Steve Case on Looking Beyond Silicon Valley for Big Ideas

By Dan Costa Features PCmag

At SXSW Interactive this year, I had the chance to sit down with a number of tech industry execs for my interview series Fast Forward, including Chris Becherer, VP of Product at Pandora; Thad Starner, Professor of Computing at Georgia Tech; Ron Howard, director and producer of the new NatGeo series Genius; and Diane Bryant, EVP and General Manager of Intel's Data Center Group.

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In this edition of Fast Forward, we're talking with Steve Case, founder and former CEO of America Online. He's now a successful investor and author; his latest book is called The Third Wave. Check out our discussion below.

Dan Costa: I've seen you at South by Southwest in various settings. This is the first time we've spoken, but I've seen you across a room 10 times over the last couple of years. Why do you keep coming back to the show?

Steve Case: I love the energy. I love the ideas. I love the creativity. I love the sense of possibility and that's what's great about innovation entrepreneurship. People really believing they can change the world and believing they have an interesting, new idea and being able to bump into people and ideas in often serendipitous ways.

Makes sense and besides, we have our agenda, if you will. One of the things we're focused on is promoting regional entrepreneurship, more inclusive entrepreneurship, more of a concept called the Rise of the Rest. We're also here to talk about that. Maybe nudge some of those issues forward a little bit and maybe inspire some folks to do something about it.

It's amazing how many smaller cities come to South by Southwest to find entrepreneurs to learn other cities' playbooks. Not like New York and LA but smaller regional centers that are trying to create their own innovation centers. You don't see that in a lot of other shows.

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Of course, some are coming from California and New York and Massachusetts, but they're coming from all over the country. It is an opportunity for people in these Rise of the Rest cities around the country to be able to connect to people and that's important. Building these networks, building these relationships.

This is a place to build those partnerships, and also there are 23 mayors here. I met with some them yesterday, and they're trying to figure out how to create more of a startup culture in their cities. The only sustainable way to create jobs and drive growth is to back the next-generation startups, some of which end up being the Fortune 500 companies of tomorrow.

I think the mayors and governors are starting to figure that out. It's great to see a couple dozen mayors here at South-By trying to learn about things and figure out what they can do to create more of a culture around startups. Austin itself has inspired a lot of them...because of the university here, the success of Dell, some smart decisions by the mayor and others, it now really is a magnet for capital and talent. How do we do that in a couple of dozen other cities that are in these rise of the rest regions?

I want to get to the role of government and how those mayors are so important to third wave companies, but let's set the stage a little bit. Why don't you explain what those three waves are?

The first wave was just getting everybody online. When we got started at AOL, it was 1985, so it was 32 years ago [and] only 3 percent of people are online. They were only online one hour a week. When we said we want to get America online, get the world online, it was a daunting task. Quite a mountain to climb. It took us a decade, but there were companies building the infrastructure, the networks, the servers, the software, the on-ramps, if you will. Then they had to educate people about why they should get online and just figure out ways to make it easier to use and more useful, more fun. Also, more affordable. When we started, it was $10 an hour to be connected. That was pretty intimidating.

I remember logging on, getting my email down, and then logging off to save money.

It was kind of like the meter always running on a taxi, so it created an anxiety and parents weren't particularly eager to have their kids spend time on it. We had to build networks that made the cost much lower. We had to create software that made the access much easier. We also just had to educate other companies, media companies, others about the digital content.

When people first dialed in, there was nobody online to talk to and nothing to do. You have to build it. That was the first wave. The beginning of that, the mid-80s, essentially nobody knew about or cared about the internet. By the end of the first wave, so the year 2000, pretty much everybody was connected, and they couldn't live without it.

When we started in 1985, it was illegal for consumers or businesses to connect to the internet. At the time it was restricted to government agencies and educational institutions. If you were on a college campus, you could do it. If you worked at a government agency, you could do it. But if you were a consumer or business, you couldn't do it. That didn't change until 1991 when the Congress passed the Telecom Act to commercialize access to the internet. A lot of things had to happen in that first wave to take the idea of the internet and make it real.

Then we get to the second wave, which is the services and apps that layer on top of the basic internet.

Yeah. That's been the last 15 years or so because in that first wave we built the infrastructure. You didn't need to do that so much anymore so it was building apps and services on top of the internet. It shifted from the PC, which was the epicenter of the first wave, to smartphones that were the epicenter of the second wave. Obviously, a lot of apps like Facebook or Twitter or Snapchat...emerge in that second wave. The playbook there was a lean startup focused on the coding and building in an app. Launch it, keep iterating it, hope you get viral adoption, hope it spreads, and then figure out some way to monetize it. At the core, it was about software. At the core, it was about apps.

It was also a relationship between the startup company and an audience. You'd get a certain number of consumers to sign up for your service, and you're pretty much done. You scale into that direct relationship. In the third wave, there are new players involved.

Exactly. The second wave it was still a battle because it was a battle for attention. There were probably 1,000 photo apps launched and Instagram, Snapchat, a few others emerged as the winners. It did have this winner-take-all or winners-take-all dynamics. It was easy to get started, easy to create an app, pretty hard to get broad-based adoption.

In the third wave, while software of course will continue to be important, it's going to be less important, and some of the other aspects of partnerships and policy will become more important. The third wave is the next logical step where you're integrating the internet in seamless and pervasive, sometimes even invisible, ways with the Internet of Things throughout our lives.

In the process I think really can revolutionize, disrupt change, things like healthcare, education, transportation, energy, food, agriculture, government services, a lot of things that have changed a little bit in the first wave and the second wave, but it'll change a lot more in the third wave. But the reason I wrote the book is I realized the playbook that worked in the first wave and was not that relevant in the second wave would become very relevant again in the third wave.

Let's talk about some of those differences. One of the things you say in the book is that innovation could get more difficult in this third wave and that a lot of the entrepreneurship models, a lot of Lean Startup models, may not work in this new age because of these new conditions. What's going to be different?

Obviously, there are still opportunities to build second wave companies, app companies. A lot of people focus, and I've seen a lot here this week at South-By. But if you're tackling some of these aspects of our lives like how we stay healthy or how our kids learn or how we move around or how we think about energy or how we operate the government, pretty fundamental things. It's not going to just be about the software. The partnerships with other players including often encumbrance in those sectors are going to be important. If you want to revolutionize healthcare, it's probably not so much an app you want. It's just probably figuring out how to partner with hospitals and work with doctors and connect with health plans and understand the policy framework, Obamacare or whatever comes next around healthcare. That's going to revolutionize how we change our health care system.

Similarly, if you want to revolutionize education. There are things you can do in the apps, things you can do in the cloud, but still, a lot of learning can happen actually in classrooms. Figuring out ways to work with teachers to create more personalized, adaptive approaches to learning. Augmenting the learning process is going to be important. That requires partnering with the teachers, partnering with the schools, partnering with the university. The partnership is going to become much more important. It was in the first wave. We had 300 partners at AOL. We wouldn't have been successful without all those partners. We couldn't have gone it alone. We had to go together. That dynamic is going to become more important in the third wave.

The other is policy. These are regulated sectors. Because they're such important aspects of our lives, the government does play a role. Entrepreneurs don't like to hear that. The government slows things down, and regulations screw everything up. Obviously, there's some aspect of that, but there's going to be some regulations around food safety or drug safety or making sure that drones in the sky or driverless cars on the roads are done in a way that's safe for communities.

I think everybody wants some regulation of driverless cars.

Yeah. Well not everybody. There are some who want nothing, but that's not realistic. I think when you're dealing with issues like this, and they're not so much about an app to book a restaurant or share photos but an app or business, a service that has a more fundamental role in our communities. There are going to be some government involvement some regulatory moments, that's skill set that entrepreneurs in this third wave are going to need to learn. Respect for that aspect of things and ways to engage and try to shape that policy. The third P that was important in the first wave, not important in the second wave, but will be important again I think in the third wave is Perseverance.

These are hard problems. Revolutionizing healthcare is not going to happen overnight. It's going to require real patience and perseverance. With AOL on that first wave, we almost didn't make it. There were a few times that it was a real struggle. Finally, after 10 years, we broke through, so people used to joke that we're like a 10-year in the making overnight sensation. That's going to be more coming in the third wave. The partnerships were a big deal in the first wave. The policy is a big deal in the first wave. Perseverance is a big deal in the first wave. They weren't that big deal in the second wave. You didn't need partners to launch an app. You didn't need to deal with policy at least until you got really big. Facebook had lots of users and some privacy issues, but for the most part they didn't really need policy. It was an overnight success. Perseverance wasn't needed. In the third wave, I think the next generation of entrepreneurs are going to need to embrace those first wave principles.

You see certain companies hitting these barriers right now. I think about Uber, and I think about Airbnb. They're built as apps. They're built as services, but then when you run them in the real world, you've got to deal with cities and towns and local ordinances. That slows them down.

It slows them down, and it's a source of frustration even here in Austin. Both Uber and Lyft were banned because they wouldn't agree to certain provisions. They're banned in some countries like Germany and South Korea. It just shows you the importance of these policy aspects to things.

At the same time, they got lucky because in their instance the policy, the regulations were generally viewed as protecting the incumbent taxi industry, which people were not necessarily that supportive of. They could ignore the laws...and just launch anyway. That's not going to work if you're trying to develop a new drug or a new medical device in healthcare. In the third wave, you're going to need to be connected on the policy side to even hit the market, to even get customers, to even generate revenue so that Uber playbook of ignoring the rules isn't going to work so well in the third wave.

Let's talk a little bit about the Rise of the Rest. You've hit I think 26 cities in the last two years. Talking about entrepreneurship, looking at the transformation of those cities. During that time we've had this incredible economic growth in the country. Unemployment is down at 5 percent, and yet if you look at our national conversation, it's all about the incumbent quality gap and the need to find more good high-paying jobs and create more of these jobs. It seems like there's a disconnect between those two trends.

There is a disconnect because they're like two Americas. What's happening on the coast, particularly in California and New York and Massachusetts, where there's a lot of innovation, a lot of wealth creation, a lot of job creation and the rest of the country. Last year, if you look at the data, 78 percent of venture capital went to three states: California, New York, and Massachusetts. Since we're funding in Silicon Valley as an example, these disruptive entrepreneurs who are in many cases creating technologies that destroy jobs in the middle of the country or not investing in the entrepreneurs in the middle of the country, they can create jobs in the middle of the country. They can at least partially offset the jobs that are lost. That's why we saw even in this election; there are a lot of people who do feel frustrated and left behind. They've not seen the benefits of digitization. They have not seen the benefits of globalization.

We need to understand that. We need to view that as a ... whether you supported Trump or didn't is a wake-up call. How do we make sure that we have a more inclusive approach to innovation and everybody everywhere feels like having a shot at the American dream? You have to level the playing field. It's not just about place. I talked about the 78 percent going to three states. Ninety percent went to men, only 10 percent to women but 1 percent went to African Americans. It does matter where you live, it does matter what you look like, it does matter what school you went to or who do you know, who's in your network. While that's always going to be part of venture capital, part of innovation, it doesn't maximize the likelihood that we're going to get all the great ideas from all the great entrepreneurs from all the great places on the playing field.

As a result, some communities are going to struggle and feel left behind. If we do that in a sustained way, I think the country itself could fall behind. We need to make sure we level the playing field so everybody everywhere has a shot and we create jobs everywhere, not just in a few places.

I also think there's the existential threat of automation. Here at South-By, we're building all these tools. There will always be jobs for people that go to South-By in various industries, but in a lot of ways, we're building tools that are putting other people out of work. What is a good response to that? The basic one is we need to raise education levels for everybody. Somehow that will enable new job creation. Is that?

I think there's certainly history to this or some context that 200 years ago, where 90 percent of us worked on farms. Now it's less than 2 percent. Largely because automation but 88 percent didn't become suddenly unemployed. We then created the Industrial Revolution and then the technology revolution. Part of it is just creating that the next new thing, that next revolution that creates a new set of jobs, many of which we can't even imagine today.

At the core, you're right. The pace of innovation robotics and AI and driverless vehicles and things like that are going to destroy a bunch of jobs. We can't stop that. We shouldn't try to stop that because if we tried to stop that, other countries like China or others would lead in those areas.

It's going to happen no matter what. The question is how do we participate and then how do we make sure we are investing in entrepreneurs and in these other places creating jobs in other sectors. Could be healthcare services, could be restaurants, could be a lot of different things. Manufacturing is coming back. We backed a company in Detroit called Shinola that works with auto workers, retraining them to build watches and leather bags and things like that. We need more of those companies that are Rise of the Rest focused.

The response that you sometimes hear is this is inevitable. You can't do anything about it. We just need to come up with a universal basic income or something, some safety net. I think that's a mistake because jobs are not just about income. It's also about dignity and people feeling good about themselves. We need to make sure we don't just focus on the income side, we also actually create jobs in more places for more people in the future. That's only going to happen if we embrace this notion of the rise of the rest.

Let me ask you my closing questions I ask all my guests. What technology trend is most concerning to you? What keeps you up at night?

I think maybe it's not a direct technology trend. It's exactly what we're talking about, the pace of innovation, how it accelerates, and how do we make sure it is inclusive and the benefits of that including jobs, including economic growth, are widespread. If we continue on the current path where we're essentially funding a few kinds of people and a few kinds of places, such as Silicon Valley, I think we'll miss an opportunity. We'll end up in 10 or 20 years being in a very difficult place as a country. It's not the technology per se, it's the societal implications of the technology and how do we make sure we are in fact leveling the playing field. I think that's a threat. If we don't do it right it's an opportunity if we do, do it right.

Is there a trend that you see as particularly hopeful or optimistic that you're just really excited about that's going to change the world?

I'd say two things. It ties in with exactly what you were asking about. I do think this third wave is going to have a profound impact on our lives. The things that it's going to be dealing with regarding how our kids learn, how our parents stay healthy, how we move around, how we think about energy, and how governments reimagine how they can offer services to constituents, are all very important aspects of our lives. You see more focus even here at South-By. More focus on entrepreneurs tackling those problems. This third wave, I think, is going to be very exciting and have significant impacts.

The second is I really am optimistic that on this rise of the rest notion that the rest really will rise. That people are beginning to wake up to the fact that our great entrepreneurs are building great companies all over the country and as more media attention focuses on those cities and those entrepreneurs and more investor attention. The investors start venture investors, get on planes to visit companies, not just cars to drive to companies. I think you'll see a more inclusive form of entrepreneurship of more impactful innovation economy. I'm optimistic about that.

Is there a product or a service or a gadget that you use ever day that you're just like, wow this is an amazing device, and it changed my life?

For me, since I was involved in those early days, it is all about the internet. I'd go to conferences 30 years ago with 400 people in the room and I'd be the only one talking about the internet. People were talking about hardware or software or semiconductors. The fact that the internet is playing such a fundamental role is gratifying. Obviously, the device that all of us, for the most part, are now phones and iPads. The ability to get access to so much information and so many people all over the world is exciting. It's great to see the strives we've made in the first wave and the second wave, and I'm looking forward to seeing the impacts of the third wave.

How can people find you online and get in touch with you? I imagine you still have an AOL.

I do have an AOL account, of course. The easiest way is on Twitter, @Steve Case. Also, we have Casefoundation.org and Revolution.com for investing, and Riseoftherest.com.

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This article originally appeared on PCMag.com.