Housing Complex

Why Tech Won’t Liberate D.C.’s Economy From the Feds

D.C. Tech: Silicon Hill?

A year ago, Mayor Vince Gray stood in a 15th Street NW penthouse and proclaimed that the assembled crowd was bearing witness to the next step in severing D.C.’s dependence on the federal government. The answer, he said, was technology. “I want to be able to look back and say I was part of making the tech sector grow in this city,” he declared.

The space didn’t look like much. The floors were bare concrete; the pipes were exposed; there was no furniture. A posterboard sign in the middle of the void stating “Board Room, 1776: Where Revolutions Begin” required visitors to give their imaginations a healthy workout.

One year after its launch, 1776 looks much more like the anchor for D.C.’s tech scene that its founders promised. There’s a palpable buzz among the entrepreneurs paying several hundred dollars a month to rent workspace there, from the small-timers sharing desks to the big-name startups with their own branded sections of the accelerator and tech hub—nearly 200 companies in total. Prominent people in the various fields tackled by 1776 firms pay visits to conduct workshops. David Zipper, Gray’s business development chief who helped give 1776 a $200,000 grant to get it off the ground, has switched teams and is now the managing director of 1776 Ventures, a new program to bring resources and public-sector contacts to 1776 startups.

Gray has made tech a centerpiece of his administration, and he hardly gives a speech without touting 1776 and the city’s other tech strides. D.C. tech has grown from an aspiration to an active and growing sector of the city’s economy. We’re now in year two of Gray’s five-year economic development strategy, which set out a goal of becoming the largest tech sector on the east coast.

But that goal remains a longshot, say some of the city’s leading tech players. Instead, there’s mounting evidence that the D.C. tech scene is running up against its natural limits.

Consider Hinge. The dating app and 1776 tenant has grown to 11 employees. CEO Justin McLeod credits 1776 for much of its initial success and says D.C. is “great for early-stage companies” because it’s “off the beaten path,” compared with San Francisco and New York, where competition between startups is fierce.

But in early April, Hinge will be taking its talents to New York. It’s simply outgrown D.C., which can’t offer the human or financial capital to successful companies that New York or Silicon Valley can.

“We’re having trouble finding really good resources and good people to mentor us,” says McLeod. “It’s a testament that all our venture capital that we raised from this round came from New York and San Francisco.”

The difference, McLeod says, is people. There are just more investors to provide funds, peers to learn from, and employees to hire in New York and San Francisco than there are ever likely to be in D.C.

Hinge is far from alone. D.C. startup HotPads.com, a real estate website, left for San Francisco in 2011. The homemade goods sales platform Umba decamped for Las Vegas; the media company Tech Cocktail moved its headquarters there, too. The list goes on.

Daniel Odio, co-founder of social networking app Socialize and senior vice president of ShareThis, grew up in the D.C. area and launched his entrepreneurial career here. But as he became more successful, he realized he had to be in Silicon Valley.

“I really tried to stay in D.C., but my only regret is, I wish I’d left earlier,” he says. “Which is sad because it is my home.”

What differentiates these companies from many of the ones that have remained in D.C. is the industries they touch. 1776 has made its primary focus the so-called regulated industries, which are tied to the federal government and the people who congregate around it. These industries include health care, education, energy, and transportation. In these areas, D.C. has a real competitive advantage, with close proximity to the government, associations, and nonprofits that drive these fields. The companies that have left have by and large worked in unrelated industries like marketing, dating, and fashion.

Hinge’s departure from D.C. “doesn’t mean it’s not a good ecosystem for other kinds of companies like health care and cybersecurity,” says McLeod. “If we were that type of company, we’d totally grow and scale here.”

And so D.C. faces a conundrum. Rather than becoming a second Silicon Valley, the District is shaping up as more of a Silicon Hill, with a tech scene built up around the activity of the federal government. And while this growing sector holds economic promise for the city, it also risks pushing D.C. deeper into the rut from which Gray and others hoped it would rescue the District: dependence on the federal government.

* * *

Of course, a focus on government-related industries may not be such a bad thing. D.C. will never be able to compete with Silicon Valley on its own terms. And being Silicon Hill offers considerable benefits to the growing group of firms that deal in the District’s areas of competitive advantage.

In 2011, Eric Westendorf, a former principal at E.L. Haynes Public Charter School, founded the education startup LearnZillion, which creates instructional videos for teachers to use. When he was raising money, his investors asked whether it might make sense to move to California to be in the heart of the startup world. But ultimately both Westendorf and his investors agreed that D.C. was a better home for the company.

“It really has to do with being able to meet with people,” he says. “When it comes to education and policy and innovation, there are people who are coming through D.C. all the time. So whether it’s meeting with people at the U.S. Department of Education, whether it’s meeting with folks who are in town for a conference, being in the center of that means being able to make connections.”

D.C. does offer a few advantages outside of the presence of the government. Michael Mayernick, co-founder of Proudly Made in DC, which highlights D.C. entrepreneurship, points to the lower cost of living compared to New York and San Francisco and says the talent pool of Web developers “can compete with the best on the West Coast and in my view it’s superior to that in New York, and the competition is not as fierce as the West Coast for talent.” (Mayernick would know; he now splits his time between D.C. and San Francisco.)

But when I ask Mayernick to name a few successful D.C. tech companies that operate outside of regulated industries, the list he rattles off consists almost entirely of companies based in Virginia. Likewise, the Washington Post ran a feature this week declaring that the D.C. area had emerged as an “alternative to Silicon Valley”—but every company mentioned in it is located in the suburbs, and mostly in Virginia. It makes sense—office and housing costs are lower in Virginia, and the state has no capital gains tax for tech investors—but it doesn’t do much to boost the District’s economy or further Gray’s goals.

Nonetheless, there are still plenty of D.C. tech firms working outside the regulated industries. LivingSocial is the biggest, although the company may not have stuck around if not for the healthy tax incentives offered by the city.

Jen Boss, who leads the city’s tech efforts in the Office of the Deputy Mayor for Planning and Economic Development, says the odd departure shouldn’t cloud the overall success of the city and 1776. “When we made investments like that in 1776, we knew that not every company would grow and stay in D.C.,” she says. “But it’s important not to focus on the one out of 180 companies that’s leaving D.C.”

Still, Boss acknowledges that D.C. is better suited to some types of companies than to others. “We’ve been pretty frank about the fact that there are certain industries that companies are more likely to succeed in with a D.C. location,” she says. On the other hand, “if you’re doing a consumer tech company, you’ll have a great time of it in the Valley.”

Boss says that tech firms’ difficulty attracting capital in D.C. could be ameliorated by a proposal, introduced by the Gray administration but tabled by the D.C. Council in 2012, that would lower taxes for investors in D.C. tech firms. Gray has pushed to resurrect the scheme.

But tax incentives for tech companies tend to boost young firms more than established ones. “I do think the economic incentives are generally skewed to the early stage across the board,” says Peter Corbett, who helped put D.C. on the tech map with his marketing firm iStrategyLabs. “And I think that makes sense.” That serves to attract new startups, but doesn’t do much to help the city retain them once they mature.

In the end, D.C. may have to set aside its ambitions for superlatives and settle for being a thriving second-tier tech city. New York’s Silicon Alley rules the financial tech game. San Francisco’s Silicon Valley rules pretty much everything else. And if D.C.’s Silicon Hill can corner the regulated-industries market, that’s probably about all we can hope for.

Photo of the Hinge workstation at 1776 by Darrow Montgomery

  • Anton Gelman

    Great article Aaron, but as a startup founder in DC, I respectfully disagree with your reasoning.

    It is true that DC has a number of shortcomings in comparison to the larger NYC or the much more established Silicon Valley (in particularly in terms of access to capital). But for many, the reverse is also true - what others lack, DC has in abundance.

    The basic reality of tech startups is that they are very fluid. Companies change all the time - they change business models, markets, and locations. That's just the name of the game. So a few companies moving their headquarters is not really a big deal.

    For every company moving, there are ten being created, staying, or moving to DC from a different city. The 1776 startup space you mentioned was not even founded a year ago, and now houses 180 companies and over 400+ people/jobs.

    Furthermore, I know the founders of Justin of Hinge and Michael of Spinnaker (both amazing guys with great companies) that are mentioned in the article, and as I understand it, part of their staff is still staying in DC. They are still job creators even if they move headquarters.

    DC will never be NYC because we just don't have 18+ million people living here, and SF is the world capital for venture funded companies, however there are very real opportunities that exist here, and there are a lot of them. Per capita, innovation could in fact become one of the pillars of the cities economy.

    Thank you very much for writing this article, it is great to have these discussions brought into the mainstream.

  • http://marty.com Martin Ringlein

    I love what 1776 is doing for the city and #DCTech, but, one of the biggest problems with one entity trying to be the "hub" of a larger ecosystem is the naiveness of things like City Paper only know the Tech scene in DC by what happens or doesn't happen in or around 1776.

    Hinge is far from a success story, it's "had" to pivot a few times already and their leaving to NYC is more indicative of where the founders want to be more so than where the company "needs" to be. It's a lifestyle choice justified by reasonable business logic.

    There is no mention of those new startups with the largest potential such as SmartThings or SocialRadar or Macaw; there is a lot happening west of 15th street NW.

    This isn't "reporting" as much as it is "hey, here is something I think I noticed about an entire ecosystem by looking at 15,000 sqft of it."

    The article does a really poor job of understanding why decisions are made regarding leaving or sharing time with DC. Spinnaker shares its time on the West Coast primarily because they were based out of 500 Startups in their early infancy, their origin is shared with SF. Daniel O. goes to the West Coast because his two business partners had just come from the west coast to DC and he wanted to be a part of that culture as he started to get into the start-up world form Real Estate. He's a classic example of someone who wanted to be a part of a start-up revolution, knew he could be successful and a big part of being a part of that culture is being in the heart of SF ... it's origins and lifestyle choices more so than it is anything else.

  • Sonya Wins

    @Anton Gelman - Since you have a different outlook on DC's tech sector than Aaron and also work inside the arena, I got a couple questions for you. You say that opportunity exists here for tech startups in unregulated industries, but how much opportunity? Should I expect to make the same move as Hinge or hope to be as lucky as Livingsocial and get a lot of support from DC government? My concern is that there's only room in DC for a few players in unregulated industries and that those slots have been filled. I'm not afraid to compete but I don't want to waste my time either.

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  • http://www.drivenforward.com/blog Glen Hellman (Mr Cranky)

    You can't look at a disneyfied version of startupland like 1776 and judge the health of a startup community. That's like judging the state of the US Military based on a visit to a Laser Tag arena.

  • http://westnorth.com Payton Chung

    While there's still plenty of room to grow in catering to B2B in highly regulated industries like security, "consumer tech" will still be a vastly larger space because consumers drive 70% of America's economy. DC doesn't quite have sufficient soft infrastructure in that industry, e.g., a critical mass of companies like ad agencies.

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