AOL cofounder Steve Case is betting $150 million that the future of startups isn't in Silicon Valley or New York, but the money isn't what's making his prediction come true
- AOL's billionaire cofounder Steve Case runs the DC-based venture capital firm Revolution.
- Case is convinced that the future of American startups lies outside of Silicon Valley, New York City, and Boston, which receive 75% of all venture capital in the US.
- Since 2014, he has gone on seven "Rise of the Rest" bus tours to encourage entrepreneurship across the country, for a total of 38 cities outside of the three main VC centers.
- Late last year, he launched the $150 million Rise of the Rest Seed Fund and put "Hillbilly Elegy" author and former Valley investor JD Vance in charge. It includes limited partners like Amazon's Jeff Bezos and Bridgewater's Ray Dalio.
- While the investments are considerable, the factor that's making the biggest impact on entrepreneurs in smaller cities is the relationships Case facilitates.
- This article is part of Business Insider's ongoing series on Better Capitalism.
At 9:50 on a Friday morning in May, I was on a bright red bus with a billionaire investor, a celebrity author, and the governor of Kentucky.
I had joined Steve Case and his venture capital firm, Revolution, for a 12-hour day of touring Louisville, culminating in a pitch contest that's was like a condensed, and significantly kinder, version of "Shark Tank" with a $100,000 prize.
Case, 59, is the billionaire cofounder and former CEO of AOL. Since 2005, he's led more than $1 billion in startup investments through Washington, DC-based Revolution. He's always been primarily interested in investing outside of the three main entrepreneurial centers - Silicon Valley, New York City, and Boston - but in the past four years he's defined and concentrated his efforts on what he calls the "Rise of the Rest."
As the person behind the first iconic internet company, Case is now attempting to become a power broker of the next major wave of innovation in the United States, and he's already made significant progress.
Case has used his DC location to its potential, lobbying for startup-friendly laws like the JOBS Act of 2012 and working on President Barack Obama's jobs council in 2011. It was around this time that he became convinced the modern world was approaching a massive technological and societal shift, and that if the US didn't get ahead of it, its citizens and economy would fall behind. The entrepreneurial hegemony of the Valley was a construct whose purpose was wearing thin.
It was time for other cities across the country, many only just emerging from depressed or stagnant economies, to take advantage of the so-called "Internet of Things" becoming the "Internet of Everything;" the shift from novelties like app-controlled light bulbs to industry-transforming developments like new methods of collecting livestock and crop data.
Case decided that he was not only going to bet his money on this upcoming shift, he was going to do whatever he could to usher it in. He would show Americans that startup culture shouldn't be reserved for the coastal elites, and he'd do it in a way that grabbed the public's attention.
Case and his team rented a luxury coach bus, wrapped it in a custom full-body sticker with "Rise of the Rest" logos, and kicked off a four-day tour from Detroit in 2014. Case made use of his connections and clout to include the mayor, governor, and his friend Dan Gilbert, CEO of Quicken Loans and major real estate developer. The day included visits to new startups in the "rising" city and ended with a startup pitch contest with a $100,000 prize from Case's pocket. The day received local coverage and provided a rough idea of what could work, but it was fairly lowkey relative to what it would become.
When I was in Chattanooga, Tennessee, and Louisville, Kentucky this past May for the final two stops on the seventh Rise of the Rest tour, upwards of 600 members of the public attended each of the pitch competitions. Despite the lighthearted fanfare, the tours were treated with the utmost seriousness. Local political leadership and entrepreneurs alike were not only advocating for specific companies, but were using the day to explain to a bus-load of influential investors why their hometown deserved as much respect and recognition as any of the big three VC markets.
It was also the first tour to draw from the $150 million Rise of the Rest Seed Fund. Instead of using only his personal wealth, Case was now working with a sum gathered from almost 40 of the most prominent investors in the country, including Amazon CEO Jeff Bezos and Bridgewater Associates founder Ray Dalio. He put JD Vance, a former Valley investor best known for his hugely successful memoir, "Hillbilly Elegy," in charge of the fund.
I had known of the influence Case had as an investor and that his portfolio proved he truly believed in this notion of the "Rise of the Rest," but I was still skeptical about the bus tours. I wondered if they were anything more than a vanity project, a collection of photos and videos with a decent check attached, but not one that was going to uplift a community.
After spending two days on the bus tour and talking with dozens of locals in both cities I visited, it became clear that Case is tapping into something with a lot of momentum. A decked-out bus and a camera crew is a spectacle, sure, but that's the point. These bus tours and pitch contests aren't going to magically transform cities overnight, but they're giving these communities a publicity boost to ride out, and, more importantly, a network that now includes 38 cities across 26 states, and contains some of the most influential business people, politicians, and academics in the country.
It remains to be seen if this seed fund is going to yield the big returns Case and his team are looking for. The first three years of the Rise of the Rest, where Case used his own money, were somewhat of a beta test for this larger initiative which, in addition to the bus tours, will also include a total of 20 annual investments.
Regardless of how the fund performs, Case and his team have already convinced thousands of Americans that their startups and their cities can thrive, and that's leading to them build things they never would have otherwise.
Bringing the bus to town
That morning in May, when I was on the bus in Louisville, Case was uncharacteristically quiet, checking his itinerary and notes as conversation swirled around him. Normally, he speaks in a low register at an energetic pace, his sentences often bleeding into each other. In the time I spent on the tour, he seemed inexhaustible, despite the week's relentless schedule.
But right then, he was overshadowed by Vance, who was leaning across the aisle to chat with Kentucky Governor Matt Bevin.
Vance, who built his public image on overcoming struggles with poverty while growing up in Ohio and Kentucky, helps bring attention to the Rise of the Rest initiative through the star power he gained from his massive bestseller - I even saw Bevin ask for his autograph. Vance lights up in one-on-one conversations, and throughout the tour, I saw guests approach Vance to tell him about their projects.
Case, Vance, and the team start their tour days on tour at around 7 a.m. and go for 12 hours. That morning, we were leaving behind an outdoor breakfast at the Angel's Envy distillery, where Bevin, Mayor Greg Fischer, and Senator Rand Paul spoke about the need to accelerate entrepreneurship in Louisville (and, in the case of Paul, announce he would vote against confirming Gina Haspel to lead the CIA). Case believes strongly that alliances with state, local, and federal government will be essential for the growth of rising startup communities over the next few decades, and Revolution has consistently initiated these conversations in each of its Rise of the Rest stops.
From there, we drove around the city, meeting seasoned entrepreneurs with fast-growing companies, novice founders with new startups, and local power brokers.
Case and Vance often split up at these stops, each taking about half of the bus group. Each visit has elements for the cameras - in Louisville, we visited an axe-throwing facility that provided plenty of photo ops - but the Revolution investors, like the guests they invite, are constantly taking notes on potential new investments or partnerships.
A day earlier, as we toured Branch Technology's robotics factory in Chattanooga, I noticed Rise of the Rest partner Mary Grove grab Case's attention and quietly chat as they closely watched a 3D printer create a complex grid. Later, I asked Case what he and Grove were discussing. He said that at each stop, he and his team make sure to highlight great businesses and initiatives for local and national media, but they're also looking for the best company to put their money in. Case believed that Branch was good enough to represent its city in the press, but he and Grove needed to know if it would fit in the Rise of the Rest portfolio. Case told me this approach to impact investing is like "building a model home."
"We want great returns for the fund but we also want to showcase the companies to others," he said, explaining that they want the companies they invest in to symbolize the unique opportunities in that specific region.
In Louisville, our last stop was at the Speed Museum's auditorium, a beautiful glass-encased space where several hundred people arrived for conversations about their city and a competition.
And in the same way that the 12-hour day is the result of four months of planning by Revolution partner Anna Mason, the series of seven or eight four-minute pitches the team deliberated for about 15 minutes each at that night's pitch contest came after careful due diligence done prior to the tour.
A few days after winning, Fuller announced on FreightWaves' site the $100,000 would go toward educational grants or relocation fees for new talent, depending on what was needed. "An investment of that size is not going to move the needle for the city unless it's directly invested in encouraging job and economic growth in the region," Fuller wrote, noting that his goal is to make FreightWaves - which expects $13 million in revenue this year and, following the tour, closed a $15.75 million Series A round - Tennessee's first company worth $1 billion.
Although not every city's winner so neatly links the city's tradition with a startup moving it into the future, it was not at all a coincidence that both of these companies represented that.
"I see what's going on in the next wave of innovation, the next wave of technological change, as really depending on things that places like Chattanooga are good at, as opposed to the things that Silicon Valley are good at," Vance told the audience at the Chattanooga breakfast event. It's about changing a community's perception of itself, so that it can both play to its strengths and retain young talent that would otherwise flee. He said he and Mason passionately agree that "folks should not try to brand themselves as the Silicon 'X' of their particular area." What makes these Rise of the Rest cities great, he explained, is that they're building on a legacy of connections and expertise in areas the Valley simply can't.
The country is bigger than three states
After just two days with the Revolution team, I had memorized Case's talking points that he brings to every speech. They explain the reason he's doing all of this in the first place.
A full 75% of venture capital in the United States goes to three states: California, New York, and Massachusetts. Half of all venture capital goes to Silicon Valley alone. That's data gathered by CB Insights, which also found that a minuscule 1% of all this VC money goes to black entrepreneurs. And regardless of race, the vast majority of founders funded are male. If the US wants to remain the most entrepreneurial nation in the world, and it should want to, says Case, then these figures must change.
Fostering these diverse startup communities, he continues, will then drive job growth that will benefit entire cities. Case cites a 2014 Kauffman Foundation report that says startups account for a full half of all new job creation in the US.
Case details his vision further in his 2016 book, "The Third Wave," using two borrowed phrases he's reinterpreted. The title is one of those phrases, coming from futurist Alvin Toffler's identically titled book from 1980 about how the shift to the "Information Age" is the third most significant transformation in all human history. Case uses it specifically to refer to the third wave of the internet, which has just begun.
The first wave, he argues, lasted from 1985 to the popping of the online bubble in 1999, and was about establishing a foundation based around PCs. It's the environment in which his company AOL thrived. The second wave lasted from 2000-2015 and was about developing search, social media, and ecommerce. It led to the ubiquity of the smartphone. The third wave began just a couple years ago, and is about "the internet of everything," where virtually every aspect of our life will have an online component, to the point where internet connectivity will no longer be seen as a perk.
This is where "the rise of the rest" fits in. That, by the way, is borrowed from the subtitle of journalist Fareed Zakaria's 2008 book "The Post-American World." Zakaria was referring to China and India, but Case uses it to represent cities that aren't New York City, Boston, or in the Bay Area.
Case argues that the companies that will thrive in the Third Wave will not benefit from being in a tech ecosystem, despite using cutting-edge technology. These companies will be in industries that are often highly regulated, like healthcare and agriculture, and will not be scrappy startups setting out to disrupt industries from the outside; rather, they will succeed through partnerships with established leaders and institutions.
"It may make sense, for example, for a company that wants to revolutionize the agricultural industry to settle in the Midwest, where the right supply chains already exist and the culture of farmers is best understood," Case wrote in his book. "A company that wants to disrupt the healthcare industry might find that doing it in Nashville or Baltimore, both of which have developed vibrant healthcare sectors, might make more sense than doing it from Palo Alto or New York City."
These "rising" cities Case identifies typically have young startup scenes, and some, like the one in Chattanooga, emerged after years of economic struggle began to fade. He saw firsthand the power of startups on communities when AOL sparked the creation of a previously barren tech corridor in northern Virginia.
So far, Case has invested about $3.5 million across the seven Rise of the Rest bus tours. Until this past tour, Case invested from his personal wealth. Nine additional investments across the country were made ahead of the last tour, with an additional one after it.
Revolution would not disclose indicators of performance for its fund. However, Amazon purchased Partpic (for an undisclosed amount) a year after it won a 2015 competition in Atlanta, and Omaha winner LifeLoop told Silicon Prairie News last December it had grown its customer reach fivefold in the year since its Rise of the Rest investment to serving 100 communities across 20 states. As shown by the Chattanooga and Louisville examples, some of the Rise of the Rest investments are just starting to build momentum, while others, like FreightWaves, are already scaling.
The Rise of the Rest Seed Fund is one of three funds at Revolution, and Case and his team don't see it as operating in a vacuum.
"So $150 million in the great scheme of things is not a huge fund - we get that," Case told me earlier this year. "But if we, in fact, are on average doing 10% of rounds, we're really helping catalyze, mobilize, more like $1.5 billion of capital. And then if we have this group of investors who are well-positioned to write $50 million checks down the road, hopefully it ends up being many billions of capital that gets unleashed here."
Megan Smith, President Barack Obama's former CTO and the founder and CEO of startup accelerator Shift7, joined the fund as an LP in February and was in Chattanooga. She told me that her work in the White House proved to her that Case's thesis is correct, and that not only are Case and his team well-respected among investors, "They're doing the leg work for them," by discovering and cultivating talent in markets that could potentially benefit their portfolios and corporations. She's most excited by the way both the entrepreneurs and investors can leverage the Rise of the Rest network, and, as an MIT board member, she connected Branch Technologies to the MIT Media Lab, even though it didn't take home the 100 grand the day it competed.
"These are national scale, maybe even global scale companies," Case told me, referring to highlights of the last tour, even beyond those in the competitions. "They just happen to be in Louisville, they happen to be in Chattanooga, so they shouldn't just have regional ambitions. They can go the distance."
Setting out in 1804
In June of 2016, Case spent a day in Louisville in a hybrid book tour-bus tour trip arranged by Chuck Denny, the regional president of PNC who oversees Greater Louisville and is in charge of developing the market and establishing his bank's visibility. Denny, who got his bachelor's degree from the University of Louisville in 1975 and his MBA from there in 1980, has made it part of his mission at the bank to improve his beloved hometown as much as possible. Denny had actually been a guest for the Nashville day of the first bus tour, back in 2014.
Denny accompanied Case to the tarmac where Case's private jet was parked, and the Revolution founder's words were so inspirational and the scene so dramatic that Denny kept a photograph of it in his office for inspiration.
"You have one of everything here," Case told Denny. "But it's scattered. It needs to be in one place to be easier for the entrepreneurs to access, and to have this density." Case explained that Louisville would benefit greatly from an entrepreneur center like the one they have in Nashville.
"I called it my John Wayne moment," Denny told me, laughing. "He imparts this wisdom on us, and then he rides off."
Just over a year later, the 1804 entrepreneurship center opened, named after the year Meriwether Lewis and William Clark set out from Louisville on their famous expedition.
It ended up being a key stop on the 2018 bus tour, concluding a chapter in a story that captures the effectiveness of the Rise of the Rest tours: how relationships can enact significant change.
Denny first invited Case to Louisville in 2016 because he was on the first bus tour, at the invitation of Michael Burcham, the founder and CEO of the Nashville Entrepreneur Center (the same one 1804 is modeled on). From that visit came the advice that built 1804, which then led to Denny mobilizing his network to successfully lobby for Louisville to be the first Rise of the Rest city to get a second bus tour. Now, that second tour is already helping 1804 grow.
The Rise of the Rest tour, even though it lasted just 12 hours, already helped move both of those agendas forward in a significant way, Fitzpatrick told me.
Case said that he and the Rise of the Rest team deliberately find diverse candidates for the pitch competitions, and work with local leaders to invite organizations specifically empowering groups like female entrepreneurs and entrepreneurs of color to be part of the tour. He told a story at 1804 about how in one of the tour's earliest stops, there was an event where only white men were in attendance, and he's avoided having that happen again.
Fitzpatrick said that the day in Louisville helped "bring people to the conversation who weren't typically there."
She told me this networking element was by far the most valuable aspect of the tour. And while she said she's not yet at liberty to share details, she's already working on partnerships started from conversations she had on the bus that will launch later this year.
"If there's nothing else I've learned from entrepreneurship, and probably business in general, it's that it all comes down to relationships," Fitzpatrick said, "and I don't know of any experience that facilitates those more strategically than the Revolution team."