With Steve Case, Co-founder and Former CEO of AOL, Author of The Third Wave
Podcast: Play in new window | Download
Thirty years after the inception of the internet as we know it, Steve Case, co-founder of AOL, has written a new book, The Third Wave: An Entrepreneur’s Vision of the Future, revealing a new paradigm already set into motion that will change the way we live our daily lives.
Anyone old enough to remember when you had to pay a monthly fee to get web access can understand the giant leaps forward technology has taken since that time and how dramatically the internet has changed our personal lives as well as our culture. Steve refers to this early period as The First Wave. Considering that in 1985 at the start of AOL only 3% of households were online and at the end of that period, roughly in the year 2000, that number had increased to about 51%. And that was just the beginning of The Second Wave, the time when Facebook, Twitter, Snapchat, and Google became major players in our daily lives, affecting forever the way we interact, learn, and are entertained.
The Third Wave, as Steve Case describes it, will be at least— if not more—dramatic and life-changing than its predecessors and will truly give definition to the term “the internet of everything”.
In developmental stage already is the driverless car which will be one component of technologically powered smart cities. Transformative changes in the field of education will alter the way our children learn and study. The standards and practices of our present health care industry (the largest industry in our country) will undergo drastic modifications on both the corporate and personal levels. In addition, large banking institutions could very well be forced to redesign themselves in order to function in a new economic climate.
Of course, all of this will inevitably cause disruption in our culture. Some industries will fall along the wayside, jobs will be lost and others created, some workers will have to be re-trained, and a surge of entrepreneurship will likely occur with many people dividing their working life between two or more endeavors. Some of the nervousness seen in our current presidential election process can be attributed to these undercurrents of change already at play.
Just as the world adjusted to the shifts that occurred during the Industrial Revolution in the early 19th century, so will we regain our balance and become accustomed to The Third Wave as it moves into our daily lives and changes us one innovation at a time.
Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital. Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.
Steve Pomeranz: You know, there was a time when one company handled nearly half of all internet traffic and created the first significant portal into the new world of the internet. There was a time when you’d have to pick up a free CD at the checkout line of your grocery store and pay a monthly fee in order to get access to the web. There was a time when that company became one of the most valuable and fastest-growing companies in the history of America.
The man who lead that company and is now leading the way toward a new phase of the internet revolution is here with me today. I want to welcome Steve Case, co-founder and former CEO of AOL. Steve, welcome to the show.
Steve Case: Great to be with you.
Steve Pomeranz: It’s 30 years after the beginning of the internet, as we know it. The internet has integrated into all aspects of our lives. It seems like we’re just getting started, everything is changing so rapidly. Your new book is called The Third Wave: An Entrepreneur’s Vision of the Future. You break down this revolution into three ways. Will you describe those for us?
Steve Case: Sure! The first wave really was just building the internet, building the on-ramps to the internet, building awareness of why people should get connected to the internet. US companies like AOL obviously played a role, but there’re many others: Cisco, and Sun, and Yahoo, and so forth were all a part of that. Started in from a consumer standpoint in the mid-‘80s and it kind of peaked around 2000. That was really the first wave. When we started AOL in 1985, only 3% of people were online and they were only online one hour a week. It was an early day. By the end of that first wave, just about everybody was connected and it was an important aspect of their lives. That was just the first wave.
In the last 15 years has been the second wave, which has really been building apps and services on top of the internet. Things like Google and Facebook and Twitter and Snapchat. Mostly software, most apps running on top of the internet—that’s had a profound impact. Facebook, obviously, now has 1.6 billion users globally. Didn’t exist at the beginning of the second wave, one of the more dominant companies now at the end of the second wave.
Now it’s the start of this new third wave, which is, I think, the next big leap. It’s going to really integrate the internet in, I think, seamless and pervasive ways throughout our lives and change some things like how our kids learn, or how we stay healthy when we go to the hospital, or even how we think about food and energy, transportation, things like smart cities. A lot of things, I think, are up for grabs in this third wave. I think it’s going to require a different mindset and also different playbook than what worked in the second wave. That’s what lead me to write the book.
Steve Pomeranz: You hear this term “the internet of everything”, everything we will do will be enabled by the internet, similar to the way everything’s enabled by electricity. Give us some examples of what this “internet of everything” actually is going to mean to us.
Steve Case: There are a lot of examples. One is smart cities. There’s a lot of development now with a variety of companies, Google, and Apple, and Uber, and Ford, and others, around autonomous vehicles, driver-less cars. That needs to connect into a broader infrastructure, a broader system, a broader network. There’s some big companies like GE and IBM and others that are focused on this notion of a smart city. As an example, how do you take some of these new technologies, but don’t just view them as standalone technologies, how did they get connected into a broader world, a broader web? In some ways, this third wave is the internet meeting everyday life.
Another example would be in schools. There’ve obviously been some technology, some innovation, in terms of classrooms over the past 10, 20, 30 years. But the reality is the way most kids learn in most schools hasn’t changed that much. But I think in the third wave it can and will, and I think some of that will be working with teachers and classrooms and working with professors on university campuses to move to a more personalized, adaptive approach to learning. We know that different kids learn differently. Some are just a little more visual learners, some just need a little more time. Adjusting our learning to reflect that, I think, is going to be important.
But also things like food, food’s a 5-trillion-dollar industry. There’s now the use of technology to create new supply chains, more farm to table systems, use technology to get things more conveniently delivered or ordered, if you’re going to a restaurant. That will become even more of a phenomenon in the third wave.
And, finally, health care. It’s the largest industry in the country—1/6th of the economy—and arguably the most important part of our lives. But the way most people stay healthy, the way most people deal with chronic disease, the way most people deal with more life threatening things like cancer, hasn’t changed that much so far, but I think will change a lot in the third wave as there’s more personalized medicine, more convenience. A lot of different things that I think can improve how we stay healthy and how we get well when we get sick.
Steve Pomeranz: Whenever there is a great shift in technology, whether it would be at the turn of the 20th century or now in the 21st century, there’s a lot of disruption. Old industries have to fall away, old jobs and job descriptions and so on have to fall by the wayside. People have to be retrained. Are we going through something like that right now, which has caused a lot of this angst that we’re hearing about in this current electoral season?
Steve Case: No question, no question. I think there will be more of that to come. There are a lot of people that are a little upset by the pace of some of the change or confused by it. There are a lot of people who feel like they’ve been left behind, particularly if they’re not living in places like California, New York, where there’s a lot of investment, lot of innovation. In a lot of parts in the middle of the country, they feel like they’re not the attention, and that has created some of the frustration.
Even the nature of work is changing. Now about 34% of people are aligned with what’s called the freelance economy, and some of these new entrance in recent years—like Uber—now millions of people are part of that gig economy. It’s just changing, even, the definition of work. When I was a kid growing up, the model…my dad worked for one organization for 60 years. Now there are some people that work for multiple companies in the same day. I think that’s creating some uncertainty and, frankly, some fear. I think, as you say, that’s playing out in this election.
Steve Pomeranz: It’s this idea of this acute disruption. I mean, if I’m running a company, or I’m an employee of a company, and I see a technological disruption headed my way, actually I’m in the financial services industry. I’m an investment advisor. I’m starting to see disruption, technological disruption, coming to our industry, the banking industry. You talk about this idea of “too big to fail”, is that kind of an old notion now? Because, really, the new technology is going to be supplanting banks roles? Let’s take banking as an example, because we always hear about these big, bad banks and that they’re “too big to fail”.
Steve Case: I think there’s too much debate on the Dodd-Frank and “too big to fail” and things like that. I get that’s a legitimate debate, but I think that’s not the only thing to discuss. I think the bigger issue, the bigger risk, frankly, at large banks is are they too big to innovate? Are they going to be chipped away at by thousands of entrepreneurs going after different segments of their business.
A lot of interest, for example, in lending platforms, particularly lending to people that now—that the banks are ignoring. I think there’re all kind of things that are happening in what’s called “the FinTech space”. I think that will put pressure on the incumbents. I think that’s, in general, a healthy thing. Having these disruptors challenging the, what I think of, as the defenders, I think, is what drives innovation, what drives economic growth over the long run.
One point, though, I make in the book is I think the third wave is going to be different than the second wave because I think partnerships are going to be more important. That includes partnerships between the small companies and the big companies. In the second wave, sometimes it was a big company sitting on the sidelines watching these new companies come out of nowhere, like Airbnb, Hilton, kind of watching from the sidelines as Airbnb went from a startup less than a decade ago to now the most valuable hospitality company in the world.
The third wave, because of the nature of some of these industries like education and healthcare, it’s going to require more partnerships. If you want to innovate healthcare, you’re going to have to partner with the hospitals or partner with the health plans. If you want to innovate at learning, you’re going to have to partner with the universities. It’s not so much about the app and the software and the go-it-alone strategy that worked for many in the second wave. Won’t work as well in the third wave. For the companies, the large companies, that understand this dynamic and are leaning into the future and open to the idea of partnering with a smaller company, they will be best positioned in this third wave.
Steve Pomeranz: You quote the African proverb, “If you want to go quickly, go it alone. If you want to go far, go together.” I think that’s what you’re saying. Steve Case is my guest, he’s co-founder and former CEO of AOL. Steve, now you’ve been investing yourself. You have an investment company that is investing in companies in this third wave. What are the criteria that you look for when you’re making an investment of that type?
Steve Case: We really have two groups at Revolution: Revolution Ventures, which invest in startups, sort of the classic series A, sometimes series B investor; and Revolution Growth, investing in later stage companies we think of a “speedups”, typically more of a series C, series D kind of thing. We’re looking in the early stage for great entrepreneurs with great ideas, including, obviously, people that are focused on some of these third wave industries and third wave trends.
We also look to add value, not just in terms of the investment we make, but how can we then help them. Because of the dynamics in the third wave, two of the areas we think we’re uniquely helpful is on helping them with partnerships and helping them on policy. Many of these industries are regulated, and we live in Washington DC, been here for three decades. Some of these issues do involve policy.
We look for those breakout ideas, third wave companies, that we’re partners in policy. The last thing we focus on is what we call “the rise of the rest”. That’s a big theme, as you know, of the book. There’s great innovation happening obviously in Silicon Valley and New York City and Boston. It’s crazy that right now last year, 75% of venture capital went to just three states; California, New York, and Massachusetts. The other 47 states fought over the other 25%. We don’t believe that reflects the distribution of great entrepreneurs with great ideas, so we’re investing at Revolution in these “rise of the rest” cities, these off the beaten track cities where most new venture investors aren’t really paying attention. We’re seeing great companies being built all across the country. That will accelerate, I think, in the third wave.
Steve Pomeranz: When you follow elections and you follow the election rhetoric, they’re always talking about the past, bringing back the old jobs, bringing back manufacturing and the like. They’re fighting the old battles, the old wars. What you’re describing here is a very dynamic process of change in America, but it seems to be under the radar because you say that a lot of these companies that are, let’s say, being purchased by Amazon and others, they’re not in Silicon Valley. There’s one in Fort Lauderdale, Florida you mention in your book. They’re in Durham and Denver and Kansas and Buffalo.
Steve Case: I think that’s the story that’s going to surprise people in the years to come. Which is not to say there won’t be great companies in places like Silicon Valley because there will, but there will also be great breakout companies all over the country. There’re examples now that if you look at, you mentioned Fort Lauderdale, one of the hottest virtual reality companies that’s raised 1.3 billion dollars, including from Google and Alibaba, is a company called Magic Leap in Fort Lauderdale.
Or you look at what’s happened in Provo, Utah. There’s four or five multi-billion dollar enterprise software companies on one street in Provo. Or Indianapolis, there’s a company called ExactTarget that salesforce.com recently acquired, now they have 2,000 employees in downtown Indianapolis. They acquired it for 3 billion dollars. Under Armour, in Baltimore, now a company worth 20 billion dollars. This perception that all the great innovation happens in Silicon Valley just isn’t the reality. That will become even less of the reality in the third wave.
Steve Pomeranz: How does the average person invest in the very early stages? This seems like a very difficult thing to do. Most people really only have access to the public markets and perhaps IPOs after they break and so on. How can the average person benefit from all these changes?
Steve Case: I think one dynamic that is worth looking at if you’re more of an individual investor is the idea of crowdfunding, which actually just got put in place this month. There was a law passed four years ago called the JOBS Act, Jumpstart Our Business Startups Act, that legalized using the internet, using crowdfunding, to raise money, whether it be equity or debt, for startups. The rules just were finalized, and it’s just going into effect right now. Now a dozen or so of these portals, these platforms, that’ll be merged to basically bridge potential investors with potential companies.
Obviously, investing in startups is risky. People have to look at it with eyes wide open. But in many of these communities, when the people know the entrepreneurs and know some of the businesses, including some restaurant concepts like a Five Guys here in DC or Chipotle in Denver ended up growing into pretty significant businesses. This is a way to back entrepreneurs in your community with ideas that you believe in and that wasn’t possible until crowdfunding went into place. I think that will help provide more capital for more entrepreneurs in more places, kind of level the playing field, will create more opportunities for individual investors to participate. I think that’s important, because as you know the IPL market has shifted.
When AOL went public in 1992, we were the first internet company to go public, our market value was 70 million dollars. Then it grew to 150 billion dollars. Individual investors were able to grow with AOL, similarly with Microsoft and Amazon and Apple and other companies. They generally went public when they were worth a few hundred million dollars. Now companies are going public when they’re worth billions, sometimes even tens of billions of dollars. Individual investors have been left out of that, so I think crowdfunding is a way to give them the opportunity, if they want to, if they take the time to understand the risks of the companies, to participate in some of these early stage companies.
Steve Pomeranz: By the time it comes to the IPO stage, a lot of the money has already been made. You mentioned laws that were recently enacted. It brought to mind the question of what is the government’s role in all of this? So many people fear the government, that they’re going to be obstructive to this freedom of thinking and entrepreneurialism. We know that government, of course, has a role. What do you think the governments role is here?
Steve Case: I think it has to strike the right balance. I think there is obviously some regulations that don’t make sense, sometimes government is overreaching. Often it lacks flexibility and agility to deal with the changing times. There’s a lot to be nervous about, or anxious about, or cynical about, in terms of the government. Same time, I think the reality is the government is going to play a role, particularly, in this third wave. The sectors that are ripe for distribution, like healthcare or food or energy or transportation, that are regulated, are going to continue to be regulated.
I think the innovators need to engage more with the policy makers and just recognize that that’s part of the challenge that’s going to be part of this third wave and be a little more respectful of the role of government that is basically elected by we the people, going to try to protect us and try to figure out ways to unleash different kinds of things, innovation. The internet itself was invented by government funding at DARPA and things like UPS was invented by government funding.
There are some good parts to the government; there’re some bad parts. I think instead of just talking past each other, I think, in the third wave we need to have more dialogue, more constructive dialogue between the folks innovating and the folks singing about these policies.
Steve Pomeranz: After all, we’re all in this boat together. My guest, Steve Case, co-founder and former CEO of AOL. His book, The Third Wave: An Entrepreneur’s Vision of the Future. Definitely worth reading. Steve, what a pleasure. Thank you for joining us.
Steve Case: Thank you, I really enjoyed it.
