Steve Case: 'Third wave' of Internet will help Middle America business

Show Caption Hide Caption Tech start-ups head to Midwest after election More Silicon Valley engineers and entrepreneurs are headed to America's heartland for their tech startups. Travis McCleery and Nick Solaro, both working in Columbus, Ohio, explain why.

SAN FRANCISCO — Steve Case, who helped foment the Internet age as AOL's co-founder, has crisscrossed the country the last few years championing a new revolution: the third wave of the Internet.

Just as the technology boom lifted the economies of Silicon Valley, New York and other coastal cities, its latest iteration will benefit the Midwest and other pockets of the U.S. as health care, energy, agriculture, education and other industries become ripe for disruption.

Such is the thesis of his 3-year-old initiative, Rise of the Rest. In an interview with USA TODAY, Case discussed the rise of tech start-up ecosystems in America's heartland.

Q: What got you launched on this mission?

A: I was working more on the policy side. And then a little over three years ago, we decided to hit the road and do these Rise of the Rest bus tours. We have done five so far and we are planning our next one in October.

I concluded that while advocating for policies that are pro-innovation, pro-entrepreneurship, pro-start-up, it's something I continue to do, but there also was a role to play I felt in terms of trying to be a catalyst within some of these cities and helping to build more of a network effect and network density in these cities and shine a spotlight on what's happening with entrepreneurs in these cities to attract more media and attract more investor attention.

Each city is different but there are dynamics kicking in across all of them that are encouraging and ultimately will result in more start-ups in more places and will ultimately level the playing field so everybody everywhere really does feel like they have a shot at the American dream and so we are creating economic growth and jobs everywhere not just in a few places.

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Q: What is it about Midwest cities that makes them uniquely attractive to entrepreneurs and investors?

A: I'd say some general reasons. There are a lot of people who have a connection to these cities: they grew up there, went to school there, have some affinity and they'd rather live there and raise their families there. There are also some financial considerations. Money raised goes a lot further.

As for city specific reasons, each of these cities has an interesting history and some of that history and some of that perspective and some of that culture and some of that DNA is increasingly helpful as we shift to the third wave of the Internet, which is less about the software and the apps and more about integrating technology and the Internet in important aspects of our lives and disrupting big sectors of the economy. I think partnerships are going to become more important and being closer to some of the big companies, many of which are in the middle of the country, is important.

Q: There have been many of these efforts in the past that have failed. Why do you believe this effort will work now?

A: I am not sure I buy into that thesis. We have seen the rise and fall of different cities. That cycle is continuing. I've reminded people when were in Detroit a few weeks ago that Detroit 75 years ago was in essence Silicon Valley when the car was the hot technology of the day and 75 years ago Silicon Valley was just fruit orchards. The first wave of the Internet was pretty regionally distributed. AOL was in D.C. IBM was in Boca Raton, Fla., Dell was in Austin. The second wave was when it became pretty centralized in Silicon Valley, when it really did become about software and apps and the Googles and the Facebooks and so forth.

As the third wave starts kicking in and industries like health care, energy, food and agriculture, and education and so forth become ripe for disruption, I think you will see this regional distribution happening again. And there are some structural things that have changed particularly in the last decade. Obviously it's easier and cheaper to start companies. And there are new forms of financing that have emerged including angel networks in these different cities, crowdfunding both for projects like Kickstarter and early days for equity debt crowdfunding platforms. There are now regional micro VCs that are popping up all over the country doing the early seed, sometimes Series A, rounds.

Q: Venture capital funding in the Midwest remains the same in the low single digits. Do you think that might change? Or will alternative forms of funding fill the void?

A: I think the early funding will come from some of these crowdfunding platforms. I think these regional efforts such as angel networks and micro venture capital funds will be helpful. But there is growing recognition that something is bubbling out there. People are paying attention to it. We are also seeing some interesting companies get financing. It starts with some of that initial funding to get start-ups started and as they start scaling and you start building these networks across these cities and to the major investors in California, New York and Massachusetts, then I think you will start seeing more investors not just getting into cars to drive to companies, but getting on planes to fly to companies.

And we're making a teeny bit of progress. The top three states got 75% of venture capital last year. The year before it was 78% of venture capital. It's not a big difference, but if you pick up a few points a year.

Q: What role is the 2016 presidential election playing in this?

A: I do think it was a wake-up call for some people who hadn't fully appreciated this dynamic where if we are only investing or predominantly investing in entrepreneurs in a few places and they're creating disruptive technologies and companies that end up displacing jobs and we're not offsetting that at least in part by backing entrepreneurs in these other places so we can create jobs in those other places, too, that there's going to be a growing divide and a growing frustration and an inevitable backlash.

Some of that played out in this election. The point I make is that it's not just people feeling left out or left behind in these middle of the country, Rise of the Rest cities, they have been left out and left behind if you are not funding start-ups there. Start-ups do create most of the jobs. In the last three decades, 30 million jobs have been created by young high-growth companies and accounted for all the net job creation in the country. Well, if you are not funding those start-ups in these other parts of the country, in the middle of the country, what some people call the flyover country, then guess what?

Jobs will be lost there and new jobs will not be created there. There are some negatives in terms of the election outcome, but I think maybe there are some positives, too, if in fact there's a wake-up call and it does lead to more investors focusing on entrepreneurs in these Rise of the Rest cities.

The argument I make to investors is that the main reason you should do it is that you can make money because there is less investor focus. But there is a second rationale that it is a way to help more people in more places and create a more evenly dispersed and geographically dispersed innovation economy which I think is an important thing to try to accomplish as a country.

Q: After the election there has been a lot of soul searching in Silicon Valley and the tech industry about automation, AI and other technological advances leading to job losses and feelings of dislocation. Is it important for the tech industry to help get people the education and training they need to get jobs in this industry?

A: I think it's important. There is no question that these new technologies are going to destroy a lot of jobs and displace a lot of jobs. It's always been the case. Two hundred years ago over 80%, 90% of us worked on farms, now it's 2% because technological innovation made it possible for land to be farmed with fewer people. That will continue to be the case. You can't debate that. You can't slow that. But you can say, what are the new jobs that are going to be created in the future and frankly what are the new industries that are going to be created in the future.

When we started with AOL 30 years ago, no one believed the Internet would amount to much, let alone be a big industry, but these things come out of nowhere and surprise you. What you do is back more entrepreneurs with crazy ideas in more places and in more sectors of the economy. Some of those things will end up surprising you. I don't think we are going be solving that problem or have a path to solving that problem if we only invest in people we happen to know who live closer to where we live, mostly in places like Silicon Valley. And it's not just a place issue.

The current data says that last year 90% of venture capital went to men and only 10% went to women. Only about 1% went to African Americans. Obviously there's a fairness argument but beyond that how do we have more shots on goal. But also it's an issue of economic opportunity. Some of those people are going to have the ideas and the companies that end up being the next big successes. How do we try to maximize our efforts to back as many people as we can in as many places as we can from as many diverse backgrounds as we can.

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