Much of Silicon Valley may be mourning Hillary Clinton’s loss to Donald Trump last month, but at least one tech insider believes Silicon Valley itself helped hand Trump his victory.
Economic anxiety outside of the technology centers was a major factor in Trump’s victory, says Ronald Klain, executive vice president and general counsel at Washington, D.C.-based venture capital firm Revolution. When voters heard Clinton talk about adding jobs in clean energy — an industry tied more closely to California and New York than to any part of the Rust Belt — they felt excluded. Their wariness may well be justified, according to Klain. “We bear some responsibility for this in the sense that the tech community has largely been focused on funding companies in just three parts of the country,” Klain said during an interview for CALinnovates’ “A Step Ahead” podcast, adding that those areas — Silicon Valley, New York and Boston — receive an estimated 75% to 80% of all venture capital funding in 2015. “This industry hasn’t done a good job of funding growth and innovation in the other 47 states, and it’s time to change that.”
How? For starters, Revolution has a program called Rise of the Rest, which invests primarily outside of Silicon Valley. Twice a year, the firm rents a bus and visit places such as Ohio, Indiana and Michigan to hunt for promising startups that need money.
“Silicon Valley is a national treasure; it is a global resource,” says Klain. “But we can’t have a country where only one or two or three parts of the country are thriving.
Listen to the full interview here:
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A Step Ahead: Ron Klain
Hey, Kish Rajan, Chief Evangelist at CALinnovates, and welcome to this addition of A Step Ahead. We’re so lucky this time to be joined by Ron Klain, who is a long-time veteran of many presidential administrations and presidential campaigns. He is one of the smartest and most respected minds in all of Democratic politics, and now he works for Revolution, a venture capital firm investing in the businesses of tomorrow.
As you’ll hear, Ron has tremendous insights on the outcome of the election. The President-elect’s proposed infrastructure program and some of the pitfalls, and really what the future of tech looks like. It was a tremendous conversation. I hope you’ll enjoy it. Ron Klain. Hey, thanks so much for joining us on A Step Ahead. We really appreciate it.
Ron Klain: Thanks for having me.
As we record this, we’re still looking at the aftermath of the presidential election both in terms of what contributed to that outcome, and now as the new Trump Administration is coming into focus, in terms of its people and priorities. We’re watching very carefully the steps that are being taken, so I’d love to talk about that a little bit with you.
Right off the top, you just recently had an op-ed piece in The Washington Post where you talk specifically about the infrastructure program or at the least the concept that came out in candidate Trump and now President-elect Trump’s discussions of priorities. You warned that program, at least as he’s talking about it, really could be a trap for the country and particularly Democrats. What do you mean by that? How might that be a trap and what is your perspective there?
Well, thanks, Kish. Sure, I think we have great infrastructure needs as a country. We need to rebuild our roads, our bridges. We need to make sure every American has access to broadband. We need to improve our airports. We need to do all of these things. It’s not a question of whether or not we have infrastructure needs. We do. The question is, what has Donald Trump as a candidate for President proposed as the way to address them?
The plan that he put out in the campaign, a plan that was written by Wilbur Ross, the man he nominated to be the Commerce Secretary, now, the Ross plan basically provides a series of tax cuts to private sector investors to invest in for-profit infrastructure projects. The problem with that is this. First of all, the most pressing infrastructure needs we have are not for-profit infrastructure projects. Things like pipelines and utility systems, which are for-profit. Our biggest needs are things like roads, and water systems in places like Flint, and bridges that don’t charge tolls. That’s where we need the help, and the Trump plan does nothing for that.
Secondly, because the tax cuts can be used for projects that have already been planned doesn’t mean necessarily we’ll get any net increase in infrastructure. No net increase in jobs. People could just take the tax breaks that the plan offers and use them to give them even greater profits on the projects they already planned to do. That’s the second problem.
The third problem is when a version of this was proposed in the past it’s been loaded up with anti-labor, anti-environmental provisions that really just splinter Democrats, help some working people hurt other working people. That doesn’t make a lot of sense. I think when you look at the Trump plan, it is addressing a need we have, but it’s addressing it in a way that will not work, that will make the rich even richer and that won’t really deliver the kinds of infrastructure projects the country needs.
Well, that’s a pretty serious indictment. There are a lot of problems in that to be sure. Not to repeat all of that, but certainly the idea that significant tax breaks could be going to projects that are already planned, that wouldn’t stimulate new infrastructure, would not create new jobs, but only would end up being a financial windfall to people that have already committed to investments. That’s obviously quite troubling, and then really the last point that you made, that if it comes at the expense of not only potentially no growth and projects but also creating leverage to inhibit the types of labor protections and environmental protections, boy, that thing really could end up being a bad deal for America.
I think it would be a bad deal for America. Sadly, it would come at the expense of the kind of infrastructure plan that we really need. The kind of infrastructure plan that Secretary Clinton, for example, proposed during the campaign, which was a plan that made the investments we need in roads, and bridges, and infrastructure, and broadband, and the other kinds of basic fundamental needs we have as a society, and did it by actually raising taxes on the wealthy to help fund these projects. That’s the right way to do it. Giving tax breaks to investors is not going to get the job done.
I think the thing that is so troubling, and I guess a real challenge, and I guess, hence, you’re stepping out and wanting to create a warning to not go too quickly to be in support of this program is certainly so much of the campaign was about the state of the economy, and people’s economic anxiety, and a real concern about jobs or a lack of jobs that are out there and growing in places around the country. This plan, I think, is at least at a high level being built as a job creation plan, and you, of course, we’re involved in a real stimulus program that was about building projects and trying to put people to work. This seems like it would stand in real contrast to those efforts.
No question about it. Look, I think that good infrastructure programs can create jobs. I want to come back to that in a second. A program that just simply gives tax breaks to investors for projects that may already be planned, may already be about to launch anyway, will not create net jobs or may create very few net jobs, so I think there’s a big problem with that. The second issue is people need jobs and people live in places. It’s not clear that if you fund for-profit infrastructure projects, that if it even does create jobs, will those jobs be in the places that jobs are needed? The single biggest thing that Trump’s plan would fund would be pipelines probably because those are a kind of for-profit infrastructure project that the plan seems to envision. Pipelines are mentioned several times in the text of the plan.
Think about that. First of all, do we want more pipelines or not? There’s a big debate about that around environmental issues. Secondly, the pipelines are largely built in remote areas that may not be the places where people really need the jobs. In terms of getting jobs to the people who need jobs, building pipelines through wide open spaces may or may not be a great job creation program.
Yeah, no kidding. Well, it’s a really interesting perspective that you’re bringing. At CALinnovates here, we talk a lot about innovation in technology broadly. I’m wondering, one of the things that we certainly aspire or would love to see in any kind of infrastructure program is thinking about how new innovations could work alongside larger infrastructure projects to create 21st-century infrastructure that is smarter about transportation, smarter about utilities, smarter about energy conservation in ways that are both good environmental practices, but good economic stimulus because it’s catalyzing the growth of whole new sectors of the economy. We would love for that to be the case in a large-scale infrastructure program, but I get a sense from you that you have some doubts about whether that would actually be the result of what Donald Trump is talking about?
Well, I do. He was very critical throughout the campaign of a lot of the Obama Administration’s clean energy programs, a lot of the kinds of investments that have been made in wind power, solar power, other forms of clean and renewable power. Donald Trump was very, very critical of all that, so it’ll be curious to see where he winds up as President. We do have a lot of needs in this country. There are a lot of ways to create great jobs, high paying jobs in the clean energy of tomorrow. That was a high priority for secretary Clinton in her campaign, and we just can only hope that it will wind up being a priority of President-elect Trump. It hasn’t been yet, but I guess we can hope for the best.
I would love to talk about job creation broadly for a moment. It does seem, certainly, when you do these election postmortems there’s a lot of things that contributed to the outcome that we got. Clearly, economic anxiety in places that aren’t the innovation and technology centers was one of the major factors. You look at how successful President-elect Trump was in the rust belt where traditional industry has been the backbone of that economy and it’s been waning. They seem to look at places like California, like the Silicon Valley, and feel that type of technology is ivory tower. It’s kind of behind a wall that they can’t reach. It seems that there’s a lack of trust around where so much of innovation and technology’s headed. I’m curious as to your perspective on how pervasive do you see that point of view and what do we do about it? Because it certainly seems that we’re going to have to embrace technology if we are going to grow a new 21st-century economy.
Oh, I think that all of us in the tech community, though I work here at Revolution, we’re a venture capital firm that invests in tech firms. We bear some responsibility for this in the sense that the tech community’s largely been focused on funding companies in just three parts of the country. 75%, 80% of venture capital in startups in venture capital is just in Silicon Valley, New York City, and in the Boston area. This industry hasn’t done a good job of funding growth and innovation in the rest of the country, in the other 47 states, and it’s time to change that.
This is a big program we believe in here at our firm. At Revolution, we have what we call “The Rise of the Rest,” and so almost all of our investments are outside of Silicon Valley. We believe there are a lot of great companies in the rest of the country. In fact, twice a year we rent a bus, drive through places like Ohio and Indiana, Michigan, Wisconsin, and we look for forgotten startups in these areas. We invest in those startups because we think that there are a lot of great people starting great business outside of Silicon Valley. It’s time for the industry, the technology industry, the investment industry, the entire ecosystem that supported the great success of Silicon Valley to look at the other 47 states, and to look for opportunities there, and to help grow the economies there.
Silicon Valley is amazing. It is a national treasure. It is a global resource, but we can’t have a country where only one, or two, or three parts of the country are thriving. We can’t be global leaders with only success in one, or two, or three parts of the country. There are super talented entrepreneurs in the rest of the country. They need investment. They need support. They need help. That’s really where our future lies.
Well, that’s really interesting. Why has it been, that statistic that you cited, 75% to 80% of the venture capital has been concentrated in those three states, those three major tech hubs that you’ve talked about? I’m curious as to what’s driven that deep of a concentration of investment in so few places and then how do we change that? How do you create financial incentives or otherwise to do what you’re talking about, which is to spread it more broadly?
Well, look, I think that these are kind of virtuous cycles, if you will, and highly concentrated cycles. That’s the nature, I guess, of the way we are as people. I think it also contributes, frankly, to a lot of the lack of full inclusion we see in tech and in venture capital. It’s basically people investing in places like them, people like them. It becomes very much of a closed circle. It’s not a surprise to me that someone in the middle part of the country looks at that and says, “That’s not going to create jobs for me. That’s not going to help people like me.”
It’s interesting, when we go and we invest in these cities, we invest in places in North Carolina, and Ohio, and Michigan what we find is a lot of great companies. Because since there isn’t as much capital chasing them from an investment perspective, we are able to do deals with better valuations. It’s often cheaper for the startups to start in these cities. They can hire talent at a more affordable price, and the cost of living is better in these places. We also find more female founders. We find more founders of color who aren’t locked out of the closed ecosystem that Silicon Valley often is. We find more diverse startups in terms of who their founders are to fund in these other places.
I think there’s a lot to be said for…again, I’m not trying to take anything away from Silicon Valley. It’s an amazing place. There’s obviously great companies, but there’s a lot to be said for what’s out there in the rest of country and what it would do both our country, for our economy, for our society, and for the tech VC community to look out there and to see what we can support.
There has to be the fodder for these types of startups all around the country. You’re right, there’s no question that Silicon Valley is sort of the nature of these virtuous cycles, as you’ve said, where talent wants to rush to the Silicon Valley because that’s the only place. I guess it’s the old Willy Sutton line. “You rob banks because that’s where the money was.” Now I would think and would hope that if others follow suit with what you’re saying they can discover that there’s all kinds of brilliant ideas, wonderful new concepts, wonderful ideas for new technologies, new companies all around the country. You don’t have to go to the Silicon Valley to find that stuff.
That’s right. Look, there are people who are graduating every day from colleges and universities all over the country. They want to stay in their communities. They want to start businesses with the people they went to college with who are also in those communities. They can hire teams in those communities. They can use a lot of the recent innovations to build virtual teams, cloud-based services, and sourcing talent from other places over the internet and whatnot to startup companies without moving to Silicon Valley. As I said, if they can get capital they can often build a team less expensively, rent space less expensively. All the things that make business very expensive to do in Silicon Valley can be a little bit easier in other parts of the country.
We just took our “Rise of the Rest” tour to Omaha, Nebraska. We found some great startups in Omaha, Nebraska and some great midsize and growing companies in Omaha, Nebraska where people leave the universities there. In particular, University of Nebraska. Great engineering backgrounds. Very talented people. Start great companies. Want to grow them there. That’s true in a lot of midsize places all over the country.
Finally, on this topic, and then I want to turn to politics maybe for just a couple more minutes before we let you go. It also seems to me, or a hope would be that by encouraging this kind of entrepreneurship and business development in places all around the country, what that could do is apply technology to a whole range of subject areas and not just the development of cool applications or cool gadgets that are driving a lot of what we see in Silicon Valley, which is interesting, and fun, and creating lots of wealth. How do sort of modernize traditional systems? Whether it be agriculture, or energy, or water, or other things that are sort of basic elements of our society that could benefit from refreshing or renewal by the type of folks that you’re seeing in Omaha and other places I would suspect?
Yeah, Kish. I think this is right on. I think it’s right on in two respects. First of all, there are regional specialties where startups can really benefit from that. Saint Louis is a great agricultural hub in the United States for a lot of reasons. Seeing a lot of ag tech and food tech startups in Saint Louis is good in every single way. One, it’s great to start a business in that space in Saint Louis because there’s a lot of expertise in the area. Two, starting such a startup in Saint Louis means you’re going to help revolutionize the incumbents in that area. That’s true for food in Saint Louis.
We did a “Rise of the Rest” stop in Nashville. We found a lot of people trying to use all kinds of technology to change the music industry in Nashville. Every region has these specialties. We’re investors in a company call Shinola, which is trying to bring some new forms of manufacturing to downtown Detroit and put people to work manufacturing things in the heart of Detroit. I think there are these local cultures, local specialties, and I think that matching those up by community can be very helpful in terms of the talent that’s there and the culture that’s there. It can disrupt and improve existing incumbents, make big companies more innovative themselves. There’s a dialog, kind of an interim process between the incumbents and the startups in a community. That can be very helpful, which leads to the second point, which is a lot of this regional-based startup idea centers around having these incumbents be the reference clients for startups. When we talk to people in the startup community, of course, it’s a challenge to find talent. It’s a challenge to build your company. It’s a challenge to find capital, but often, the really critical barrier is, can I make a first big sale? Can I sell my thing to somebody? Can I get someone to buy my thing?
Having startups in communities where there are big incumbents in the same space that often provides that critical, critical customer. Will Monsanto in Saint Louis buy ag tech from ag tech startups? I think that having this kind of regional-based strategy can really be good for all elements of the entrepreneurial ecosystem.
Well, it sounds vital if we’re going to get to a place where we’re truly getting folks all around the country to see, and embrace, and leverage the benefits of technology and not see it as something to be worried about or, frankly, leveraged against, which I think in my view was just too much of what happened in the election. I appreciate your point that folks that are in the technology ecosystem bear some responsibility in helping to change that understanding and that perception in reality of what technology can really mean to us.
Look, I think bearing responsibility may be harsh, but I think the point is we all should understand that we’re all in this together, and that there are opportunities for the tech community if they reach out to the rest of the country. That will also change our politics in a more positive and healthy way.
Turning to politics for just another minute, you’ve been one of the great leaders in the Democratic party in our country now for some time. For those of us that are of that persuasion, thinking critically about what happened here, building this type of economy going forward that you’re talking about, I’m wondering if you see some challenge from within. Things around how organized labor, for instance, which is in such a critical and vital component of the Democratic party, but where is the willingness there to engage in this type of change? I might look at the education sector and ask the same question. I’m curious as to your view of what types of internal changes might have to happen to unleash the type of new economic era that I think you’re touching upon?
Well, look, I think that we have a lot of priorities as a country, and certainly, we need to do a better job on education. I still believe passionately we need immigration reform, even though I know immigration took a hard hit in the campaign. We cannot win the global battle for talent if this country educates hundreds of thousands of young people from around the world and then proceeds to send them home when they want to start jobs and create wealth here in the United States. That’s a mistake.
We need to invest in our infrastructure. That’s a critical need. Both our traditional infrastructure, and as you talked about earlier, give some of the new forms of infrastructure. We should have the best broadband in the world here in this country. We should have the best internet in the world in this country. That’s a critical part of our global competitiveness. Find ways to promote job creating capital formation. I think we have a lot of needs.
I have to say, I was a little disappointed. I know I’m a partisan, so you can take this with a grain of salt, but I was disappointed to see when President-elect Trump named his group of business advisors, his council to advise him on jobs. There wasn’t a single executive from the tech sector on that council. There were executives from Wall Street. There were executives from big industrial companies, but no one from technology, no one from venture capital, no one from social media, and no one from any of these new economy sectors. That sends a bad signal. I think we’ve got to obviously invest in our traditional legacy businesses here in America, but we also have to invest in the things that are creating jobs of tomorrow. Hopefully, the President will listen to people who are from these rising economic sectors in the future.
No kidding. It really begs the question if in his mind making America great again means that we’re going backwards to a time when the economy just looked and behaved differently, or if it actually means renewal, which is to build on what’s good, but to try to modernize it. I think by that measure of who he’s surrounding himself with so far, sadly, it looks like more of a backward looking approach to what the economy can or used to be.
Correct. That just seems to be highly unlikely that’s going to succeed. I don’t think we can go back to the America of the 1950s. I personally don’t want to go back to the America of the 1950s, but even if someone wants to I don’t think it’s possible. I think we have to find a way to really embrace what’s succeeding in our economy and then make sure it’s more widespread, more evenly shared, more evenly distributed, has more people with access to it. That, to me, seems like the best way to create jobs and growth for everyone.
Finally, finally, I always try to end on an optimistic note. Despite these present challenges that we have and the political disagreements and debates that are obviously going to ensue, what are you seeing out there through your work and revolution, and what you’re seeing on the political landscape that never the less gives you hope or makes you optimistic about what’s possible?
To go back to what I said a little while ago, Kish. I think it is interesting to me that as we travel the country of evolution, we go to some of these places that most people in tech don’t think about, midsize cities in the middle of the country, in almost all of them you find really enthusiastic, really energetic entrepreneurs. It’s encouraging in a number of ways because a lot of these entrepreneurs outside of Silicon Valley not only have all the same energy, and intensity, and enthusiasm that they have in Silicon Valley about the products they’re building and the teams they’re assembling, but they also really often have a real dedication to their own communities. To making these a better place to live. To really growing and revitalizing cities in the heartland of the country.
They often have a dedication to focus more on job creation. I think too often in Silicon Valley it’s almost a badge of honor that you can create a billion dollar company and employ no people. I think that you see out in the heartland people are really focused more on startups that create jobs, that growth, and that often real focus on a double bottom line. A real focus on the social impact of what they’re doing. When you talk to these entrepreneurs you hear so much enthusiasm about how their product will make their communities better, how their product will make the world better. How their products help the environment, help with people’s healthcare, help with education, help with these pressing social needs. I see a lot of really energetic and enthusiastic people out there who want to make their communities a better place, who are looking for some help to do that. There’s a lot of great people doing great work out there in the country if we all just give them a hand.
Well, listen, Ron Klain, the work that you have done for some time through politics in the public sector and now the great work that you’re clearly doing at Revolution, you have been and continue to be one of those contributors making a real difference across the U.S. We really appreciate the work that you continue to do, and I’m very grateful that you took a few moments out of your schedule to talk with us here on A Step Ahead.
Great. Thanks, Kish. I appreciate it.