowdfunding.
3.  Talent: How do you lure people back? The boomerang strategy.  These cities have lost a lot of their talent.
4.  A need for network density, connectivity.  How do you make sure that larger companies, like P&G in Cincinnati or GE in Detroit, are really making it a priority to foster entrepreneurship?  How are they working with the next generation of entrepreneurs in their city, either through mentoring or providing capital.  In the tech world, especially the Bay Area, there’s a high network density that helps.  We need to create that sense of optimism and resources in other cities.

My first job out of college was a gig with Proctor and Gamble.  And at that time, there really wasn’t anything else in the community.  There was a recognition by P&G and other public sector leaders that it was important to invest in the next generation of entrepreneurs.  Some of that meant giving capital or also, just being customers of these smaller companies.

Chhabra: Your firm, Revolution, and its investments have concentrated outside the Bay Area.  Do you see other venture capitalists going beyond the Bay Area as well?

Case: You will see an increase in venture firms in New York City and California expanding their horizons, realizing that there are companies to be invested in outside those communities.

There are regional venture firms that have cropped up.  National firms as well.  But there’s still a considerable number of firms on Sand Hill Road in Menlo Park who want to invest locally, companies that they can drive to.  So it’s going to take time before regional and national firms deploy more regional strategies.

From an investment standpoint, it makes sense to invest in other places.  From an evaluation standpoint, it’s lower in some of these other areas.  From an entrepreneurial standpoint, the cost of living is lower in Detroit and Nashville than in SF.  So you can go a longer way with less capital.  That’s an arbitrage for investors who can invest at lower evaluations and for entrepreneurs, you can get more bang for the buck.

When these companies are successful, a public market investor never asked where the company is based.  They don’t really care.

Chhabra: You’ve been a big proponent of crowdfunding - as an alternative especially for startups who are not in the Bay Area.  How close are we to having companies use this as a legitimate source of fundraising?

Case: Two years ago, Congress signed a law that changed the rules for the first time in 80 years, making it also easier to go public, in part because of the Jobs Act.  New rules around crowdfunding say that entrepreneurs can use the Internet to fundraise.

The legislators have done their part.  We are now waiting for the FCC (the regulators) to finalize the rules for equity/debt crowdfunding. It’s going to be a game changer when that goes through.  It will certainly help regionally and for people who don’t have as fair a shot at raising capital.

The last time Congress updated the Securities Law was in 1933.  A lot has changed since 1930.  So, there is definitely a role for Washington to play to make it easier for investors and entrepreneurs as well as make sure that we remain cutting-edge.

Chhabra: While Revolution isn’t necessarily an impact investor, the Case Foundation has been exploring impacting investing.  What is your take on the field?  Is it a niche idea or does it have commercial viability?

Case: Impact investing has made immense progress from just being an idea to something that’s actually happening now.  It’s both similar to traditional venture capitalism and different.  There are some unique elements such as the legal structures offered, ie. the b corp.  I’m pretty bullish on it and believe that it will emerge as a broader phenomenon over the next decade.

Chhabra: You’ve said that partnerships are key for entrepreneurs to flourish.  What kind of partnerships do startups need?

Case: At AOL, we needed partnerships to help build the Internet.  That was the first big wave that required partnerships to just get the basics: software, hardware, a platform to distribute it through.  There was a tapestry of alliances that made it happen.

Second wave of the Internet has been Facebook and Twitter or apps.  It’s a little trickier like trying to create a hit record.  But not all records are hits, just as not all apps are going to be.  It’s been a very product-focused phase.

The third wave is about integrating the Internet: the Internet of Things.  Transforming healthcare, transportation, energy-- big parts of our lives that haven’t really changed yet.  And that’s where partnerships will be important.

For example, if you want to reinvent education in school.  You can’t just create an app and drop it in the app store.  You need to work with school districts, communities, teachers, and parents.

As we say, revolution happens in evolutionary ways.