Investing Outside the Valley with Steve Case (Revolution) and J.D. Vance (Revolution's Rise of the Rest Seed Fund) | Disrupt SF (Day 2)
6:59PM Sep 6, 2018
So with that, please welcome to the stage from Revolution, Steve Case and JD Vance, as well as your moderator Matt Burns. Warm welcome, please.
She was not lying. It is warmer up here then is back there. Stephen, JD, thank you for joining us. Thank you. We brought you here to Silicon Valley because it seems like you go everywhere but Silicon Valley. So here we are, how many cities have you two visited last few years?
We started this Rise of the Rest effort about almost five years ago. And so far, it's 38 cities, 10,000 miles all across the, you know, the countries and places in the northeast like you know, Buffalo and Portland, Maine and Minneapolis, Madison and Phoenix and Albuquerque. More usually we're in Birmingham, Chattanooga, Memphis, Louisville, Cincinnati, Columbus, we've been kind of Kansas City, in all the country just trying to understand what's happening in these cities. And we're finding remarkable entrepreneurs that are building remarkable companies.
But there's people here now that right now, the venture capital is really focused on the coast. Last year 75% of venture capital in this country went to three states, California, New York, Massachusetts, and the other 47 states kind of fight over the other 25% And sure, find that kind of level the playing field. So everybody everywhere, really, if they have an idea, they kind of have a shot the American
Yeah, we brought you here so you can talk to these folks and where it's a great place other than Silicon Valley, because you just raised $150 million fund and hired JD to run it for you. And so now you're investing outside the valley.
We have talked about this Economist article though, right. Last week, the economists wrote a fantastic article with the headline why are silicon or why are companies leaving Silicon Valley, so that's my question to you two. Why are they leaving?
Well, we always try make Rise of the rest, not an anti Silicon Valley thing. Because as you all know, Silicon Valley is still a pretty happening place. There's still a lot of cool stuff going on, entrepreneurs building great companies here. But what we do try to highlight the fact that there are also really cool things going on outside of Silicon Valley. And, you know, part of what's driving the growth of some of these, these these areas. And so these sectors is that if you want to build a consumer facing internet company, Silicon Valley is obviously a great place to do it, highly networked.
A lot of experience here, if you want to build a biotech company, if you want to build a healthcare company, if you want to build a transportation logistics company, it helps to be close to the sectors into the companies that can be potential customers, be potential supporters, be potential mentors. And so I think one of the things that's driving what we expect will be a pretty significant migration of risk capital away from the coast and towards the middle of the country, is the fact that in the next wave of innovation, as Steve would put it, you're going to see a lot of these harder tech companies and you're going to need to be close to some of the customers that are operating those spaces.
Yeah, great. So you're seeing these companies leave and you're investing outside the valley, you must have some data that shows investing in Omaha, right, will yield a return for your fund. What What is that data?
No question. It was early. We just launched this Rise of the Rest fund last year. So obviously you'll take some time before we'll see the results. But just some anecdotal examples, we've made several dozen investments over the past year when company in Detroit we back now has 400 employees and $32 million a day and revenue called StockX one that we backed a couple months ago when we were in Chattanooga is a company focused on almost like a Bloomberg data system for the trucking industry. And a lot of trucking companies are headquartered in and Chattanooga.
Since they won that competition they've gone to raising, it was an $11 million $12 million kind of round so we're, and this is true in all these different cities we've we visit, but as JD said, this is not a a anti Silicon Valley that we're proud of Silicon Valley, it will continue to be the leading ecosystem, it will continue to be kind of the pride of America the envy of the world, we just want to make sure that my guess is how many people in this audience, put up your hand if you were born in the San Francisco area.
So relatively less than 5%, you came here because you believe the best opportunity was here. You couldn't stay where you grew up, because the I particularly wanted to be part of the innovation economy, you had to leave there was not enough happening in those places are not enough capital and those places so you said, I want to be part of whichever revolution you wanted to be part of, and in Silicon Valley, this broader region was the obvious place to to be. We just want to change that dynamic.
If you want to be here, you should be here obviously, but if you want to go back, as JD, when we're going back to Ohio, you wanted to raise your family someplace else. We want to make sure there's opportunities to be part of this startup economy, this innovation economy everywhere and we want to make sure the audience in those places have access to the venture capital and the mentoring and the partnerships to allow them to scale these, these, these companies.
That's critically important in terms of this, even having a more inclusive innovation, a kind in this country, not just having a lot of things happen on the coast that are disrupting people in the rest of the country, jobs are being lost in the middle of the country. People are resenting that and so how do we create more jobs and more places? Meanwhile, going back to your question, we think there's one of the great our investment arbitrage opportunities of certainly my, my lifetime where because so little capital is focused on Detroit and Des Moines and Madison and those kind of cities we visited, the valuations of those companies are lower, so it's kind of like you're buying wholesale but when they're successful, and ExactTarget got acquired by Salesforce for $3 billion in Indianapolis.
You know Marc Benioff didn't say oh, it's an Indianapolis we should only pay $2 billion worth $3 billion dollars but when Scott Dorsey the entrepreneur starting that company was much harder to raise capital and those early investors got in in a much lower evaluation. So it really is about kind of leveling the playing field.
Let's, let's name some cities here. I want to play a little game, right? So let's say you're a certain regions are better equipped to handle certain type of startups. Let's say you have an agriculture startup. What region or city is good for that is we have an agricultural startup, actually in southeastern Kentucky coal country. But you know, there isn't a whole lot of entrepreneurship going on in southeastern Kentucky. At least not yet. We certainly hope that that that will change over the coming decade. But St. Louis being close to Monsanto being some close to some of the companies there is pretty helpful.
So you know, there are ag tech companies everywhere. But certainly some of the active companies that we see that we're most excited about are starting in places where, as we said before, there's some legacy industry that's supporting that it.
Well look at Ducky, Lincoln, Nebraska also great farming cities, a lot of universities their focus on ag tech and some startups are starting to come out of that. As JD mentioned Monsanto based in St. Louis and people like Monsanto circle don't like Monsanto, you can't argue there's thousands of engineers who understand farming there in St. Louis. I just went through a big merger that will lead to dozens of maybe hundreds of people leaving and wanting to be part of the startup economy. And suddenly in 10 years, you'll see an egg tech kind of built around around the St. Louis area.
What about logistics and shipping,
So we're between the Tennessee so obviously, Memphis is the headquarters of FedEx. Chattanooga is the headquarters of freight waves, which is company we invested in just a few months ago, as Steve said, but a lot of the big shipping and logistics companies are in southeastern Tennessee. So I'm surprisingly a lot of the I think the great shipping logistics startups are going to come from those places, or even if you're not coming from those places, you're certainly gonna have to operate in this places.
And we do have a bias and again, we have great respect for Silicon Valley. We know we're here and we're we celebrate it but we also believe in what I've called the third wave of the Internet where it's disrupting some of these kind of real world, you know, sectors like health and agriculture and so forth. domain expertise is going to become important. And partnerships are going to become important. And there is sort of a truism here in Silicon Valley and Reid Hoffman is was part of PayPal is a great example to the part of the reason PayPal was successful was because they didn't know anything about the credit card industry.
So that led them to have new insights, fresh insights, that is true, but it's also true, we believe, that if you're trying to really revolutionize healthcare, you actually do need to know something about how doctors work and how, you know, nurses work in hospitals operate and how the payment systems work, and even some of the regulatory issues that domain expertise will be important. And we also believe in this third wave partnerships are critical.
You can't do this not about dropping your app in the app store and suddenly being you know, Snapchat or Facebook or something which was you know, the sort of the second wave model whereas really software running on top of the internet when it's really being integrated, much more fundamental ways that expertise is going to be critical and and and also partnerships are going to be critical. Most of the big companies, 75% of Fortune 500 companies are in the middle of country.
And most of the leaders and most of the sectors are in the middle of country. So if you believe in domain expertise, and you believe in partnerships that should advantage these rising cities. But only if we get the venture capitalists here that you know, you know, get on planes to visit the entrepreneurs there as opposed to just get in their car, get on, get on your bike and say, if it's not in my backyard, I'm not really interested.
So you you raised 150 millions for this rise, Rise of the Rest fund. You went around the country and you got money from Jeff Bezos, Eric Schmidt, Dan Gilbert. And, and I imagine you went to them and you said, Jeff Bezos, you know startups from making a lot of money in Silicon Valley. Give me your money and I'm going to invest in startups everywhere but Silicon Valley what what was your your pitch to these people?
Essentially was at first of all, Jeff saw those he moved to Seattle when when you know, Seattle was not what it is today and because of the success of Amazon and Microsoft other companies is now you know booming so he watched it kind of firsthand I think the people we that we have about 40 people that were end up being investors you know very successful entrepreneurs very successful investors and in whether private equity venture cap like Jim Breyer and John Doerr and Reid Hoffman sure next and David Rubenstein and Ray Dalio and Howard Schultz. So it is a great group
they have seen the thank you, they have seen the you know, the some of these cities revitalize because of what's happened in terms of entrepreneurship. So they believed it was an arbitrage opportunity they believe it's there's a truism that creativity is everywhere, opportunity is not so how do you bridge that so opportunity really is is everywhere so it was not a we actually thought we're going to raise a smaller fun and an end up being a larger fun and we raised it more quickly because people really resonate they did feel like something was bubbling out there created a both an opportunity and we think a little bit of an imperative.
What about the opposite though and JD when you're traveling around by bus to these cities, right? And you meet somebody in Nashville and they have a good startup and they want to move here. Do you, how do you advise them? What do you advise them to look for when they move to Silicon Valley? Or should they move to Silicon Valley?
Well, I always say, it depends on what you want, right? If there's some credible reason that you need to move to Silicon Valley to get this business off the ground to get investors interested, then sure, move to Silicon Valley. But by and large, there's enough going on in these communities. There's enough startup supports, there's enough networking ecosystem support that that most these entrepreneurs don't need to move to Silicon Valley.
And there is a broad recognition of that fact. I do think that case would have been a lot harder five years ago. It wasn't a whole lot harder 10 years ago, but the entrepreneurs who are operating the city's No, I mean, look, you know, we get to play it pair engineers the same salary that we might pay them into the Silicon Valley, but they can actually live on it they can actually support a family on it. They know that there's enough going on in the area that we're they're operating and for a lot of these folks, it's not just about the company, it's about the lifestyle and about the community.
If you're Scott Dorsey in Indianapolis, an entrepreneur that I put up against any entrepreneur in Silicon Valley sold his company like Steve said to Salesforce for $3 billion, Scott Dorsey doesn't just want to build a great company in Indianapolis. He wants to be part of what's going on in the Indianapolis ecosystem. I love Silicon Valley, it's hard to make a difference in San Francisco as a single entrepreneur it's not as hard to make a difference as a successful entrepreneur in Columbus Ohio because you can really influence the way that businesses start and grow.
And the other thing I'd say is is the trend we're starting to see you know just last few years I think it will accelerate in the in the coming years is large companies here recognize that there is a lot of talent here but it's really hard to attract and even harder to keep people and their high to tap into talent elsewhere Uber you know, dar we just heard from their center of gravity for their driverless car operations is not Silicon Valley. It's Pittsburgh, Pittsburgh, which is a town you know, kind of power the whole Industrial Revolution, Carnegie Mellon's arguably the best robotics university in the world.
So that basically said, that's where we should plant that, that flag, Google's open offices and places like Detroit and Ann Arbor, because there's a lot of talent there. And we also are seeing the beginnings of a slowing of what's been a brain drain over the last 20 years. Exactly. You know, many people in this room that that they maybe went to, you know, Pittsburgh, and we're graduate from Carnegie Mellon, but almost everybody left because the opportunity wasn't there, the opportunity was elsewhere. Now, more people in their graduating are staying.
And we're also beginning to see a little bit of a boomerang of people saying maybe it's now time to come back the opportunity is there I can, you know, kind of kind of pursue my dreams of being part of that and doing something super innovative but also, you know, pick a different place to live that over the next decade, I think is going to be a real mega trend. It's not just watching where the capital flows it's watching where the talent flows and this sensor you have to be here or you can't play is going to start diminishing.
Yeah we were talking backstage about this statistic from the economist Mark Perry where a one way U Haul rental from San Jose to Las Vegas is $2,000 a one way you all rental from Las Vegas to San Jose is $100. I think there are a lot of trends that we're seeing. That's obviously obviously just one data set. But there are a lot of trends that we're seeing that suggest that people are really thinking about how to build a life in communities that have been losing people now they're starting to gain them back.
JD earlier you sounded when you're talking about making an impact. You sound a lot like what Dan Gilbert says. And out of Detroit, right. And I know I'm quite well and interviewed many times here says in Detroit, you can be a big fish in a little pond. So my, my question is, how much do these individuals have in supporting the region versus the local government?
Sure, I think obviously, you need all hands on deck. This is not a problem that risk capital alone can solve and we obviously we have a $150 million fun we think that we're going to catalyze with that fun about one and a half billion dollars of investment. But as Stephen, I talk a lot and we talk a lot with other folks that if we want this effort to be successful, we have to show that people can do well by investing in these areas.
It's great to put your money to work at something you care about, Steve and I obviously care about this a great deal. But we believe in this thesis. And we believe by being successful in this thesis, we're going to cause institutional investors to get off the sidelines, we're going to cause some of these endowments and local pension funds to get off the sidelines. That's the long term goal.
But even if they get off the sidelines, even if capitalists writ large are investing in these communities. You obviously need better policy, you need quality schools, you need quality infrastructure, you need good broadband, especially in rural areas. So this is one important piece of the puzzle but it's not the only piece of the puzzle by any means.
You guys roll into town on a bus and you put on a big show and you draw a massive crowd but it seems to be that you roll in like a church tent revival, right? Throw this party and then you leave. How do you ensure you're making a lasting impact?
What we do, there is a little bit of a, I guess the revival aspect of it, because we're trying to celebrate what's happening, shine a spotlight on what's happened to get more people paying attention, even locally what's happening, create more connections, more the network density. That's one of the great things about Silicon Valley create a little bit more a sense of possibility, almost fearlessness and some of these community which tend to be a little more cautious and risk averse. But actually, our team spends months in advance planning.
And then there's a ton of follow up, including we've now done two summits rise, the rest summits where we brought the first one brought up over 100 community kind of ecosystem leaders together. The last one was about 100 regional venture firms. This next one we're doing in a few weeks is nearly 100 companies. We back through this rise of rest fund and we've got people like Eric Schmidt and Meg Whitman and Dan Gilbert and and others that are going to be Jim Breyer are going to be kind of part of that. So there's a lot of planning that goes into this.
But the other aspect of you kind of take a step back and I you know, when when the intro was when we started AOL in 1985. So what's at 33 years ago, only 3% of people online and their online one hour a week and those early days of the internet, that first wave of the internet actually was regionally distributed. We were based in the DC area, you know, you know CompuServe was in Columbus, Ohio. Dell was in Austin.
Microsoft actually started in Albuquerque, before moving to Seattle, Sprint was in Kansas City, the major communications company at the time, Hayes with a modem company was in Atlanta gateway was in North Dakota, I could keep going down the list. That first wave was quite regionally distributed in the second way when it really was about apps and software writing on top tier. And that's when Silicon Valley really became so, so dominant.
We really do believe in the third wave will see innovation both regional eyes within the United States and globalize around the world which will not again just as we said, the beginning does not predict that the client Silicon Valley but as the economist said, we do think we've kind of hit peak Silicon Valley and the dynamics over the next decade will result in more of this leveling of the playing field in terms of opportunity, which will create great investment returns.
We also, as I said before, will create a more inclusive innovation economy. So hopefully more people and more parts of the country can wake up feeling optimistic about the future, as opposed to anxious about the future, which is the reality today for many people in many communities.
Okay. So I asked this to every investor and that we have on stage I didn't prep you for this either. So we have about two minutes left. How do people get ahold of you? How do they get your money?
So on our Revolution website, you can actually submit a form of pretty standard form that we use to evaluate investments. You can also just email me my emails freely available on the website. It's JD Vance at revolution.com. And, you know, we try to give every entrepreneur a fair shake. I really believe and this is one of the things I learned in Silicon Valley that the investors who stick out are actually responsive. You know, we try not to just take meetings and then disappear.
If we're not gonna invest in the company, we at least try to give them the answer and given an explanation. And obviously we hope with with a lot of the folks that reach out we can get to.
Yes, I was firstname.lastname@example.org. But also our strategy is to partner with other investors with our whole strategy, the Rise of the Rest is to kind of be a catalyst the world might do 10 or 20% of around, we won't lead rounds, we won't take board seats. We're really trying to empower the regional venture firms get some of the institutional capital and a coast to invest in those regional firms and have them take the lead. So then we create this network effect, you know, around the different companies and connect these different firms, but we're really looking for others to lead. So when people come to us, we actually then connecting to other people, and if they're interested in taking the lead, then we'll we'll usually participate as well.
Yeah, that's great. So where are you guys off to next?
Our next summit will be in Chicago in a couple weeks. We're planning our next trip which will be our our, I think, our ninth road trip and we haven't picked the dates of the cities but it likely will be kind of more in the kind of Pacific Northwest is a lot of you places there, Fargo and others that we think are pretty interesting. So you know probably do that next spring.
Great and a JD, do you think Michigan has a chance against Ohio State this year?
out of Sydney Do you do I won't say the answer is yes. Thank you have a pool of North sorry.
Alright, great. Well, thank you so, so much, so
Thank you all.