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Steve Case on the innovation economy in 2021

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Revolution CEO (and former AOL CEO) Steve Case joins Yahoo Finance Live to discuss the platform’s “Rise of the Rest” 2021 playbook — which aims to spotlight promising startups outside of the coastal tech hubs — as well as the current state of big tech, his thoughts on Section 230, and more.

Video Transcript

MYLES UDLAND: I'd love to begin by talking a bit about the work you've done at Revolution, the Rise of the Rest fund, and this distribution dynamic we've seen play out as a result of COVID, people leaving San Francisco, leaving New York, and if you feel like this is COVID specific or if this is the market coming to the thesis that you've been outlining here for several years.

STEVE CASE: A little bit of both. As you said, we started the Rise of the Rest initiative and Startup America almost a decade ago and said, we need to have a more evenly dispersed innovation economy. We can't just have the successful startups in a few places like Silicon Valley. We need to spread them all around the country. And the data from the venture capital associations over the last few years, about 75% of venture capital has just gone to three states-- California, New York, and Massachusetts.

So we've been on this for a while. And we've long predicted that at some point, there would be a, after a brain drain of talent, people leaving the middle of the country to go the coast because that's where the opportunity was, there'd be a kind of a returning, a boomerang. And we're seeing an acceleration of that because of the pandemic. So maybe that is one of the silver linings.

A lot of people that were in San Francisco, were in New York, some of these major startup cities, did decide to shelter in place. I think initially, they thought they would just do that temporarily. Some of them have decided to stay, whether they be entrepreneurs or venture capitalists. I think that bodes well for the Rise of the Rest.

JULIE HYMAN: How is that distribution going to play out? Because, you know, I'm looking at the map of your footprint of the Rise of the Rest fund and some tour dates that you guys were making. I mean, Miami is on here. That has obviously been a hot destination for people to move to. Nashville has been hot. Dallas has been another place that people have been looking to, Denver. Are we going to get-- are you at all concerned about new kinds of unequal distributions based on the migrations that we're now seeing as a result of the pandemic?

STEVE CASE: Well, I don't think so. I mean, right now, if you look at the last couple of decades, in terms of what's happened with the innovation economy in this country, it has overwhelmingly been in three cities. What we're trying to do with the Rise of the Rest is spread that to more, like, 30 cities. And so far, we have visited I guess 44 cities with our Rise of the Rest bus tour. Our Rise of the Rest fund has invested in over 150 companies and 70 cities.

So there's a lot of things happening there. And I think that really is going to be helped and catalyzed by what's happening with this pandemic. So certainly, there are challenges in each of these cities. And it's great to see mayors like the mayor in Miami and other leaders in different cities really saying, this is a moment. Let's seize it. Let's really focus on startups. Just try to be a magnet for the talent. Then we can be a magnet for the capital, and we can have some of the next generation, big, iconic breakthrough companies follow.

We actually just published a week or so ago a new playbook, a Rise of the Rest playbook. You can go to the revolution.com site and click on it. And it's a free guide that really just talks about what's happening in cities like Miami, cities like Tulsa, cities like Denver, and more broadly, in states like Ohio.

There's some amazing things that have been bubbling, really, for a number of years. It's just we're now seeing this acceleration because of the pandemic. And hopefully, that will mean over the next five or 10 years, more of the venture capital will spread out. More of the startups will spread out. And therefore, more of the job creation will spread out.

MYLES UDLAND: And, you know, Steve, related to that, you hear a lot from VCs, who will say things like, you know, a city needs a big exit to kind of be codified as a major place that you want to put a lot of capital. And what we're seeing in public markets today is the SPAC is now so popular, such an easier route for companies to come public. Do you think that will help take a city like Columbus to its first deck of corn exit, right? If that's something that that kind of a hub needs to have more folks like yourself say, hey, I want to look specifically at a hub like that to put a lot of capital to work.

STEVE CASE: Well, some of it, I think, for venture capital just expanding the aperture. There actually have been some breakout multibillion dollar successes in Indianapolis, in Columbus, in Denver, in Provo, Utah. But this has already been happening. We're just now seeing an acceleration. And that's what I think is going to be interesting to watch over the next decade.

I think SPACs do create a great option for companies that have a long-term growth plan, that they really need to tell that story and show how they're going to grow. And the SPACs do seem to be better pricing those growth stories in more of a traditional IPO, where you're more constrained in terms of what you can disclose.

More options for entrepreneurs, more options for companies, more capital going to startups in general is a good thing, which is why I worked on the JOBS Act seven or eight years ago to change some of the rules regarding capital formation. And there's still work to be done. So any innovations such as SPACs I think can be helpful.

BRIAN SOZZI: Steve, you also helped develop Section 230 way back when. Looking at the debate that has evolved since, how would you modernize it?

STEVE CASE: It's a good question. When I was running AOL now almost, I guess, 30 years ago, that was when some of the initial rules of the road of the internet, whether it be e-commerce, whether it should be taxes or how do you keep things safe for kids, but also the 230 rule. At the time, it was different, obviously, because fewer people were on the internet. And even on AOL, it was mostly about posting messages and message boards.

The phenomenon in the last decade in particular, with things like Facebook and the news feed, where there's algorithms that are kind of putting things higher up in the list, that does change some of the dynamics. So I do think it requires a fresh look. Obviously, there's a lot of focus here in Washington now on that. Exactly how it should change, I haven't focused on it enough recently to really know.

But it's fair to say that now that the internet has really arrived and the way these systems are working, particularly social media platforms, is different. And they are playing more of a role in terms of what people are seeing. It's not just serendipitous. Taking a fresh look at 230 does make sense.

BRIAN SOZZI: What would that fresh look like, Steve? What would it look like to the bottom line of big tech?

STEVE CASE: Well, it's hard to say. I think it's a sensitive issue. There's a lot of nuance to it. So I think you have to really kind of dig in and understand what sort of the-- you're trying to deal with. How do you solve it in a way that has positive benefits for the broader startup ecosystem? Obviously, some of these big, powerful companies, whether it be Facebook or Google or others, are so strong, it's hard for startups to really compete with them.

So anything that can level the playing field and allow more startups to do things that are more disruptive, including challenging incumbents, not just in legacy industries, but also some of the Silicon Valley giants I think would be a good thing. 230 is only a small part of that discussion, but I think it could be an important part.

JULIE HYMAN: Yeah, obviously, antitrust and lots of other stuff going to be part of the discussion also. Steve, I do want to switch gears and talk to you about that phenomenon that Myles was talking about at the top of the show that we've been watching closely, which is the heavy short interest in a lot of shares that are now seeing the sort of counter bull raid, for lack of a better term.

And there's also been talk with SPACs, with hot IPOs, with certain stocks that have just been going to the moon, and a lot of parallels being drawn to 1999, a period that you are very familiar with. And so, I'm curious, do you think we are at another one of those moments, which are always hard to call? But what are you seeing in here that maybe gives you pause in this market or not?

STEVE CASE: Well, I think it is a little different. The 1999 obviously was the internet was just coming of age. It was sort of this phenomenon. Any company with dot com in their name, people were interested in investing in. Many companies went public that really had little or no revenue, and in some cases, didn't even know what their business model was going to be. So it really was really a pure concept dynamic.

That's not what we're seeing today with IPOs or even with SPACs. There's much more granularity in terms of the growth trajectories of these businesses. We've involved-- you know, Revolution Growth, which is sort of the flagship fund at Revolution, has been involved last year. DraftKings went public quite successfully via SPAC. Now it's trading at a $20 billion plus valuation. More recently, a couple of weeks ago, we announced the transaction. Still have a couple of months before we'll close with Talkspace and the telehealth base also via SPAC.

So we do think it's a useful mechanism for companies that need access to capital and want to tell their story with more transparency that they're able to do on the IPO side. Is the market fully valued? Time will tell. There are some stocks that maybe are a little high, but there are also a lot of stocks that have missed because a lot of the momentum has been for those giants, the so-called FAANG stocks.

We also need to focus not just on the companies that exist today that are going public or are public, but this next generation of companies, which is why backing startups everywhere, going back to the discussion about the Rise of the Rest, is really, really so important.

JULIE HYMAN: And so, let's talk about that for a moment, the private market. Are you finding good value on that side? Are you finding ample opportunity? Are you finding it at prices that you think are attractive right now?

STEVE CASE: Well, we're careful. We have three funds at Revolution that, you know, as I said, Revolution Growth is the main one. About 2/3 of our assets under management. We also have Revolution Ventures, which has been quite significant. It had a lot of momentum. And then, more recently, this Rise of the Rest in seed fund.

We're being careful, particularly on the later stage growth investments. We're being pretty disciplined. We make three or four investments typically in a year. Some make 15 or 20. And some of that is because we want to make sure we're really backing the right entrepreneurs and have the time to help them scale those companies. But also, in some cases, we have thought valuations were on the high side. So we've been careful in terms of pulling the trigger, if you will, on making new commitments.

MYLES UDLAND: And, you know, Steve, just to wrap up, finally, we started the conversation with kind of how COVID changed the geographic distribution perhaps of where people are looking. I'm curious if there's new areas of the market, particularly in healthcare, that folks are more interested in, given the way that, you know, the pandemic certainly confronted us with a lot of shortcomings within that part of the system. And Talkspace, we talked to them a couple of weeks ago-- certainly a part of that. But I'm curious if there's other opportunities there that you guys are seeing.

STEVE CASE: Absolutely. We also have another company-- Revolution Growth-backed Tempus in Chicago has done some amazing things using big data to try to better diagnose initially cancer, but they also focused on COVID. CLEAR, a company we also backed at Revolution Growth, initially focused on kind of an airport fast pass, but also launched in this past year a health pass. Actually powered the bubble that the Hockey League used and NHL used in Canada a few months ago, and now expanding that with a lot of corporations embracing the health pass.

So I do think-- because I think the pandemic was a reminder how important health is in terms of everyday life and how some of the delivery systems aren't very effective. So creating better care, better outcomes, more affordability, kind of a greater convenience, I think people are on it. And there will be a lot of momentum in that sector over the next decade. We're already seeing it. We expect that to accelerate.

Also, by the way, it ties in with the Rise of the Rest because some of the most important healthcare organizations, like M.D. Anderson in Texas or Mayo Clinic in Minnesota or the Cleveland Clinic in Ohio or the big health plans like United in Minneapolis, a lot of health plans in Nashville. I think as healthcare becomes more important, and we're entering this third wave of the internet, these rising cities will become more important as well. So that's why I'm so optimistic about the future.

BRIAN SOZZI: Steve, we've got some new data out this morning. Definitely, I want to get your thoughts on it. From the Americans for Tax Fairness, they came out and noted that the wealth of America's billionaires increased $1.1 trillion through the first 10 months of the pandemic, which really seems out of whack. It really does. What would you like to see from the body administration to close that wealth gap between the haves and have-nots?

STEVE CASE: Now I've been very concerned about this and talked about it over the years. And some of that ties in with the work we're doing, trying to back startups to do create jobs and good-paying jobs, not just in those companies, but for every startup job, there are about five other jobs in the community in housing and services and so forth.

And in terms of your specific question, when he was running for office last summer, now President Biden put this Build Back Better plan in place that did deal with income inequality and also did deal with this issue of, how do you make sure we don't have the innovation haves and have-nots, where some people, but not that many, are really benefiting from this innovation economy? A lot of people are being left behind by it. And that included trying to get more capital to more entrepreneurs in more cities, to back more startups and create more jobs, as well as, more recently, the legislation they introduced, which included a $15 minimum wage.

So I think the Biden administration's on it. They recognize that we continue to be the leader of the pack, the most innovative entrepreneurial nation in the world. But it hasn't been particularly inclusive. And we need to have a kind of reboot capitalism and reboot innovation and entrepreneurship so it brings everybody along. Everybody gets the benefits, and everybody has an opportunity to participate in the innovation economy.