Steve Case on the Real Value of His Working with Startups

Steve Case is a busy guy.

Not only is the AOL co-founder a high-profile proponent of entrepreneurship, tweeting out related stories 10 times a day and traveling the world with his vision to help foster many more Silicon Valleys, but he’s heavily involved with the government’s efforts toward the same end. Over the last two years, Case has co-chaired the National Advisory Council on Innovation and Entrepreneurship, chaired the private sector Startup America effort, and become a member of President Obama’s Jobs Council, among other things.

Case is actively investing, too. For years, he’s been funding four to six early stage ventures a year out of his own pocket under the brand Revolution Ventures.

Late last year, Case teamed with up some of his former AOL colleagues, Ted Leonsis and Donn Davis, to raise a $450 million fund that invests in growth stage companies and primarily targets businesses on the East Coast and in the area of Washington D.C., where Case lives and works. The Revolution Growth fund has already backed three deals, and expects to make 10 to 12 altogether over the next few years.

To better understand how Case is managing it all, VCJ recently sat down with him in our San Francisco office. He shared what he thinks is interesting and what he won’t go near as an investor. Our conversation was edited for length and clarity.

Q: You raised your first fund with outside LPs late last year. Do you feel there’s already too much capital already available for startup entrepreneurs?

A: There are sources of capital, particularly in the technology space, where we tend to invest. And the capital itself isn’t as valuable or differentiated as it was 25 years ago, because there are more sources of capital.

But the real value is how you work with companies to help them scale, whether it’s partnerships or building up the management team or rethinking some aspect of the business model, and frankly, that’s also what makes it fun. So we’re looking for teams where we can take a little idea and build a big company. They’re looking to us not just for capital but for some of the help.

With AOL and LivingSocial and ZipCar [which Case has backed], there’s a certain approach to taking these ideas and scaling them into big companies, and having done it over a fair number of years, across multiple sectors, that’s where I think we add the most value.

Q: Where could an entrepreneur see this at work in your recent portfolio?

A: One example is FedBid, which has been around for 10 years. They essential do a reverse auction to help the government save money. They handle about $2 billion in transactions [per year] and save the government about 12%, so they’ll save the government a couple of hundred million dollars.

But they’ve just scratched the surface, we think, in terms of what’s possible. So our goal is, four or five years from now, to have $10 billion in transactions going through this platform, which, if it continues to save at that level, means the government will save a billion dollars. And the company typically gets 1.5% to 2% of a fee, [so] you have a couple hundred million dollar revenue stream that’s quite profitable.

They actually sold us about a third of the company [for a reported $25 million] at a reasonable valuation because their conclusion was that the other two-thirds will be a lot more valuable with us involved. And we’ve already helped accelerate some of their efforts within the federal government. And we’re looking at ways to launch in state government.

Q: Where won’t you invest?

A: Generally, if a company is just looking for capital and it’s a hot company and everybody is throwing term sheets at them, we don’t play. That’s not interesting to us. We also don’t think that’s the best way to maximize returns for ourselves and our LPs, so we’re looking for these special situations where we really believe that it’s a billion-dollar idea.

We don’t mind getting lucky and having an overnight success like LivingSocial, which we invested in when there were four people and now there are 5,000. But that’s the exception to the rule. Our experience with AOL or ZipCar is that they’re a decade in the making before they’re considered “overnight” successes.

Q: What’s the long-term vision for LivingSocial and is it different enough from Groupon that it can be successful?

A: Oh, yes. First of all, there’s not room for thousands, but there is room for two. It’s not a winners-take-all business but we’ve always believed that it’s a winners-take-most business.

We’ve always thought [LivingSocial] is a classic network-effect business and if you could build scale and a significant brand and audience, then you were going to a great sustainable business.

It has already moved beyond the core, daily deal business, which is a pretty good business and leveraged its platform to enter new businesses, like vacations and take-out and delivery. When you have tens of millions of people who’ve essentially given you permission to send them an email every day with an interesting offer, and you have credit cards on file, you have a powerful platform.

Q: Do you think the company’s IPO prospects have been hurt by Groupon’s performance as a public company?

A: We’ll have to see.

Q: Similar to other growth stage investors, have you looked at buying secondary shares?

A: No, we haven’t. We’re much more comfortable being earlyish-stage investors. At Revolution Ventures, we’re making six to eight deals a year, typically in the $3 million to $5 million [range] in the early stage [of a company’s life]. We define them as under $10 million investments and I do those personally.

Revolution Growth is set up as a $450 million fund and we’re typically making $10 million to $100 million investments there, though the sweet spot is in the $30 million to $50 million zone.

We have not played in the secondary market. We’re not buyers of stock; we’re investors in companies and take a longer term view, and so we’re trying to find companies that are lukewarm and make them hot.

Q: The Revolution Growth deals have so far focused on the East Coast, including FedBid, Resonate and Echo360. Might you invest in a Silicon Valley company?

A: We aren’t averse to investing in Silicon Valley. There are many things that are wonderful about Silicon Valley. We just need more Silicon Valleys. Our bias, at Revolution Ventures and Growth, is to invest in the areas that are underserved, because there are a lot of great entrepreneurs and the valuations are better.

If FedBid had been in Palo Alto, its valuation would have been much higher than it was in Tysons Corner, Va.

Q: Is there any way, then, for Valley VCs to work with you on the growth stuff?

A: Actually, a lot have referred us deals that they think are perfect for growth. They either think it makes sense for us—because maybe [the company] is on the East Coast—or [they want us involved] because they were an earlier-stage investor that owns 5 to 10 percent of the company and aren’t going to spend a lot of time on it, particularly if it isn’t in the VC’s neck of the woods but they believe it has big company potential.

Softbank was an early investor in Echo360 deal, for example. Alan Patricof’s Greycroft Partners was an early investor, too. Greycroft is actually who told us to take a look at it.

Q: What’s your biggest exit to date as an investor? Revolution Money, which sold to American Express in 2009 for $300 million?

A: Yes, I think we owned around 40% of the company. We got back a hundred-something million [dollars] on that sale.

Q: What about Zipcar? You’ve held on to your shares.

A: Yeah, we’re big believers in it. It’s been a tough road this last year since it went public above the range. It went up to $30; now it’s $10ish.

But we’ve seen this movie before at AOL. Even though AOL went public at $70 million, we did the merger with Time Warner eight years later and it was worth $150 billion. And it was not a straight line; it was a rather circuitous path based on perception. And clearly, right now, it’s the fear of competition [impacting ZipCar’s shares], with Hertz and Enterprise, and watching what they are going to do. We’ll have to see.

Often the fear of competition from the incumbents is greater than the reality.