The Third Wave: An Entrepreneur's Vision of the Future (11 page)

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.”
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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.
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We all watched with horror as the levees failed and the streets flooded. At one point, 80 percent of the city was submerged.
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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.”
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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.
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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.
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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.

F
OR DECADES,
Milton Friedman’s old maxim—“the social responsibility of business is to increase its profits”—has been the equivalent of religious doctrine, particularly among investors. CEOs who view their role as having dual purposes—a focus on both profits and social impact—are often the targets of angry investors, who see any money diverted from the margin as unrealized return. But this posture is starting to change, at a pace that could make what’s become known as “impact investing” a megatrend in the Third Wave.

One hundred years ago, the focus of most investors was largely on return. But over time, and after events like the Great Depression, there was a recognition that investors also needed to factor in risk. Today, the element of impact is being injected into the investment approach as well. Impact investing is a bridge between traditional business and philanthropy—and
between financial return and social good. When someone invests in a new company, the hope is that he’ll eventually make that money back, and then some. When someone contributes to a nonprofit, on the other hand, there won’t be any financial return, only the expectation that something good will come from it. Impact investing provides the best of both worlds. You can generate a financial return while enabling a societal benefit—driving both profit and purpose.