In Austin and the District, a shared start-up vision but different paths

Donna Harris and Josh Baer share a similar vision.

Speaking together earlier this month at the South by Southwest conference in Austin, Harris, one of the founders of 1776 in the District, and Baer, the founder of Capital Factory in Austin, discussed the work they are doing through their respective business incubators to build a dense network of technology start-ups in their cities.

However, the paths they are taking to get there are different.

“We have some things in common with D.C., and there’s plenty we can learn from working together,” Baer said in an interview. “At the same time, Austin is unique. We’re at a special time right now. Not everything we do would work there, and obviously the same is true the other way around.”

On the surface, what Harris and Baer have done in the past two years looks similar. Both have helped build a central command center for their city’s new technology ventures — and in the process, they have brought a large number of entrepreneurs, investors and previously fragmented start-up networks together under one roof.

In Austin, that epicenter is Capital Factory, a 46,000-square-foot coworking space located in the middle of downtown. Started in 2009 as a summer start-up accelerator, Baer acquired the space two years ago and expanded the program into a year-round business development center, which now houses more than 200 early-stage technology ventures.

Related: A behind-the-scenes look inside Capital Factory

“There are so many entrepreneurs moving to Austin,” Baer said. “I’m just trying to scoop up as much of that awesomeness as possible and squish it into one place.”

One year later, Harris and co-founder Evan Burfield started 1776 in the District with a similar mission. They converted 15,000 square feet of empty office space into a high-tech business incubator and entrepreneurship education hub. In its first year, the group has already housed and provided mentoring to more than 100 start-ups.

“It’s really about creating density, and bringing as many great new companies as we can together in one place,” Harris said during the panel discussion with Baer in Austin during the music, film and technology festival.

Last fall, 1776 and Capital Factory entered into a partnership with six other start-up incubators around the world to collaborate on programs and connect start-ups, mentors and investors. Burfield said what Capital Factory has built in Austin is among the most similar to what his group is working toward in Washington.

“They’re essentially one year farther down the road, and they’re trying to do a lot of the same things we are,” Burfield said during a visit to Capital Factory. “It’s a helpful model for us.”

On paper, the two metropolitan areas bear a number of similarities that make them ideal for entrepreneurs. Both have rapidly growing populations, several nearby universities and plenty of wealthy residents — all important ingredients for young companies in need of customers, talented employees and investors with deep pockets.

However, the concentration of that wealth is where the groups start to see a divide.

In Austin, the entrepreneurial ecosystem benefits from a relatively large number of mid-level angel investors, Burfield said. On the other hand, the Washington region has a handful of billionaire investors involved in thetechnology space (Steve Case, Ted Leonsis), but in terms of the overall number of start-up investors, particularly successful entrepreneurs-turned-investors, Burfield said the District simply cannot compete at this point with Austin.

That has forced the two co-working spaces to take different funding approaches. 1776 follows a common business incubator model in that it charges a modest amount of rent from each of the start-ups it brings in and mentors, but the group does not take equity in any of its resident companies.

Conversely, Capital Factory requires a 2 percent stake right off the bat in exchange for space in the incubator, after which it introduces each company to its roster of about 60 private investors. And here’s the wrinkle: If two of those individuals agree to invest $25,000 in the start-up, Capital Factory matches that $50,000 investment. In addition, two partnering venture capital firms, one in Austin and one in Silicon Valley, have agreed to match it further.

So if a company can get in the door and then get two of the incubator’s trusted investors to each put in $25,000, the team automatically raises $150,000. Not surprisingly, that has already proven to be a big draw for local entrepreneurs, and it provides Capital Factory with a sustainable funding method.

“I think it’s a model that could be duplicated in other places, but the limiting factor, especially in smaller cities, is having too few investors,” Baer said. “If we only had two or three mentors, it wouldn’t work.”

Capital Factory and 1776 have also taken different approaches to recruiting entrepreneurs. In Austin, where an array of technology companies from different sectors have seen success, Baer said his team has decided not to focus on or give priority to any particular industry when looking for promising young companies.

At 1776, Harris and Burfield decided to narrow their focus to attract early-stage technology companies in highly regulated sectors such as education, health care and clean energy — businesses they believe would benefit the most from close proximity and frequent interactions with federal policymakers.

“I think for D.C., that was a really smart move, focusing on certain verticals,” Baer said, conceding “if an entrepreneur is doing something around education or health care, it might even be worth moving from Austin to D.C.” Of course, “that would be a pretty hard sell for me,” he added, “but I could see that.”

So far, the different approaches seem to be paying dividends. Capital Factory continues to invest in more start-ups and is adding one or two new investors to its roster every month, Baer said. In the District, 1776 is in the process of spreading to a second floor and recently expanded its mentoring services, now offering a full-time business coach to some of its entrepreneurs under a new program called 1776 Labs.

Meanwhile, Austin (No. 17) and the Washington region (No. 8) both moved up in the latest annual rankings of the nation’s top start-up destinations compiled by Entrepreneur Magazine and the Kauffman Foundation.

“It’s a process. It doesn’t just happen overnight,” Baer said.

Follow J.D. Harrison and On Small Business on Twitter.

J.D. Harrison covers startups, small business and entrepreneurship, with a focus on public policy, and he manages the Post's On Small Business blog.
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