Washington’s new start-up economy doesn’t revolve around government work
For a newly minted MBA like Dan Berger, Washington was a bright light in a dimming economy. The capital promised influence, affluence and the opportunity to change the world.
But sitting idly in a cubicle in Herndon, Va., wasn’t going to be Berger’s world-changing gig.
“They’re paying me $90,000 a year and I wasn’t doing anything, just waiting for work to come to me,” he said.
Disenchanted, he filled his days by making lists of ideas for the job he really wanted, businesses that didn’t yet exist, such as a social network for people on jury duty, or an airline that flew to surprise destinations, or flower arrangements for men, or a service that would send someone butterflies.
Or a digital way to plan who sits near whom at a wedding. “There it is,” Berger said.
Five years later, Berger, 31, is chief executive of Social Tables, a fast-growing digital business that has raised more than $1.5 million from D.C.-area investors and has more than 500 customers, including hotels, caterers, museums, universities and nonprofit groups. Social Tables’ programs handle seating arrangements, check-in and other details for parties, meetings and conferences.
Berger had tried the old Washington ladder. He worked on Capitol Hill for a few years straight out of college. He parlayed his MBA from Georgetown into a spot in Washington’s post-Sept. 11 government contracting boom. But he found his bliss in an office in a sprawling open space in a downtown D.C. office building, where club music keeps a steady beat under the young (average age: 27), 16-
person staff’s sales calls. Whoever lands the most sales one day gets to be office DJ the next.
Born in a Dupont Circle rowhouse in 2011, Social Tables has no ties to federal contracts, but Berger is quick to say that “without D.C., we wouldn’t be where we are today.” That’s because he has drawn talent, advice and money from more established local start-ups such as LivingSocial, from big contractors such as Booz Allen, and even from former government employees. For a bargain $3,000 a month, he rents space from 1776, a business incubator that also provides a steady stream of counsel and inspiration in the form of seminars, schmoozing and one-on-one relationships.
At one point, Berger looked into moving to New York, where he grew up, but he decided that Washington’s potential was worth staying for. People work long hours without complaint — part of the city’s workaholic culture. New restaurants and nightspots mean happier, busier workers, Berger said: “There’s been a cultural revolution in this city that’s phenomenal.”
The pool of talent to choose from is deep, in part because so many smart young people came here to work in politics and government and decided the grass might be greener in the business world.
“A few years ago, people on the Hill were revered,” Berger said. “Now they’re mocked.”
The big shift
The explosion of government outsourcing and homeland security spending in the first decade of the century translated into striking increases in population, income and affluence throughout the Washington area. The region is now home to 53,000 one-percenters, up by 20,000 since the turn of the century. Nearly 3 percent of the top earners in the nation live here.
“This city thrived because the federal government acted as a seed,” granting contracts to hundreds of new companies that in turn created thousands of six-figure jobs, said Fitzroy Lee, deputy chief financial officer for the District.
The new money nudged the local culture from a staid, button-down, civil-servant sensibility to a new openness toward flaunting financial comfort. The newly monied invested in home theaters, elaborate kitchens and luxury vehicles, and settled in fast-gentrifying neighborhoods.
But after federal spending in the D.C. area leapt from $29 billion in 2000 to $82 billion in 2010, the trend has reversed. Federal spending dropped to $75 billion in 2012 and is set to decline for the foreseeable future.
Now, the Washington economy is pivoting again. Even as federal employment in the District dropped by 2.2 percent last year, private-sector jobs bumped up by 2.5 percent, according to city statistics.
As the government has retrenched, cutting jobs and slamming the brakes on spending growth, the Washington area has flourished. The government’s metastasizing need for computer technology — nearly one-fifth of federal spending is now tech-related — attracted a huge corps of engineers, developers and other IT workers to the D.C. area. Now, many firms and workers who benefited from that outsourcing revolution have parlayed that business into new ventures that are far less dependent on public dollars.
Across the region, growth is projected to accelerate over the next four years even as federal spending accounts for about 10 percent less of the local economy than it did in 2010, according to George Mason University economist Stephen Fuller. But what remains unproved is whether local investors will overcome their traditional conservatism and pump money into risky new ventures.
We’re on a path to being a more vibrant, diversified economy with more entrepreneurial aspects,” said Steve Case, the co-founder of AOL, which spawned dozens of tech spinoffs and start-ups in the D.C. area. Case now runs D.C.-based Revolution, which invests in start-ups, mostly in the Washington area, such as LivingSocial and HelloWallet, a financial tools provider developed by an entrepreneur who came out of an old-line D.C. think tank.
“None of the companies we’re involved in are government-related,” Case said. “Washington is not a one-trick pony anymore. It’s not Detroit.”
In the four years since Daniel Kasun moved to Washington to run one of Microsoft’s operations, he has seen a shift in the area’s economic profile.
The D.C. area is now No. 1 in the nation in per-capita use of Microsoft’s BizSpark, which supplies free software to start-ups. “We’re seeing a big movement in the past two years from big government contractors to start-ups,” Kasun said. “Three or four years ago, those guys were set for life in the company. Now you see people from Lockheed and Northrop becoming the innovators.”
“It used to be you’d graduate from Virginia Tech or George Mason and you’d go to Silicon Valley,” he said. “Now they stay here. And they come here. In four years, it’s gone from ‘Who’d want to go there?’ to ‘I really want to be there.’ ”
As a result, Microsoft “is significantly overweighted in the people and investment we’ve put in this area compared to anywhere other than Silicon Valley.”
During the first decade of the 2000s, the Washington area was home to more of the nation’s fastest-growing companies than any other U.S. city, according to a study by the Kauffman Foundation. And urban sociologist Richard Florida ranked the area in the Atlantic magazine as a leading center of venture-capital-backed start-ups, up there with Austin and Seattle.
The innovation is coming not only in the computer world but also in a slew of new fields, especially health, education, energy, transportation and hospitality — industries in which government regulation or international commerce are important.
Case’s investments in Washington start-ups focus on the next wave of businesses he expects to be disrupted. He looks for industries on the cusp of revolution, such as virtual classrooms competing against traditional schooling, ride-sharing and high-tech dispatching transforming the taxi industry, and the breakdown of the fee-for-service model of medical care.
What brings such innovation to Washington are the same factors that helped elevate the region to unprecedented affluence — the unusual number of dual-income, high-earning couples here gives families a cushion even in hard times. The large number of women in top executive positions, including at the helm of some of the biggest defense contractors, has given the region an income boost over other metro areas.
The D.C. area is also one of the nation’s top magnets for highly educated immigrants and for millennials, who flock to Washington “just like young people did in the past, to try to fix the world and give back,” said Christopher Schroeder, who advises new businesses in the region. “But they believe that government doesn’t work, so they’re drawn to the private sector, to start-ups that want to do good.”
A start-up capital
It’s 10 a.m. and the next generation of Washington’s economy, clad in jeans and T-shirts, hair still wet from the shower, straggles into an unmarked 1980s office box on 15th Street NW.
They don’t work for the feds, don’t have government contracts, don’t have offices of their own, and in most cases don’t exactly have employees or even customers. Not yet, anyway.
But they fancy themselves Washington’s next power elite — the owners and managers of hundreds of start-ups that exist for the moment mainly inside laptops and tablets perched on long wooden tables in a vast, 12th-floor space called 1776.
This is the 24/7 business incubator that Evan Burfield and Donna Harris fashioned out of old wooden doors, salvaged lockers and mail slots. In January, they rented a floor of an unremarkable downtown office building, gutted it to bare concrete, moved in some couches, installed a kitchen, bought enough PB&Js to survive the apocalypse, added a healthy supply of merlot and opened for ideas and entrepreneurs.
Within a few months, 1776 was home to more than 130 nascent businesses, selected from more than 400 applicants — kids right out of school and mid-career executives fresh from government or big private companies, techies and poets, bouncing concepts off each other, listening to successful mentors and shaping each other’s business plans.
Many of the start-ups are one-person initiatives, but some employ as many as 18 workers in the big room. Solo ventures pay $300 a month to plop down at a random table and put in a day’s work; more established businesses pay double that and get assigned space.
Sujoy Roy runs VisitDays here; his infrastructure consists of a table, two soft chairs and a bench. Roy’s idea is to create an online place for high school seniors and their parents to search for the right college, while giving colleges data on potential applicants visiting their campuses. He could have started anywhere, but “Washington is still the most powerful city in the world,” said Roy, 25. “The capital flow isn’t as strong as some other places, but Washington attracts a lot of young technology talent. And, especially in education, the leaders and thinkers are here.”
Roy’s is one of six education start-ups that moved into 1776 in its first eight weeks of operation. Flat World Knowledge, a digital textbook publisher founded in New York City, moved to three tables at 1776 to be near regulators, institutions that control student loan money, and education entrepreneurs who have emerged from Blackboard, the D.C.-based education technology company.
None of Flat World’s 30 employees came from the government or contracting worlds, but four, including its chief executive, came from Blackboard.
“What you’re seeing now in Washington is the same kind of disruption that happened in the late ’90s with Internet-related businesses,” said Michael Chasen, who co-founded Blackboard in 1997 and is now a regular speaker and adviser at 1776. His start-up, SocialRadar, which will let social-media users know upon walking into a room what their connections are to others in that room, is camping out at 1776 while its new offices are being built five blocks away.
“D.C. does well whenever there’s mass disruption in a field,” Chasen said. “Right now, it’s education and health care, which are both tightly linked to government regulation.”
By Burfield’s tally, a thousand Washington area companies are trying to raise capital; 350 of them launched within a dozen blocks of 1776.
Burfield, 37, who grew up in Falls Church, Va., started his own tech company in Fairfax 17 years ago, in the heat of the telecom bubble. He saw then that Washington’s new business anchors — AOL, MCI, Nextel — were luring talent to the area.
“Almost none of our start-ups have any connection to the federal government,” Burfield said. “They’re just not interested in entering an 18-month procurement process that costs $200,000 to win. The brightest 28-year-olds who want to change the world are not going to come here and engage with a broken government process. We’re interested in the government contracting world only as a source of talent to be repurposed.”
Where it happens
But it’s no accident that 1776 is based five blocks from the White House and two blocks from K Street; many of its businesses aim to disrupt industries that are regulated by government. Others want to do business with states, localities and school systems. That doesn’t require them to be in Washington, but they soon see that all the actors are here: the government, trade associations, international organizations, lobbies and PR firms, and nonprofits.
“D.C. becomes the place where everybody meets, even if it’s not where the actual business occurs,” said 1776’s Harris, who formerly ran a lobbying firm.
Doug Naegele’s Infield Health, for example, consists of a desk at 1776 and a wire hanger on which the chief executive keeps a blue oxford shirt to switch into from his golf shirt “in case somebody really important is coming by.” His start-up aims to help hospitals stay in touch with patients after they are discharged — as the new federal health-care law encourages. Infield has created jobs, but so far only in India, where his IT workers toil remotely. Naegele, 42, is in Washington because he believes the Affordable Care Act will produce a wave of new jobs here, close to the health-care bureaucracy.
But he worries that the region’s conservative approach to business will make it hard to find capital. “Think of a guy who spent 30 years at PricewaterhouseCoopers and makes $350,000 as a manager,” he said. “He works hard, but if he has a $1 million house in McLean and two kids in private school, I totally get why he doesn’t jump into an innovative start-up.”
The stability of government work remains an obstacle to creating a robust entrepreneurial culture in Washington, said Hooman Radfar, chairman of Add This, a Vienna, Va.-based tech company that provides data analysis for social media. “It is tough to hire into young companies here because people say, ‘Hey, I’m making $130,000 as a developer for the government — why should I give up that security?’ ”
What keeps Washington in the second tier of innovation centers at this point is the reticence of the region’s wealthy residents to embrace risk to the degree that funders have in Silicon Valley or New York, many entrepreneurs said.
Although the D.C. area is home to five of the seven wealthiest counties in the nation, “some people here are super-cautious,” Case said. He has seen start-ups here prepare two decks of slides for their presentations to potential funders — “one for locals who are going to say ‘Show me the money’ and one for the Valley, which is all about the vision and the idea.”
Even Case early on considered moving AOL to California to be in a more risk-friendly environment, but he stayed, as have many of the 25,000 people AOL employed at its Dulles campus at its peak. Alumni of AOL have created more than 100 D.C.-area companies.
Case’s Revolution now funds about 20 new businesses, two-thirds of them in the D.C. area and none of them dependent on government, even though the founders in many cases emerged from classic Washington institutions — foundations, think tanks and the government itself.
“Sixty years ago, Detroit was Silicon Valley, the center of the hottest technology,” he said. “The population and economy soared, and they built hotels, stadiums and arts centers. But they were overly reliant on a single sector and lost their entrepreneurial mojo. Washington won’t make that mistake.”