Growing and sustaining prosperity for small-town Americans

The divide between rural and urban communities has widened as the COVID-19 pandemic pushes rural communities’ economic recovery further behind. How can leaders put rural regions on track to thrive?

The disproportionate impact of the COVID-19 pandemic has drawn renewed attention to the divide between rural and urban communities and the economic opportunities they are afforded. In the 11th episode of McKinsey’s new Future of America podcast, McKinsey’s Rachel Riley sits down with Matt Dunne, founder and executive director of the Center on Rural Innovation, to discuss the challenges and opportunities related to economic development in rural America, including quality of life, access to the tech economy, and avenues for entrepreneurship. The following is an edited excerpt of their conversation.

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Growing and sustaining prosperity for small-town Americans

Rachel Riley: Welcome to McKinsey’s Future of America podcast, where we’ll explore how we can build a future that drives sustainable and inclusive growth. Join us in conversation with leaders who are accelerating progress to grow, broaden, and sustain prosperity for more Americans.

I’m your host for today, Rachel Riley. I’m an associate partner out of McKinsey’s Atlanta office, and I work primarily with state and federal government clients on organizational transformations. But I’ve also advised several state governments on economic development in rural America, which is an issue I’m passionate about because it’s where all of my family is from. I’m joined by Matt Dunne, who’s the founder and executive director of the Center on Rural Innovation. Welcome, Matt, and thanks so much for being here with us today.

Matt Dunne: Thank you, Rachel. Great to be here.

Rachel Riley: Could you start off by telling us a little bit about your background?

Matt Dunne: Sure. I grew up in Hartland, Vermont, which is a rural town that was a dairy and machine tool community until it wasn’t. It was very interesting growing up in a community going through that kind of tough economic transition. And it really propelled me to get involved in economic-development efforts from a variety of vantage points.

I had the opportunity to serve my local community straight out of college in the state legislature where I focused on inclusive economic development strategies, but I also joined a software company based in rural Vermont that grew to 120 employees. I then had the honor of serving under the Clinton and Bush administrations as the head of AmeriCorps VISTA before I came back home and served in the state senate while working at Dartmouth College, trying to create change agents from that institution. I was then recruited by Google to head up community affairs and create that program for the company, starting with data centers that were mostly in rural places, but eventually covering the Americas, overseeing the philanthropic efforts on a local level and ways to be good corporate citizens, whether it was associated with those large infrastructure projects like data centers, Google Fiber, or in our offices.

Rachel Riley: That’s an awesome career, and I love the focus in terms of rural economic development. I also have a background from a Vermont farming family and currently live in Tennessee, where I have several farms in my broader family. I love rural America. Could you talk a little bit about the organization that you run now and the work that you all do in rural economic development?

Matt Dunne: I tried to get back into politics in 2016. It turned out that was not the year for me to do that. As I was coming out of that experience, I was trying to figure out where I could make an impact with that very strange background that I just described.

As I was looking at the landscape that had emerged across rural America, whether it was in Vermont or Wisconsin or New Mexico, we saw just an incredible divide emerge. And I had the chance to have a fellowship at the MIT [Massachusetts Institute of Technology] Media Lab to really dig into what those issues are.

What emerged from that was the huge divide that had grown very quietly between urban and rural places since the 2008 recession, where urban places came roaring right back and rural places not so much, so that even by January 2020, before COVID hit, not even half of rural counties had gotten back to their pre-2008 economic levels.

COVID hit and everyone fell, but rural places fell further. We’re already seeing an unequal recovery. So, as we were digging into what was the root cause of that really unprecedented divide based on geography, it came down to three things. One was automation. Second was globalization, because of policy but also because of technology advances. And the third was the decline of entrepreneurship in rural America in the 30 years prior to the 2008 recession. When that economic shock happened, automation accelerated. Globalization accelerated. And the jobs that were created after that were with firms less than ten years of age.

But, unfortunately, even though those factors created millions and millions of jobs in the US and technology fields, it also removed millions and millions of jobs. It almost exclusively created those jobs in urban places and almost exclusively removed them in rural.

The ramifications of that showed up in a variety of different ways: population loss, individuals going to college and not coming back to rural places, as well as the diversification in the kinds of jobs that were resilient in the face of future automation and provided opportunities for economic advancement.

When we look at our “North Star,” we look at the divide where computer and math jobs are located, since those are the core of the fruits of automation that is out there. Right now, rural America represents 13 percent of the nation’s workforce but only 5 percent of the computer and math jobs.

So, we believe that core to getting back to an equilibrium, to be in a place where there is greater equity across geography, you need to bring that 5 percent up to 13 percent. That doesn’t mean that all technology jobs need to be in rural areas or that all rural jobs need to be technology jobs. But it needs to be a piece of each of those economies. Frankly, in the age of the internet, there should be no limit to where tech talent can be unlocked, as well as entrepreneurial ideas that can create companies generating wealth in the communities where folks want to be.

Opportunities and connections

Rachel Riley: I love how you framed those three major challenges around automation, globalization, and entrepreneurship. Could you talk a little bit about what the Center on Rural Innovation does in order to address some of these challenges?

Matt Dunne: Yes. We decided to try to hit it head-on. We had some early support from Reid Hoffman—who was the founder of LinkedIn and on the board of Mozilla and other kinds of entities—who really got this challenge. But he wasn’t sure what the answer would be, and he was pretty sure that we didn’t necessarily know the data behind it either.

We started as an organization really digging into the new economic indicators in rural places—which are fundamentally different things—looking at the kinds of occupations that can provide that long-term resiliency, looking at the trends in investment, in venture-backed companies, and where those were happening and where they weren’t.

We really started with understanding the data and sharing that data nationally through tools that could allow for others to explore it and to then have a feedback loop on how do we look at addressing these. From there, we wanted to get to the action part.

So we started working with a pilot community in rural Springfield, Vermont, that had been the nation’s leader in machine tool and had the highest per capita income in the state for 40 years until the machine tool industry left and it just cratered. The pilot community had gotten, in the meantime, an Obama-era grant to bring gigabit-speed internet to every home—but nobody knew about it. And there wasn’t a lot of understanding of what to do with it, despite the fact the community was only a 35-minute drive down the interstate from Dartmouth College, or that it was creating all kinds of intellectual property and economic growth based on that automation and innovation economy.

We put together an innovation hub there that was focused on two things: one was supporting scalable tech entrepreneurs through an accelerator program but also creating a tech talent development program in partnership with different kinds of tech talent content providers, whether locally or nationally, online or in person.

The second purpose was to create the spaces for folks to come together, because density does matter. It can happen in a rural place; you just have to be really, really intentional about it. Starting with that pilot—and securing some resources from the [US] Economic Development Administration that was dedicated to that kind of scalable tech entrepreneurship activity—we then got a contract from the Economic Development Administration to try to bring those kinds of technical systems to other rural places in the country.

That year, we were the only completely rural place in the whole nation that had gotten one of those build-to-scale grants that the Economic Development Administration had been pushing out. They realized that was a problem on a variety of levels, not the least of which, if there was an inequity in where the benefits of the automation economy were going, that they were maybe exacerbating it if they weren’t able to get those resources to the communities that were lagging behind in those areas.

That set us off on a course to create a network of communities. We started working with seven communities that raised their hands and said, “Yes, please. We want to go and build this kind of tech economy.” We helped them with assessing their assets, building a strategy, and then securing funding so that they would have three years of runway to really get this effort off the ground, both on the entrepreneurship side as well as on the tech talent side. We’ve been doing that now for four years and now have a network of 28 communities across 21 states in four time zones in our country. They are all just extraordinary organizations and leaders from different entities within communities, sometimes from the city, sometimes from the formal economic development entity.

Sometimes this involved a group of people who just stood up a coworking space and said, “We need to create something different for the community that we love,” and built out a start-up ecosystem from there. So, as part of that membership, we then supported them on their efforts to realize this vision. The network, which is now almost the equivalent of two million people, is spread out across a lot of different groups. So, we have an annual start-up competition.

We started a CORI [Center on Rural Innovation] innovation fund to invest in early-stage companies, because investors were still not looking at these locations as the place to find opportunities. That fund has been really successful in not only finding deals but also for helping companies that are now on growth trajectories, completing their rounds of funding, and really taking off.

So we come at it from whatever angle we can. But at the core it’s about capacity building because we don’t think owning and operating a chain of innovation hubs is going to succeed. You won’t have that local understanding and passion and connection to the core assets that maybe you need to an individual place. But what we can do is help create network value and bring the kind of connections to national caliber leaders, strategists, mentors, and investors, and then allow for the whole to be a lot greater than the sum of the parts.

Recognizing diverse communities

Rachel Riley: That focus on place-based and targeted development is so important because there really is no one rural America, right? In the research that our firm has done, and in the article that I’ve published, we always talk about how there’s at least five archetypes. And even that is really simplifying the richness of what’s a very diverse landscape.

Matt Dunne: We sometimes joke that when you’ve seen one rural community, you’ve seen one rural community, because that variation is so broad. You do find some common trends, and the work that you’ve done has really helped people wrap their heads around what does a rural community mean.

Depending on who you talk to, that size is also different. If I’m telling a person from a rural area that we’re going to go work in a community of 35,000 people, they go, “Oh, you’re going to the big city,” whereas when I talk to a friend in San Francisco about going to work in a community of 35,000 people, they’re, like, “Oh, my God. Are there any people there to do these projects?” There’s a lot of that context that’s so important to surface.

Rachel Riley: I think one thing that is often painted in a broad brush is this idea of the one rural American worker. In reality, there’s of course a ton of diversity in the people and the skills that are out there. What are some of the most common misconceptions that you find yourself fighting with regard to the folks who live and work in rural America?

Matt Dunne: The first thing that we have to say over and over again is that rural America is not White America. And we have an unbelievable mosaic of communities that have, in some cases, 90 percent white non-Hispanic populations but other places that are majority BIPOC [Black, Indigenous, and people of color].

That richness needs to be understood so that people don’t jump to the conclusion that you’re only talking about a stereotypical upper-Midwest rural community that does not have diversity. We’re seeing communities in rural Kansas that have gone from 5 percent to 40 percent Hispanic in just 12 or 15 years. Those are big jumps that communities are needing to grapple with and work through. But for the most part, the leaders we talk to see it as a huge opportunity, that there is all of this new energy and perspective. But they’re still trying to figure out how to navigate that work.

The same is true in the rural south where there are majority-Black communities. But we also need to understand that the majority of Black rural communities have struggled the most in economic advancement over a period of time. That is something that we think is critical, because if we’re a nation that is truly committed to diversity, equity, and inclusion—particularly in the kinds of jobs that can create economic advancement opportunities—we need to be focused on those communities of color in rural America.

The importance of broadband access

Rachel Riley: As you mentioned, this is a moment when there’s some reason for optimism, right? There’s a lot of investment happening, specifically around broadband access, which is obviously a critical enabler of tech jobs and, frankly, just 21st-century life in America. Could you talk a little bit about some of the historic barriers to providing broadband access, and maybe some of the promise of this moment?

Matt Dunne: It’s been a really amazing two years. I’m not sure there has quite been the recognition of what’s happened where for so long the economics of broadband were such that rural places were unlikely to get it. Sometimes there are scrappy ones, like in Wilson, North Carolina, that went and built it based on their municipal electric company.

Other places created new enterprises that could allow for public–private partnership and overcome those cost barriers. But in the infrastructure bill that passed was an unprecedented amount of funding specifically to build fiber to the home infrastructure and future-proof broadband. The idea that there would be $43 billion dedicated to that was really unthinkable even four years ago. There are now enough resources, if used right in public–private partnerships, to actually solve the broadband gap for the long term.

It’s going to take some work, especially in states that have passed laws literally prohibiting public–private partnerships, which I find extraordinary. But there are states that did that because incumbents were fearful that they would face competition in those scenarios. But the Biden administration has been very clear that they want to distribute the money to the places that have passed policies that allow for those dollars to go the furthest in building future-proof “fiber to the home” kinds of broadband initiatives. Hopefully, policy makers will understand the importance of this moment. Because if we miss this chance, I don’t see it coming again. This really can be the rural electrification of our time.

Closing the tech gap

Rachel Riley: I want to go back to this idea you raised about the importance of the tech economy and how, in this moment, we can really take the opportunity to close the gap for Americans who live in rural communities. One thing you’ve been working on is the rural innovation initiative. Tell us a little bit about how that’s supporting a tech ecosystem across rural America.

Matt Dunne: The rural innovation initiative came out of the need to help communities that want to have a tech economy to be able to build one. There are a couple of pieces to that. One is understanding the assets that they have. We believe that the rural communities that will move first are ones that have a four-year college or university campus in their area, have figured out, at least, decent broadband, and have a core downtown—which has the potential for a strong coworking space and other kinds of amenities to bring people together and allow for a new economy kind of vibrancy.

Then, of course, there’s leadership—which you can’t figure out from a bunch of statistics but is important to know to determine whether there is aligned interest. It doesn’t need to be from the formal leadership in the community, although it’s helpful if they’re not a barrier.

But there has to be a core group of people willing to dedicate their time and energy to making this kind of thing happen. So we come in and provide that extra capacity and time and space and structure. One of the challenges that rural communities are facing is that after economic disinvestment for a couple of decades, people who are already wearing three or four hats in a community are now trying to wear seven or eight.

So, this involves having the time to think through what that strategy would look like, what a budget would look like, understanding who would be a right partner for delivering a great accelerator program. Or how to convince folks coming out of a place like University of Wisconsin-Platteville or Murray State or someplace else that they could actually stay in this community to build out their technological idea, commercialize it, and turn it into a real company.

It’s hard. What we do is work with that community in an intensive way—not to do the work for them, because that doesn’t work—but to allow them to build out a clear strategy for executing on that kind of vision over a three-year horizon, and to also think about how to attract the tech talent and other support systems that can allow it to thrive.

Our technical assistance work is to build out those kinds of actionable documents and then help the communities to secure the funding, because, again, if they’re just trying to execute this strategy on top of the 12 other things that they do in their normal day jobs, they’re not likely to be successful.

We believe it’s important to bring those resources and to make sure that they have the real capacity to support a grant of that size but to also hire the talent to lead it. Many times that person is someone who is coming back home after growing up there, who left and had an extraordinary career in tech or the start-up world or at a university. And they have the chance to come home to lead that work in the community with the resources to execute on it. That’s what the initiative is about—getting those communities to that place where they can start to execute.

They go from there to joining the network, where we’re able to help them in their journey. But more important, they get to connect with other communities to learn from each other. In some ways, our best work is putting them together and getting out of the way so that they can share those best practices and understand new models.

It’s been so exciting to see the generosity from community to community, not to feel like it’s a zero-sum game or that they have to hide the great youth coding league program that they’ve got in Cape Girardeau, but instead to realize that this is about growing new capacity across the board. So, sharing that kind of framework or programming or even the competition itself across 12, 14, 20 communities is seen as part of the ethos of the rural innovation network.

Investing in communities

Rachel Riley: One other way in which those journeys probably look quite different than the sort of picture that folks probably have in their mind of traditional start-up ecosystems, right?

Matt Dunne: Exactly.

Rachel Riley: This idea of keeping the ownership and the investment within the community is so important. Our research shows that owners of small and medium businesses in communities disproportionally contribute in terms of employment, investment, those sorts of things. What are ways that you all try to encourage that, or where have you seen that done really well?

Matt Dunne: We’re looking at it through a very specific lens, which is tech start-ups. Tech start-ups have a variety of different trajectories. But frequently, it’s an exit. It’s building a company, building some intellectual property, and then having an exit that brings return and wealth to the folks who have created it. And that’s an important factor for us, of why we concentrate on entrepreneurship itself and not just helping to do tech talent pools where they would work for national companies remotely or believing that the return of many urban folks to rural places is in itself the solution.

Because we don’t believe that “Zoom town” is community. We don’t think that people working in isolated places can actually create that synergy that leads to longer-term community wealth creation that can then support all kinds of things over a period of time. The places that we’ve seen do this well are ones that have helped to aggregate investors, that were willing to do that early-stage “angel” kind of support to allow for a company to get off the ground, and they’ve also figured out how to connect to mentors. We try to help facilitate that, but frequently there are folks who are expats from a rural community who want to give back. They’re not moving back any time soon, but they’re happy to be a mentor and connector to resources or expertise to allow them to grow.

We’ve seen it in a variety of locations. But it’s also important to know that success in a rural context doesn’t need to be a Silicon Valley version of a unicorn with a multibillion-dollar exit. There are companies that have exited or done creative things like ESOPs [employee stock ownership], where employment ownership exits are in the $20 million to $30 million range, which can be transformational for a community in terms of confidence but also in the wealth that then gets reinvested into those communities.

Places like Cape Girardeau, Missouri, have been really successful in building that kind of ecosystem locally, and same with the Shenandoah Valley of Virginia. Red Wing, Minnesota, has seen a couple of exits from enterprises that were founded there. Those resources are then being reinvested back into the community. So we’re starting to see that evidence. It’s still early stages to see the fruits of this happening, but those are places that are leading the way.

Shifting the narrative

Rachel Riley: Definitely. And the other advantage of focusing on entrepreneurship is that innovation has always been very core to rural life. When you had to build things yourself, do things yourself, live with less resources, it became such a part of the culture. That gives me a lot of optimism about the future. I would love to hear about any trends you see or things you’re excited about as we think about the next few decades.

Matt Dunne: A lot of our work is focused on narrative shift. We talked about misperceptions about rural places being White places, for instance. But we also have to work really hard to overcome the strange narrative that just because you live in a rural place, you can’t code. Or just because you’re in a smaller community, you can’t come up with a new, innovative way to solve a big automation problem or a tech problem or creating rockets that work better, like they’re doing in Durango, Colorado. We just have to work really hard to overcome that misperception that’s been out there.

We have to work really hard to overcome the strange narrative that just because you live in a rural place, you can’t code. Or just because you’re in a smaller community, you can’t come up with a new, innovative way to solve a big automation problem or a tech problem or creating rockets that work better.

One of the data points that really helps with shifting that narrative is where venture capital is going, because in 2017, only $3.2 billion went to start-ups in rural zip codes. By 2021, that grew to $42 billion. Now, that’s still not quite showing equity, right? That’s going from 0.5 percent of all venture capital going to rural places to 2.5 percent. But it’s a meaningful change. And what it says to us is that there is an opening of the aperture from investors that they can actually find value in investing in tech companies and start-ups in small-town America.

Rachel Riley: I think that would be a pretty exciting alternative narrative in terms of the ways that rural communities can really be a core part to the future of the American economy. Thank you for sharing your insights with us today. It’s inspiring to hear the ways in which this is a moment of opportunity, ways in which momentum is building outside of major cities and reasons why there’s real optimism for the future.

We are wrapping up each of our Future of America episodes with a rapid-fire Q&A. I’m going to put you on the spot a little bit here. First question, is there a book or article that you’ve read recently that excites you about a more sustainable and inclusive future?

Matt Dunne: Yes. The book that I am recommending is by Ro Khanna, who is a member of Congress and wrote a book called Dignity in a Digital Age, which really talks to this notion that we need to make sure that we have more equity in the new economy in order to not only have fairness in our country but in fact to save our democracy. It’s a really powerful book, especially coming from someone who is the representative of Silicon Valley to say that we need to do more than just benefit Silicon Valley.

Rachel Riley: Awesome. What makes you optimistic that we can achieve sustainable and inclusive growth?

Matt Dunne: The source of the biggest optimism is actually the local leaders we work with across the country who, frankly, came up with this idea that they could have tech-based economies that are thriving and inclusive well before we did. And we’re already starting down that path. We’ve been able to just connect them to additional resources and collaborators and mentors and others to accelerate them on their journey. But it’s their optimism and excitement and grit and their sense of rural collaboration that really gets me up in the morning.

Rachel Riley: What’s one thing that listeners can do today to help promote sustainable and inclusive growth?

Matt Dunne: I would say it depends on who the listener is. If you are an investor, it’s understanding that you need to get outside of your comfort zone to look for places and companies to invest in. If you’re a policy maker, it’s really thinking about the potential for rural America. I’m not saying that it has to only be about what it has been in the past, whether it’s recreation or agriculture or natural resource extraction. All of those are going to be a part of rural, but it can be about new-economy jobs.

If you are a person in a rural place, make sure you’re challenging those narratives that you may have heard from a guidance counselor who said, “If you’re successful, you get out of here.” Or, if you are a person who’s trying to start a coworking space and a meetup for technologists, and if someone says, “Oh, you’re just trying to do city things,” know that that is bunk. That kind of innovation and excitement can happen in small-town America. And there are others out there like them who want to make that a reality.

Rachel Riley: Thanks, Matt. That was Matt Dunne, who’s the founder and executive director of the Center on Rural Innovation. And I’m Rachel Riley. You’ve been listening to McKinsey’s Future of America podcast series. Thanks for joining us.

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