IMAGINE IT’S a beautiful afternoon in late May in Palo Alto. The class of 2040 has just graduated from Stanford University.
Meet Jessica. She’s a second-generation American. She majored in public policy and, like a majority of her classmates, computer science. She’s at the top of her class. Jessica can have any job she wants—and she’s gotten several offers from some of the most innovative Third Wave companies in the world.
And so after she’s dropped off her cap and gown, she packs up her self-driving electric car, gets in, and tells her onboard personal assistant where she’s heading. As the car drives off campus, she starts binge-watching that classic show Silicon Valley that she’s heard so much about from her parents. It’s playing on her windshield as the car merges onto the highway. But Jessica isn’t going to San Francisco. She’s headed to New Orleans. And none of her peers are surprised.
By the time Jessica and her classmates are graduating from college, a quarter century from now, the entrepreneurial landscape of America will look much different than it does today.
Since the First Wave of the Internet, venture capital money in the United States has been geographically concentrated. In 2014, three-quarters of all venture dollars flowed to just three states: California, New York, and Massachusetts. Our most entrepreneurial graduates tend to head to those states, too. They go to follow the money, while the money comes to follow them. Over time this arrangement has perpetuated a virtuous cycle—a financial ecosystem—in which the best innovators and the best investors congregate in just a few places to commercialize the best ideas.
There is nothing wrong with this system. On the contrary, it is the formation of these innovation clusters, and the ecosystems of collaboration that have risen around them, that has helped advance technology. We don’t want this progress to stop. At the same time, because the tech sector has been concentrated in so few areas, most of the economic gains are concentrated, too. It’s what turned the Santa Clara Valley into one of the wealthiest area codes in the world. It’s what produced a vast medical and biotech corridor in Massachusetts, and the jobs and tax revenue that come with it.
Yet, largely because of this concentration, the economic benefits of the growth of the technology companies have not accrued to many places in the United States. Though consumers in Ohio are just as likely to use smartphones as their counterparts in New York, far fewer are likely to be responsible for the software itself. For most of the First and Second Waves, if an engineer in Nashville wanted to start her own digital company, the only real choice was to move—either to one coast or the other.
This dynamic has caused a brain drain of sorts in the United States. Entrepreneurs are cultivating the skills and creativity to come up with great ideas in the middle of the country. But then they are taking their ideas—the company behind it, the jobs that come with it, and the economic activity that surrounds it—and moving out of town.
But as we enter the Third Wave, this arrangement will change. In fact, it’s already starting. In Durham, North Carolina, for example, seven companies at the American Tobacco Campus’s tech hub had exits totaling $1.5 billion between 2013 and 2015.1 Jessica’s journey to New Orleans might be hypothetical, but this future is not. And it’s an illustration of what I’ve referred to as “the rise of the rest.” Journalist Fareed Zakaria coined that phrase to describe the rise of new economies in places like China and India. The same phenomenon is happening within the United States, as regions throughout the country begin to rise.
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Over the next two decades we will see cities that were once marginalized become entrepreneurial powerhouses. We’ll see dozens of startups born in places such as Denver and Kansas City and Austin and Pittsburgh. We’ll see venture firms opening offices in Indianapolis and Minneapolis and Salt Lake City.
We’ll hear stories from places like Buffalo, where a once abandoned area of buildings has become the center of a new tech renaissance. As a reporter for USA Today wrote, “As the city slowly emerged from its funk through growth in advanced manufacturing and medical research about 15 years ago, tech and other industries began to land here this year. Today, construction cranes scatter the skyline. Construction is under way for a 1-million-square-foot SolarCity manufacturing center (valued at $1 billion), the addition of 500 IBM jobs and an extension to the University at Buffalo’s medical research facilities.” I’ve invested in two young Buffalo startups myself: Energy Intelligence, which builds technology that harvests energy from motor traffic, and POP Biotechnologies, which uses nanomedicine to develop cancer treatments.
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This geographic diversity is vital to our future. According to the Kauffman Foundation, “New businesses account for nearly all net new job creation,” and “new companies less than one year old have created an average of 1.5 million jobs per year over the past three decades.”2 In other words, startups are the engine of our economy. The communities they form, the talent they recruit, the products they make, the jobs they create, and the lives they improve can all be leveraged to transform communities.
For me, the rise of the rest is personal. My family goes back more than one hundred years on the Hawaiian Islands. My grandfather on my mother’s side ran the general store in the town of Hilo. My other grandfather was the treasurer of a sugar plantation on the island of Kauai. Both of my parents went to college (and my dad got a law degree) on the mainland, but then went straight back to Hawaii. But when it was my turn to leave for school on the mainland, I did so knowing I would likely never go back. It wasn’t that I had negative feelings about Hawaii. It was home—and in many ways still is. But I knew I wanted to paint on a bigger canvas, and that reaching for such ambitions wouldn’t be possible from Honolulu. So there’s something personally exciting about knowing that this will soon change for the next generation of entrepreneurs, whether they live in Honolulu or Houston.
I also see the rise of the rest as an investment strategy. Some of the best ideas in the world are being hatched in cities that too few venture capitalists pay attention to. For the past several years, I’ve been getting out of my office, and onto a bus, to see what’s going on in the rest of the country. I’ve traveled to two dozen cities across as many states and seen communities and accelerators thriving in unlikely places. I’ve listened to pitches from companies few have ever heard of, with ideas I wish I’d had myself. I found Artiphon in Nashville, the maker of a tech-enabled musical instrument that went on to raise the most money in history for its category on Kickstarter and was named one of Time magazine’s 25 Best Inventions of 2015. I found Shinola in Detroit. Founder Tom Kartsotis believed Detroit would be a comeback city, and he decided to grow Shinola in a Detroit building that once housed automobile innovation. Hundreds of former autoworkers have been retrained to craft beautiful watches, bicycles, handbags, and notebooks. And Shinola’s “Where American is Made” ethos is being brought to cities around the world, including New York, London, and Washington, DC. We wrote Shinola the largest check in my investment firm’s history. In fact, we’re on track to invest more than $1 billion in rise-of-the-rest cities, and that’s just the beginning.
There are three main reasons I’m confident that major new innovation centers will emerge and flourish around the country. Among them, the most significant is the Third Wave. The rise of the rest and the Third Wave are two different phenomena. But they are colliding—and converging—in self-reinforcing ways.
Most of the industries that are targets for Third Wave entrepreneurs are already clustered throughout the country. And so for many Third Wave entrepreneurs, there is appeal to putting down roots where industry ecosystems already exist. During the Second Wave, the industry of focus was technology, and so Second Wave entrepreneurs understandably flocked to the place in the country where tech companies and investors had clustered. But during the Third Wave, though products will be tech-enabled, they won’t be tech-centric. They’ll use apps, but the product won’t be an app. And so the benefit derived from being surrounded by the tech world won’t be as high. Instead, being surrounded by experts in the industry you’re trying to disrupt may reap the biggest dividends.
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. 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. And entrepreneurs pushing the limits of robotics technology may find a welcome home in Pittsburgh, the steel city and manufacturing powerhouse where Carnegie Mellon, a research university with arguably the world’s best robotics program, is located. Of course, many will still head to Silicon Valley, but less so than we’ve experienced in the past. Ultimately, entrepreneurs will want to be in the place where the highest concentration of related expertise is to be found.
Over the coming years, I expect to see lots of tech entrepreneurs and engineers who started in the Bay Area consider relocating in search of industry-specific expertise. And the Third Wave explosion of new kinds of startups won’t just be driven by these entrepreneurial carpetbaggers. We’ll also see industry veterans and local innovators start companies in the rise-of-the-rest regions where they already live, to solve the problems they know and understand.
The Second Wave had many inspiring stories of twenty-something computer coders creating multibillion-dollar companies. The Third Wave will have similar stories, but the founders are less likely to be twenty-something coders and more likely to be thirty-something farmers and factory workers and chefs and artists—people who saw a problem in their own spheres of expertise, then leveraged the skills of others to build great companies.
That was certainly true for Jewel Burks, the founder of Partpic and the winner of our rise-of-the-rest pitch competition in Atlanta. These competitions pit local entrepreneurs against one another for a $100,000 investment prize. Jewel was working in Atlanta for an industrial parts company and noticed that she was frequently receiving calls from upset customers who had mistakenly received the wrong part. Jewel realized that while these customers were looking for specific parts—a bolt for this, a rivet for that—a lot of people didn’t know the actual name or number of the part. So there was a lot of guesswork, and a lot of frustration when customers didn’t get what they needed.
Jewel had an idea. She called her friend Jason Crain, who worked at the music recognition company Shazam. Jewel and Jason came up with a concept for a product that would recognize parts not by description but by sight. Just snap a picture of the part you needed to replace, and the software would identify what the part was and send it on its way to you.
This kind of real-world solution might lead to a valuable Third Wave company, but it’s an idea few people with traditional startup backgrounds would ever have pursued. They wouldn’t have had the experience taking those phone calls, or understood the prevalence of the problem, or the scale of the opportunity.
Of course, while the Third Wave will play a big role in the rise of the rest, it is not the only factor driving it. There’s also a cultural element. Sure, California is a terrific place to live and work, but not everyone who goes out there wants to stay forever. If you’re a midwesterner, the opportunity to work for a startup in the state where you grew up could be a major selling point, the chance both to be in a place that fits your lifestyle and to give back to a community whose future you already have a stake in.
And there are related financial considerations, too. The rise-of-the-rest cities I’ve been visiting have a much lower cost of living. San Francisco is one of the most expensive cities in the world. So is New York. If you start a company in a city like Cincinnati, where the cost of living is lower, the overhead costs for your company will drop. A $100,000 seed investment might be enough of a spark to get a venture-scale business growing rapidly in Cincinnati. In San Francisco, that same $100,000 might only be enough to hire a part-time engineer and rent a few cubicles in a shared office space.
The playwright Tennessee Williams is sometimes quoted as having said, “America only has three cities: New York, San Francisco and New Orleans. Everywhere else is Cleveland.” And while I might disagree with that second part, the first was, at one point, a pretty accurate description.
New Orleans has long been a major economic hub. Before there were major railways or airplane runways, there was just the Mississippi River, carrying people and goods in and out of the city. In 1840, the city was “rated . . . as the fourth port in point of commerce in the world, exceeded only by London, Liverpool, and New York.”3 But more recently, it was battered, and nearly broken, by the tragedy of Hurricane Katrina.
In August 2005, Hurricane Katrina swept through New Orleans and the surrounding areas with winds topping 125 miles per hour.4 We all watched with horror as the levees failed and the streets flooded. At one point, 80 percent of the city was submerged.5 Nearly two thousand people lost their lives. New Orleans emerged a shell of what it once was.
Even before the storm, New Orleans public schools were struggling. Only 30 percent of students were enrolled in passing schools. Graduation rates and test scores were depressingly low.
Jen Medbery came to New Orleans in 2008, less than three years after Katrina struck, to teach math as one of the founding faculty members of a new charter school. Jen already knew her way around a classroom. She had just spent two years doing Teach for America in rural Arkansas, and before that, she had earned her computer science degree at Columbia University.
While teaching, Jen noticed that she and her colleagues were spending far too much time recording data by hand—absences, grades, detentions—or by cobbling it together in complicated spreadsheets. Though they collected the data, they were not spending much time analyzing it, sharing it with one another, or using it to make better decisions. Doing that would take time and energy, precious resources needed for students in the classroom.
In 2009, Jen founded Kickboard, a company that makes it easier for schools to understand, and benefit from, the data they collect. The platform helps teachers look at their classes as a whole, and track their students across classes, to examine the big picture. If a student in my class is also doing poorly in your class, we should probably talk. If that same student happens to be doing well in a third class, or on writing assignments but not quizzes, her teacher might be able to figure out why.
And it’s not just about helping teachers. Principals can now see how their individual teachers are performing, and tailor professional development and other administrative decisions around school-wide data. If several teachers are having the same classroom management issue, what new discipline policy can be put in place? If a specific reading standard isn’t being met, what resources can we allocate to the reading teachers?
At the same time, parents are able to track their students’ performance in real time. If Billy has gotten his second detention this week, or Maria has uncharacteristically missed a homework assignment, parents can be clued in and communicate with teachers. Because of the emphasis on data, if Jamie has failed a quiz, parents can understand if this failure was a fluke or a sign of a larger problem, and work with teachers on how best to intervene.
New Orleans was the perfect testing ground for Kickboard because, post-Katrina, nearly every public school in the city became a charter school. The relative independence of charter schools, and the startup nature of the rebuilt school system, allows them to adopt new school-wide practices quickly. As a result, charter schools in New Orleans began embracing Kickboard—and other companies like it—with interest and excitement. As Jen told the Times-Picayune, “There is no other city in the country that allows for that amount of innovation.”6
New Orleans is now making a name for itself as a place where education technology companies can build partnerships and innovate in ways nearly impossible anywhere else. If this relationship continues, there is an inevitability to the success it will breed. Already there are organizations like Tim Williamson’s Idea Village that are building a movement around supporting local entrepreneurs like Jen. Inevitably, this environment will drive more education pioneers to come to New Orleans—to join Teach for America or startups. More edtech, or education technology, companies will be born in New Orleans. Then investors interested in edtech will follow, funding a new generation of technology and creating a self-sustaining ecosystem. This is well under way. By 2012, New Orleans already had one startup for every 200 people—a number 56 percent higher than the national average. What once seemed impossible now seems inevitable: New Orleans, a city many were tempted to give up on, is rising again.
The rise of the rest matters. Combined with the Third Wave, it has the power to reshape the identity of dozens of cities around the country. And it means that the transformative economic value of the Third Wave can be widely shared.
The moment’s significance, though, is not confined to economics. The rise of the rest will also bring diversity—both of people and ideas—which is something our country needs. Silicon Valley has a well-documented diversity problem. According to the New York Times, Facebook reported that only 4 percent of its employees in the United States were Hispanic in 2015, while only 2 percent were black. At Google, the numbers are similar, and have been for years.7
The rise of the rest can mean diversity of opportunity. It can mean breaking the cycle of money flowing to the same kinds of people for the same kinds of ideas. It can mean the growth of businesses focused on fixing the problems in America’s backyard, not just in San Francisco’s. And it can mean lowering the barrier to entry across the board for entrepreneurs, no matter their background or geography.
The rise of the rest isn’t just going to spread the rewards of the Third Wave around; it’s going to create more of them. We will see more people starting more companies to solve more problems and seize more opportunities—many of which will never land on Silicon Valley’s radar. And I believe the leaders behind these emerging companies will end up being the most diverse group of CEOs America has ever produced.
I do want to be clear, though. For all the potential benefits that come with building a company outside of the three big hubs, there are also plenty of challenges that companies will need to overcome, most of which are not easily remedied with a plane ticket or a moving van.
Part of being a company coming from outside Silicon Valley is dealing with the perception that, as an outsider, what you’re doing must not be valuable.
I was in London recently at a conference for entrepreneurs and investors and quizzed people about the difference in valuations between London-based companies and those located in Silicon Valley. The general sense was that valuations in London were sometimes as little as half the valuations in San Francisco. London is a global metropolis and financial center, and it has a hot startup scene. But the reality is, it is largely ignored by most venture investors. Can you imagine what that valuation gap might be if you were building a startup in Des Moines?
And that kind of gap is not just a blow to your self-esteem or your hometown pride. Having that lower valuation means that you’re also likely to have a lot less access to capital. And without it, the practical benefit of locating somewhere with a lower overhead might not end up mattering as much as you had hoped.
And yet, in the long run, the valuations of rise-of-the-rest startups will normalize. Early funding rounds may come with a valuation discount. But once a company has a proven track record of growth, the private markets will take notice. When Amazon acquired Zappos in Las Vegas, or Salesforce acquired ExactTarget in Indianapolis, they paid full price. There was no discount because of the location.
There are also real challenges when it comes to talent. How do you convince an engineer living in Brooklyn that she should move to Boise? It won’t always be easy.
But I’ve also seen the flip side to these challenges. In the 1950s, Silicon Valley was just an apple orchard until William Shockley decided to start his semiconductor company there. Likewise, the Washington, DC, region was predominantly the land of government contractors until entrepreneurs like Bill von Meister decided to build a startup there. That’s how CVC—and later AOL—came to be located nearly three thousand miles from Silicon Valley, in the suburbs of Washington.
It was hard in the beginning. We were raising money from New York, San Francisco, Chicago, Boston—even Toronto—but not from anyone in Washington. And we were trying to convince people to leave stable jobs in DC to join a struggling startup—a much harder sell in a city whose culture doesn’t generally reward risk. At the same time, the people we did hire were self-selecting to be part of our company, which meant they probably believed in our mission more than someone in the Bay Area who jumps from startup to startup. That helped us build a stronger culture and a stronger team.
It was also easier to attract people with government experience to our team than it might have been had we been based in California. Al Haig, President Ronald Reagan’s secretary of state, joined our board in the mid-1980s, which gave us a lot of credibility and a lot of useful insights. Frank Raines joined our board in the late 1990s, shortly after he stepped aside as head of the White House Office of Management and Budget. Colin Powell also joined our board at that time. Much to my delight, Colin was one of the most active users of our beta products and a quick critic when our design was flawed. We also hired a number of executives after they left government jobs. We had a home court advantage, too, able to spend more time, build more relationships, and have more influence with some of the most powerful people in the country.
Thirty years ago, Washington, DC, was much like emerging rise-of-the-rest cities today. And having watched DC grow into a major startup hub has given me confidence as I see the same pattern replicating itself across the country.
When the Smithsonian’s American History Museum recently put together an exhibit called Places of Invention, Silicon Valley, not surprisingly, made the list. But what about Hartford, Connecticut? Or Medical Alley, Minnesota? Or Fort Collins, Colorado? They made the list, too.8
Throughout our history, innovation has come out of unlikely places. And it will again: Magic Leap, a virtual reality company in stealth mode, has already raised over $1 billion from investors including Google and Alibaba. Guess where they are located? Fort Lauderdale, Florida. This likely would not have been possible in the Second Wave, when cutting-edge tech companies were expected to be in Palo Alto (leveraging Stanford PhDs) or Boston (packed with MIT graduates).
The rise of the rest is beginning to happen, and the momentum will continue to build over the next decade.