Venture capital-funded startups are moving away from Silicon Valley, AOL Co-founder explains

AOL Co-founder and Revolution CEO Steve Case appears on Yahoo Finance Live to discuss where the innovative economy is heading as venture capital firms look to fund startups in cities outside of Silicon Valley.

Video Transcript

BRIAN CHEUNG: Silicon Valley, the land where VC money famously flows like honey, but the question is has the Bay Area already reached saturation point on firms to invest in? You can see the chart ahead of you of the share of seed and early-stage VC dollars declining over the last few years. And a report from Revolution says yes, it may have reached saturation with coastal investors looking for new opportunities in places like Philadelphia or Austin.

So who better to talk about this and other major tech trends than AOL cofounder and Revolution CEO Steve Case? And, Steve, it's great to have you on the show this morning. Again, Revolution has this new report there, and that's kind of what I want to start.

You're detailing in this report these rising cities which may be taking some of that share away from San Francisco and the Bay Area. First of all, which cities are they, and then what's behind the trend that you're observing?

STEVE CASE: Well, for the past decade, the innovation economy really has been dominated by Silicon Valley and, to some extent also, New York City, that area, and the Boston area. And most of the rest of the country has been struggling to get venture capital for most of the decade. 75% of venture capital has gone to just three states.

But we're starting to see-- and it was building over the last few years but I think, accelerated because of the pandemic-- a dispersion of capital, and it's not just a few other cities. It's really dozens of cities. We've now done our Rise the Rest bust tours in 44 cities. Our Rise the Rest seed fund has invested in 80 different cities.

So it's a broad-based effort, and it's beyond the usual suspects that people talk about like Seattle and Austin. We're seeing a lot of momentum in Chicago, in Los Angeles, in Raleigh-Durham, in Dallas, in Phoenix, in Columbus, here in Washington, DC. So I think over the next decade you'll see dozens of cities rise up, not just a few.

JULIE HYMAN: And, Steve, as you said, it's really accelerated, it seems, over the pandemic. This is not a shock because we have seen movement accelerate, right, people moving out of big cities. So talk to me about how that dynamic has affected the investment dollars and what you're talking about, and the ability of people to also work remotely has affected what you're talking about.

STEVE CASE: Well, it's definitely been a tipping point. I think people-- we're kind of breaking or separating work and life, and there's more flexibility in terms of how you want to work and where you want to live and more remote work, more hybrid work, which gives people more opportunity to decide where they want to live.

And once they're doing that and they're living in some other place, probably initially working for their existing company, over time they're likely to start doing something more locally, either start something there or join something there. So that will accelerate what's happening with these startup communities.

But as the report we did with PitchBook said, there's really three particular points I think are interesting. One is for the first time in 10 years, the amount of venture capital going to the Bay Area is under 30%. The second is in these other cities outside of the big three, over the last 10 years there's been a 600% increase in venture capital from $4 billion 10 years ago to $24 billion now.

And the third, which I think is actually the most striking and the most encouraging, is in the last 10 years, 1,400 new regional venture-capital firms have been launched that are providing some of that initial capital in some of these cities. And as some of those initial companies get launched and start scaling, they'll obviously access more capital, including from coastal investors.

So our expectation over the next decade is we really will see a dispersion of capital, in some part driven by this dispersion of talent. And while Silicon Valley will still be the leader of the pack for sure and New York and Boston will still be very, very strong, we'll have a more dispersed innovation economy, more jobs being created in different parts of the country, more economic growth in different parts of the country, and investors who recognize this is a trend. We've been doing this for a decade, but we've seen more and more people the last couple of years really jump on the bandwagon, which is very encouraging. I think what's going to happen in the next decade and how many big multibillion dollar companies are launched in cities that most people don't think of as startup cities, I think people are going to be really quite surprised over the next decade.

BRIAN SOZZI: Steve, is there one city that stands out to you outside of, obviously, Silicon Valley and New York, that you're seeing a lot more startups begin there, and what would be driving that?

STEVE CASE: Well, as I said, we've invested now in dozens, and picking just one is kind of asking like who's your favorite child? which is not a question nobody-- no parent wants to answer. We really try to champion all these different cities, and we're investing-- as I said, we have 185 investments in 80 different cities alongside over 300 regional venture capitalists. So we view this as a broader movement and seeing a lot of momentum in lots of different cities.

But in terms of what's driving it, generally in these cities there has been a tent-pole company that's been successful and created spin-off capital and some other people doing other kinds of things. Often there's a strong university there. Often the business community is engaged to support the startups, not just the big companies helping themselves but the big companies partnering with, mentoring sometimes, investing in the smaller companies.

Usually the mayor, the governors are championing startups, really recognizing that's a better path to run economic development. Don't try to get big companies to move headquarters. Try to get small companies to be successful.

And there usually is a collaboration in those cities. There's sort of a network effect, network density, if you will, which is one of the great things about Silicon Valley. People in that city are really rallying together to try to create more momentum and tell their story both locally to get some investors that they-- particularly those early angel rounds-- as well as nationally to get more of the coastal investors paying attention to what's happening.

And then we've seen this now-- because we've been on the ground for nearly a decade, we've seen this in dozens of cities, and it's really remarkable what's happening. The only news with this report is now people are starting to notice and the dollars are starting to flow, and that, I think, will accelerate over the next decade.

BRIAN CHEUNG: Hey, Steve, I want to shift from startups, tech startups, to big tech, and there's been a lot of questions about regulation down in DC, which I understand is where you're joining us from. Yesterday there was the Instagram CEO appearing on Capitol Hill, and he was facing some questions about specifically the monetization on these social-media apps specifically of children. I want to play for you a clip of Amy Klobuchar pressing the Instagram CEO yesterday. Take a listen.

AMY KLOBUCHAR: Do you view the kids as a feeder way for people to get into your product? Have you not-- have you not done things to get more teenagers interested in your product? Are you not worried about losing them to other platforms? You better tell the truth. You're under oath.

ADAM MOSSERI: Absolutely, Senator. Senator, we try and make Instagram as relevant as possible for people of all ages, including teens. Teens do amazing things on Instagram every day, but we also invest, I believe more than anyone else, in keeping people, including teens, safe.

BRIAN CHEUNG: And again, that was the CEO Adam Mosseri of Instagram. But, Steve, my question to you is that AOL had AIM instant messaging. I was using that when I was a teen. I guess the question is what is the balance of offering products that teens want to use to communicate with others but also, at the same time, keeping them safe?

STEVE CASE: You've got to keep them safe, and we saw this in the early days of the internet. When we started AOL in 1985, only 3% of people were connected, and they were only, on average, using the internet for an hour a week, so it was pretty early days. In those early days, the government position was should sort of be a light touch in terms of regulation. We don't quite understand. Let's let it run.

Well, now obviously the internet is ubiquitous. Social media is ubiquitous. So it's not surprising that there's more focus on what the right regulation should be.

I predicted this five years ago. I wrote a book called "The Third Way," that there would be a need for more dialogue between the innovators in Silicon Valley and the regulators, whether it be here in Washington, DC, or Brussels or other places around the world. That's now starting to happen.

So I'm glad they're having these conversations-- also the conversation yesterday on the crypto side of things. Having this dialogue is important. It's not-- at this point, because the internet has really matured, it's not surprising to me that there's more of a focus and even relooking at some of the things like something called the Section 230 that was put in place when I was running AOL. You know, circumstances have changed, and it merits a fresh look.

JULIE HYMAN: Steve, speaking of that crypto hearing, you specifically got a shoutout in that hearing, and I just want to play the sound from that mention.

- Thanks again for the hearing. I feel like I've spoken to Steve Case in, like, 1990, so thanks for the vision that you guys have, and thanks for the hearing, Madam Chairwoman.

JULIE HYMAN: Steve, I was amused to hear that, especially knowing that we were going to be talking to you today. And that leads me to ask, looking at these sort of burgeoning technologies and investing and seeing, as you are, all of these startups around the country, whether it's Web 3.0, whether it's some of the talk about AI or the metaverse, et cetera, which of these trends are you most excited about, or where do you think this sort of next technological wave is going to come?

STEVE CASE: Well, I think what we're entering is what I've called the third wave of the internet, which is really when the internet kind of meets the real world and impacts some of the most important aspects of our lives-- how we stay healthy, how our kids and we learn, how we invest money, how we move around, what and how we eat. So some of these sectors like health care and food and ag and others are the ones that really getting more and more attention. That was building over the last decade, I think will be even stronger over the next decade.

So for me, it's how do technologies converge to really solve those problems? One company we backed with our Revolution Growth fund, a company in Chicago called Tempest, is using AI to really provide much more precise diagnosis for cancer and other diseases. So people, when they're diagnosed, are likelier to get the therapy that actually works and can save their lives or prolong their lives. So that's where I think the technology is focused.

That first wave was getting everybody online, kind of building the on-ramps to the internet, the servers and the modems and all that kind of stuff. The second wave was really software and apps riding on top of the internet. Google, Facebook, of course, are among them.

The third way, as I said, is when the internet really connects more to the real world, but what's interesting about this third wave, it's going to be more regulated because these sectors are regulated because they're so fundamental in terms of everyday life-- what drugs we take, what food we eat, and so forth-- and partnerships are critical, that you can't just do it alone. It's not just about dropping an app in an app store.

And our focus at Revolution are backing companies generally outside of Silicon Valley that recognize that partnerships are critical to really build a network around your business, and policy is also critical, and you've got to engage in a responsible way with policymakers.

BRIAN CHEUNG: All right, Steve Case, AOL cofounder and Revolution CEO. We'll have you back on next time your name comes up in a congressional hearing. Thanks again.