Silicon Valley exodus: expect several dozen spots to emerge as ‘strong startup cities’: Steve Case

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Yahoo Finance’s Akiko Fujita and Zack Guzman speak with Steve Case, Revolution Chairman and CEO, about how the pandemic has accelerated the Silicon Valley exodus, and VC funding outlook.

Video Transcript

AKIKO FUJITA: Well, the pandemic has accelerated a move out of Silicon Valley with companies like Oracle and HP moving their headquarters outside of California. Our next guest says it’s not a bad thing. His Rise of the Rest Fund has been actively investing in startups outside of traditional tech hubs.

Let’s bring in Steve Case. He is Revolution chairman and CEO. He’s also the founder of AOL. Steve, it’s great to talk to you today.

You’ve always said that there are plenty of ideas outside of these traditional tech hubs. The capital just hasn’t followed. How has that changed over the last year?

STEVE CASE: Yeah. The data right now says, according to the National Venture Capital Association, that 75% of venture capital went to just three states. 50% went to just one state, California. And so we’re overweight in backing entrepreneurs in places like Silicon Valley and not balancing that by backing entrepreneurs in other places.

And because of that, over the last several decades, we’ve seen a brain drain, where a lot of people growing up in different parts of the country, going to school in different parts of the country, felt they had to leave where they were to go to the coast, usually to Silicon Valley, because that’s where the money and the opportunity was. I think the pandemic has started to reverse that.

We’re seeing a little less of a brain drain of people leaving, a little more of a boomerang of people returning. And I think that bodes well for these rise and rest cities. I think people will be surprised over the next decade How. Many breakout multibillion dollar companies are happening in places all across the country, not just in a few places on the coasts.

AKIKO FUJITA: Yeah, I was going to ask that. So much of the conversation has been framed in sort of this zero-sum context, that, you know, Silicon Valley losing out means a win for Texas or a win for Florida. How should we be looking at this migration that we’re seeing right now in terms of startups? Is it about multiple cities instead of one big tech hub in the future?

STEVE CASE: Yeah. I think what we’ll see over the next 10 or so years is several dozen cities really emerging as strong startup, you know, cities, just as we’ve seen San Francisco, New York, Boston be strong; more recently, Seattle, Austin, others come up. There’s really a couple of dozen that really are growing. Our rise and rest seed fund is actually invested in 150 companies in 70 cities. And we visited with our rise and rest, you know, bus tours, our road trip– 43 cities.

And there are really remarkable things happening in those cities, and some of them are built on the expertise that resides in those cities. For example, when we were in Chattanooga, the company we ended up investing there, called Freight Waves, focused on the trucking industry, much of which is headquartered in Chattanooga.

A company we backed in Chicago, Tempest, just an idea five years ago, now has 1,600 employees, has raised a billion dollars focusing on oncology and precision medicine. Some of the most significant data scientists are coming out of the University of Illinois, and now they’re staying in Chicago instead of leaving.

So I think it’s going to be fascinating to watch, and I do think the pandemic– obviously, there’s many terrible, tragic aspects to it, but I think one of the silver linings we’ll look back at, that maybe this was a change, and Silicon Valley lost a little of its dominance, and other cities all around the country started rising up, therefore creating startups in those cities, therefore creating jobs and opportunity in those cities and allowing people to decide where they wanted to live as opposed to feeling like they had to be someplace else.

ZACK GUZMAN: Yeah, Steve. I’m not sure how closely you’ve been tracking the efforts there in Miami, but Miami Mayor Francis Suarez has been on the show a few times talking about different ways to draw some of those companies away from Silicon Valley, embracing Bitcoin with some of his initiatives there. But going back to why you created AOL in the Northern Virginia area, it sounds like policies are pretty important. So talk to me about what maybe would need to be done out of Miami perhaps to attract some of these companies to actually relocate.

STEVE CASE: I have visited Miami on our tour last year, and I just was doing something with the mayor last week. And they are doing a great job in terms of trying to be a magnet for talent and a magnet for capital. And we encourage other mayors to do the same kind of thing. It’s kind of game on in terms of where people are going to resettle as things are going to get back to some version of normal. And most people are going to think about where they really want to live long-term and not necessarily feel like they have to be where they had been before.

In terms of your question, I’ve talked about the third wave of the internet. The first-wave companies like AOL basically were building the internet, building the on-ramps to the internet. The second wave is building apps and software on top of the internet– things like Facebook. And that’s really where Silicon Valley becomes so dominant.

The third wave is sort of when the internet meets the real world. And it’s health care, it’s food and agriculture, some pretty big parts of our economy. And the domain expertise in those sectors and the partnerships you need to form to be successful in those sectors are often in the middle of the country, not on the coast. And so that’s going to be an interesting dynamic to watch.

It’s not just when people think about where they’re going to live or perhaps where they’re going to relocate. Some focus on cost of living, and there is a differential. Some might focus on lifestyle reasons to be in a particular place, and there are some places that have some, you know, great benefits there. Some may focus on family or other reasons to be there.

I think the most significant reason is some of the expertise and partnerships you need to be successful in this third wave are going to be in those cities in the middle of the country, and that’s going to accelerate this migration.

ZACK GUZMAN: To Akiko’s point though, I mean, when we’re seeing some of these companies move to those new areas, you yourself were saying that you weren’t surprised to see kind of the backlash against those companies as they moved into Silicon Valley, brought that tech community up, and kind of pushed out maybe the culture that was there already.

I was just in Austin last week, kind of starting to see the same things with Google down there. When you look at it, what maybe needs to be done to make sure that doesn’t happen in any city that starts to attract the tech talent that comes in? How does a city actually build around that to make sure that it’s not two forces working against each other?

STEVE CASE: No, it’s tricky. And Austin has seen great momentum– one of the companies we backed at Revolution Growth. Big Commerce is based there now. I think about 1,000 employees doing super well. And they actually started in Sydney, Australia, and decided to move to the United States and decided not to go to Silicon Valley, but to go to Austin. And as a result, you’re seeing momentum there.

I think to your question, it’s going to be a tricky balancing act. How do people who arrive feel welcomed and included and integrated in the startup community, but also be respectful of what’s come before them? There are a lot of people who have been working for, in some cases, decades in building these startup communities, building these entrepreneurial communities. And having people kind of jump in and suddenly think, like, they come off as sort of the know-it-alls is not going to work so well.

So it’s going to be a collaboration, a balance, bringing some fresh people, some fresh ideas that can launch some new companies, back some more companies, but do it in a way that’s respectful of each individual community and what they can bring to the party and recognizes there are a lot of people who have been working on this for quite a long time. And how do you respect them and not just come in and look like you’re the– you know, have all the answers?

AKIKO FUJITA: Steve, let’s talk about the established players in the tech space. You’re in DC. You’ve heard the conversations about how this administration is going to try and crack down on the big tech names. You are part of the initial conversation around Section 230 when it was drawn up. You’ve said that there needs to be some changes here because when it was in the ’90s, you know, the internet wasn’t what it is today. What are the specific changes do you think legislators should be looking at?

STEVE CASE: Yeah. When we started, actually, in 1985, only 3% of people were online, and they were online for only one hour a week. So it was really the early days. And some of the discussions we were having then were how to create the internet, how to stand it up, what should the policies be to commercialize access to the internet, to make it– you know, commerce, e-commerce attractive in terms of tax rates and so forth.

And in those early years, there was some legislation passed that did create this 230 provision. At the time, it was different because communications was front and center, but it was more chat rooms and bulletin boards. There weren’t really algorithms that were pushing content up and basically promoting specific kinds of content. So it’s gotten a lot more complicated.

Now, we obviously– including nowadays, because of the pandemic, are living almost all of our lives online. It has become a much more essential part of everyday life. And there are algorithmic interventions that now do significantly impact what people see. And so taking a fresh look at things like 230 does make sense. I’m not surprised that the administration and Congress are starting to look at that.

AKIKO FUJITA: What specifically though do you think that needs to be changed around that? I mean, you’ve heard the arguments in favor of keeping it as it is. For those who say, look, well, the focus is on the big tech names, appropriately so, there’s a lot of other services that are likely to be hurt if the sites themselves are liable for the content that’s placed on there.

STEVE CASE: Yeah. And again, I’ve been out of this now for 20 years, so I’m not the one to intervene and say exactly what should happen. But I’m just saying, given some of these laws were passed over 30 years ago in those early days of the internet and so much has changed since, taking a fresh look makes sense.

I think that it’s going to be a broader recognition that policy is going to become much more important in this third wave of the internet. The industries I mentioned like health care, for example, of course, there are policy regulatory aspects, if nothing else, because of COVID. I think we now more appreciate that. So recognizing there’s a role for policy, there’s a role for regulations in these third-wave sectors, I think, is going to be a key part of the discussion we need to have in the next decade.

ZACK GUZMAN: Let’s talk about where Revolution’s putting money to work here right now, because it does seem to be an interesting time in the market. We’ve been talking a lot about SPACs. We’ve been talking a lot about what that does for valuations more on the private side. When you look at opportunities out there right now, what are you looking at as maybe the most interesting across the board in tech and some of the problems that are being solved as we look at kind of where the economy goes here after the pandemic?

STEVE CASE: Well, Revolution– we have Revolution Growth, Revolution Ventures, and the Rise of the Rest Seed Fund. And then so we are investing across, really, the whole entrepreneurial lifecycle. Some of the areas that we think have seen a lot of momentum in the last year– you mentioned SPACs. DraftKings is one of the companies in the sports tech sector that we backed that done fabulously well. I also mentioned big commerce. We’ve seen an acceleration, obviously, in what’s happening in e-commerce because of the pandemic.

Another company we back, Talkspace, is seeing a lot of momentum in telehealth, because offices are closed. There’s been a real acceleration in the telehealth space. We’re also seeing a lot of interest in sustainability. A company we backed in Richmond, Virginia, TemperPack, is focused on sustainable packaging, essentially getting rid of Styrofoam, which is terrible for the environment, replacing it with sustainable packaging. So those are some of the areas that we’ve been looking at.

We think there’s a lot of opportunity in all these different sectors and as we move into this third wave, this juxtaposition of technology and partnerships and policy and also recognizing the center of gravity around innovation isn’t going to shift because of this notion of the rise and rest. So place is going to matter more. Those are some of the themes that we’re particularly focused on right now.

ZACK GUZMAN: All right. Revolution chairman and CEO and former or current– you’re always going to be known as it– the co-founder of AOL, Steve Case.

STEVE CASE: Probably, probably.

ZACK GUZMAN: Appreciate you coming on here. Absolutely. It was my first email account, as well. Steve Case, thanks again. Appreciate it.

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