A few days ago I was minding my own business, enjoying my morning Chocolate Cheerios, when I came across a guest blog post in Venture Beat asking “Is there Hope for D.C,’s Startup Scene?” Yeesh. Not a great way to start a day.
Not one to let a good breakfast be ruined without fighting back, I wrote my own blog post standing up for D.C.’s tech scene, and subsequently had some really great interactions with VentureBeat and others in the D.C. tech community about it. I will give VentureBeat full credit for taking my and others’ reactions to heart and recalibrating their headline. The retitled post now asks, “Does DC know startups?” Reading the retitled post, it raises two important questions for D.C. tech: Can you find tech leadership in Washington? And what is the proper role of government in fostering technology?
There is no doubt that when I wrote my original blog, it was to stand up for the place where Amplifier Ventures and I make our home, and where every day I see entrepreneurs and government working hard to make things happen. D.C. has a tech scene. It is vibrant and frankly much more diverse and established than tech scenes in many other parts of the nation. And, the government has a role — a large role in fact — in the tech world both locally and nationally. As someone who has been part of the D.C. tech community since the 1990s as an investor, and has worked in policy areas with both federal and local government officials, I have a firsthand view of the broad aspects of D.C. tech. I also have spent a great deal of time in Silicon Valley over the years, and think it is a terrific place. It has a vibrancy that is essential to our national economy, and is an extremely valuable resource for our future. I believe that D.C. tech has a similarly important role, and understanding its importance will allow all of us to benefit from its contributions and potential.
D.C. startups: Diversity and dynamism
Entrepreneurs follow opportunity (or as we VCs like to say, “entrepreneurs follow the money”). The D.C. tech scene has a very distinct composition when compared to other regions. Like Boston, New York, and the Valley, D.C. has a vibrant software startup scene. We have accelerators, incubators, nationally recognized VC firms, and local government agencies that are committed to fostering further development of this scene. Perhaps our light software development ecosystem is not as deep as some other regions, but if you aggregate all of the D.C. region’s entrepreneurial activity it is comparable to, and in some ways more dynamic than, Silicon Valley’s. What is not appreciated by many outside our region is that a substantial portion of local tech entrepreneurship is engaged in creating complex software and other technologies and providing it to serve national security and the government. And, this portion of our tech community has been extremely successful and productive for the last 25 years.
This kind of technology entrepreneurship might not be as blog-worthy as the newest way to share photos of cats, but it has created wealth and entrepreneurial rewards for many people in our region. Moreover, there is a large technology work force here: There are as many software engineers in the D.C. region as in as the Valley, for example.
Technology M&A is also comparable. Last year I published a report about our region’s M&A activity. I looked at every M&A deal in the D.C. region and the Valley from 2005 to 2011. M&A in Silicon Valley is concentrated in what it does best: consumer Internet and semiconductors. Tech M&A in the D.C. region is more diverse. Overall activity by number of deals was very comparable. Entrepreneurship in the D.C. region is very symbiotic with the federal government. That has been its biggest strength, and creates its biggest opportunity. When you combine that with a healthy light software innovation ecosystem the picture is more nuanced and much more exciting.
If entrepreneurship is measured against its overall success rate, rather than its success against a particular type of innovative activity, the D.C. region has as many, if not more, opportunities for entrepreneurs to come up with a business idea and work it through to a rewarding exit than anywhere in the U.S. It may not be sexy enough to be part of the tech blog echo chamber, but it’s a fact supported by data and my anecdotal experiences every day working with serial entrepreneurs in the D.C. region through FounderCorps and Amplifier Ventures.
The importance of the federal government
The second question I want to address in this post is the role of the federal government in technology entrepreneurship. Specifically, many in the Valley (and elsewhere) seem to share a concept that “government doesn’t matter for entrepreneurship — it should just get out of the way.”
I have a problem with that as a broad statement. One of the unappreciated facts about our economy is that there is an almost direct correlation between government spending on R&D (and government regulatory choices) and every successful industrial cycle that that the U.S. has benefitted from, since building the nation’s railroads. The relationship between basic science, application, national security and subsequent commercialization denotes a highly symbiotic connection between government and investors.
For example, the venture industry and entrepreneurs have benefitted mightily from the Internet, but the basic research to create it happened through U.S. government spending and policy choices. The venture capital industry does not create industries, it finances incremental innovations in industrial waves. That’s not a criticism, it’s a fact: Creating industries takes time and many blind alleys. The VC industry needs rapid growth and returns. It needs industrial waves to succeed for it to generate returns.
I would argue that the current challenge in the venture industry (which is related to its inability to generate extraordinary returns) is a direct reflection of the maturing of the most recent industrial wave and its monopolization and concentration. This is why you currently find two types of venture funds succeeding: funds that can make big bets and withstand monopolistic market power from the Five Horsemen of Technology, and funds (and angels) that grow quick acqui-hires for these same monopolies. But, they are not funding new industrial waves.
The big question to be answered is: Where do the next industrial waves come from? Casting one’s eyes towards life extension, material science, artificial intelligence, man/machine interface, alternative energy, conservation, robotics and space, as just some examples, you see a large role being played by government R&D spending and policy in shaping these nascent industrial waves. To say that government should just stay out of these things is to completely miss the point. In a world of hedge fund-driven financial investing and public company constraints, just about the only source of long-term R&D capital for emerging technology in our economy is the federal government.
There is certainly a large ideological battle being played out in our society about the role and expense of government. It is playing out in the grinding fight over tax rates and government spending. Heck, when golfers complain about their tax rates (thanks, Phil Mickelson, for crying about your 62 percent tax rate and demonstrating that you have the worst accountant on the PGA tour) we clearly have reached a point of saturation. But, balancing a budget without recognizing the importance to our economy of government funded tech R&D and consumption is just silly. It is like burning your furniture to stay warm. At some point you are going to need someplace to sit.
Over the last 18 months I have worked with extremely committed people in DOD, DARPA and elsewhere in our federal government to figure out how to get the next generation of technologies matched with entrepreneurs and into the commercial world. This is a big effort and one that is of crucial importance to national and economic security. I expect that many of these technologies will get developed and industries will get established in Boston, New York, Silicon Valley, and the D.C. region, as our entrepreneurial communities innovate. But, make no mistake, the role of D.C., both in its entrepreneurs and in the government, will be an important part of our next industrial waves.
My message therefore is pretty simple. Either on the level of the entrepreneur, or on the level of being a source of industrial waves, the DC region is highly relevant and important to our national economy. To my friends in the Valley I say hello, and invite them to come spend some time with me here in DC. It might open your eyes — and, as is often the case for entrepreneurs — some of you might move here. After all, entrepreneurs follow the money.
Jonathan Aberman is the Founder of Amplifier Ventures, an investor in government related technology driven companies. He is also Chair of FounderCorps, a regional not-for-profit focused on mentorship and entrepreneurial development in the Washington, DC region, and an Adjunct Professor of Entrepreneurship at the Robert H. Smith School of Business, University of Maryland. He is the co-host of the nationally broadcast politics and business program Leftjab Radio on SiriumXM. Follow him at @jaberman.