How to Get Venture Capital to Places Left Behind

The Wall Street Journal

Silicon Valley continues to attract more venture capital and more startups than anywhere in the U.S., but Steve Case says that has to change. The AOL co-founder and chief executive of investment firm Revolution LLC says “everybody, everywhere” should get a shot at the American dream.

Revolution has invested $840 million in startups outside of California, New York and Massachusetts, and its Rise of the Rest startup bus tours—a series of weeklong tours of startups, meetings with elected leaders, speeches at incubators and pitch competitions—focus on entrepreneurs outside those states. Mr. Case has personally invested $4 million in pitch-competition winners.

People in the middle of the country especially are feeling “left out and left behind,” Mr. Case says, and he talked to The Wall Street Journal about why that needs to change. Edited excerpts of the conversation follow.

Looking inward

WSJ: What are you hoping to accomplish with Rise of the Rest?


MR. CASE: Hopefully we can help kick-start a process that will come down to more capital going to more people in more places and also more capital going to impact-oriented companies.

Hats off to Facebook and Twitter and Snapchat and Waze, they’re huge successes, they should be proud of what they’ve done. But there’s more to life than photo apps and social media. I love that stuff—it’s part of AOL—but the food we eat, the way we get around, how we consume energy and how we think about water and how we stay healthy and how our children get educated, those are more important things.

Those are the problems-slash-opportunities that the third-wave entrepreneurs will focus on.

I think many of the answers will be in the middle of the country, because for many of the perspectives that are needed—for instance, to reimagine agriculture—it’s helpful to be working with farmers and be close to farmers. If you really want to rethink health care, spending time in Cleveland at the Cleveland Clinic or in Rochester at the Mayo Clinic or in Texas at MD Anderson or in Baltimore at Johns Hopkins is important.


Of course Stanford does great work, but the other places are considered centers of excellence in cancer, for example, and so you get startups that are more closely coupled to those institutions, and those places I think will be advantaged.

Also we are looking at, are there things beyond what we’re doing that we can do? Should we try to help support the creation of more regional venture-capital funds? We’ve backed some, but is there some more institutional way to create dozens of venture-capital funds?

And can we figure out ways for others to co-invest alongside of us in some of those companies?

Local funding

WSJ: How do you connect entrepreneurs to sources of capital in these cities, especially when there’s a shortage of venture capital there? It’s a chicken-and-egg problem.

MR. CASE: One of the arguments we make in each of these cities, or even pleas that we make, is there’s usually or almost always in these cities a lot of money on the sidelines—companies that could be investing in startups, wealthy families, some that have been there for decades, that could be investing in startups, and for the most part they aren’t.

It’s really important that local entrepreneurs get their initial support from local investors—I think that is a signal to people in other places. If the people in Nebraska or Minnesota or Iowa or what have you aren’t investing in entrepreneurs, why should the folks in California or New York or Massachusetts pay attention?

It means creating more angel networks, because often people are a little reluctant to jump into this—it’s an area they don’t have a lot of expertise in, they don’t want to do something that looks stupid. Angel networks help curate investment opportunities and mitigate risk for inexperienced or unsure startup investors.

Local civic or community organizations that spotlight successful startups could also help drive investment by identifying key opportunities. Finally, corporate partnerships can validate an idea or business model and de-risk a startup investment.

The other thing that’s very important is crowdfunding. In my view the rules are overly complicated. They’re too burdensome for young companies seeking to raise capital. For instance, much more can be done to reduce the still onerous disclosure obligations on startups—especially those doing low-volume sales.

So I hope one of the things the Trump administration does is take a fresh look at that and look at ways to streamline those rules so more people will use crowdfunding, because I think it will help more entrepreneurs in these off-the-beaten-track Rise of the Rest cities to get the initial capital to get started.

Hopefully we can reduce some of the either naiveté or to some degree arrogance that I do see in places like Silicon Valley. There are a lot of people who think all great innovations will always happen in Silicon Valley because that’s where all the smart people are and that’s where all the capital is, and I think that attitude is going to get Silicon Valley into trouble. And in the long run, or even now, we’re starting to see it have some implications more broadly in the country.

We saw the implications with the presidential election, which in part was a referendum on the forces of globalization and digitization that Silicon Valley celebrates. Nearly 90% of venture capital last year went to blue states and just 10% went to states that voted for President Trump. Voters in red states have good reason to feel left behind. That gap will continue to grow if we don’t find ways to connect all Americans to the benefits of innovation and entrepreneurial activity.

I’m bullish on Silicon Valley—I don’t want to sound overly critical—but we do need to figure out ways to make sure this next wave of entrepreneurship, particularly in the U.S., is more inclusive, and that includes regional inclusivity and also different people.

Creating options

WSJ: How do you get entrepreneurs to not go to Silicon Valley or New York and start companies in some of these other places instead?

MR. CASE: If people want to go San Francisco or New York or Boston, go for it, but I just hope they don’t go there because they feel like they have to. Fifty years ago, if you wanted to be in the entertainment business you had to be in Hollywood, and if you wanted to be in financial services you had to be in New York. I don’t think anybody believes that now.

We’ve seen those industries move from being highly centralized to being more distributed, and I think that will happen here, too. So it’s really more about giving people that path so if they want to stay in Minneapolis because they grew up there or just graduated from school there, they can, or if they left Minneapolis and want to go back because they want to raise their families there.

WSJ: Are there other obstacles to Rise of the Rest that you’re working on?

MR. CASE: I think there are some opportunities. When the president and Congress focus on the tax code, I hope some of the focus ends up being on how do you create the right incentives to encourage more risk capital to go to entrepreneurs and particularly to entrepreneurs in these Rise of the Rest cities.

There were concepts in the past, like a couple of decades ago, with empowerment zones, where there’s tax benefits to invest in certain places. I think looking at tax policy as a way to encourage more job creation is important.

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