Steven Pearlstein: Steering the region from .gov to .com

Steven Pearlstein
Columnist January 6, 2012

Local economic boosters love to remind anyone who will listen that the Washington region boasts the greatest concentration of technical or knowledge workers in the country. The implication, of course, is that we’re right out there on the technological edge alongside Silicon Valley, Austin and Boston.

It makes for a wonderful marketing story, but it’s fundamentally misleading. What the numbers don’t tell you is that almost all of this high-tech work is done for the government — and therein is the problem. For even with this impressive ecosystem of firms, workers and advanced technology, the region hasn’t yet spawned a critical mass of companies providing technology products and services for consumers and private businesses.

Steven Pearlstein is a business and economics columnist who writes about local, national and international topics. View Archive

There was a brief moment, in the mid- to late ’90s, when the commercial tech sector looked like it might be taking off, with hot, fast-growing companies such as AOL, MicroStrategy, Nextel and scores of other entrepreneurial startups supported by a burgeoning network of venture capitalists. But as a result of failed mergers and the dot-com bust of 2000, most of that faded away, along with the commercial-tech sector’s momentum and swagger.

Very little was made of this disappointment during the ensuing decade, if for no other reason than the government-contracting sector was growing so fast it didn’t seem to matter. Now that the region faces the prospect of a decade-long decline in federal spending, however, it has taken on some urgency.

That doesn’t mean that the Washington region can never develop a thriving commercial-tech sector — as I’ll explain in a moment, we can and must. The challenge is that we’ll have to do it with different companies and different workers operating in a different business culture.

The reality is that firms and workers that thrive in a government-contracting environment are almost antithetical to the ones developing new apps for the iPhone or even a new database-management system for Macy’s. The customer base, the timelines, the marketing, the skill sets, the way products are priced and employees are paid — they’re all quite different. As former Lockheed chairman Norm Augustine used to quip, the history of “diversification” by government contractors is unblemished by success.

You can feel the difference in the two cultures the minute you step into any of the District offices of LivingSocial, the daily deal site that has become one of the hottest tech startups in the country, with 5,000 employees and $175 million in fresh funding in its coffers. Everything about LivingSocial is young, hip, playful, full of entrepreneurial energy and possibility, which is to say it feels nothing at all like walking into Booz Allen in Tysons Corner.

Not surprisingly, LivingSocial has its roots in the Washington of the dot-com bubble. Its founders, Tim O’Shaughnessy and Val Aleksenko, were barely out of college back then, but they got their start, along with some of their initial funding, from Revolution, a local entrepreneurial hothouse founded by former AOL executives Steve Case, Ted Leonsis and Donn Davis.

Although LivingSocial is the best known of these, it is hardly the only one. There is Blackboard, Personal.com and Hello Wallet in the District, as well as OPower and Gridpoint and Clearspring in Northern Virginia. And while they, and companies like them, have little if anything to do with government, they definitely benefit from being in the Washington region.

Why? Because Washington has suddenly become a cool place for smart, well-educated young people to live, which turns out to be a vital ingredient for successful, fast-growing tech companies. Some may have grown up here, others gone to school here, still others attracted by the excitement of being in Barack Obama’s Washington. Some have significant others working in law firms or think tanks. Many are attracted to the affordable-yet-hip urban lifestyle on U Street NW and H Street NE, and along the Rosslyn-Ballston corridor.

Played correctly, this cool, urban lifestyle card could be used to lure out-of-town tech companies such as Google, Facebook and Apple to open new commercially oriented development centers as they begin to look beyond their expensive and highly competitive base in Silicon Valley. New York has already benefited from this geographic diversification, and there is no reason Washington can’t, as well. Rather than foolishly chasing after headquarters of old-economy defense giants, local officials could make better use of their time and money on commercial-tech prospects of all sizes, not just for the jobs they create and the buzz they generate, but for the startups they inevitably spin off.

What would also help, of course, would be to have a world-class graduate research university here. Although the region has a number of fine universities that are getting better all the time, we don’t yet have an MIT or a Stanford that can serve as a magnet for the world’s best scientific and engineering talent. We’ve kidded ourselves that the National Institutes of Health could serve the same purpose, only to discover that the people it attracted lack the entrepreneurial gene. The economic spinoff has been disappointing.

There is, of course, just such a world-class research university up Interstate 95 at the medical complex of Johns Hopkins University. Until now, the Hopkins docs seem to have been much more interested in getting research grants than getting rich by starting companies. In the past decade, that has slowly begun to change. Now that Hopkins has bought hospitals in Bethesda (Suburban) and the District (Sibley) and plans to move ahead with the development of a 100-plus-acre research-and-commercial campus on Belward Farm in Rockville, the Washington region has a stellar opportunity to create a much stronger Hopkins connection.

The current strategy in Rockville is to turn wet labs into biotech firms, which has met with only modest success and, in any case, has produced precious few jobs. Going forward, the better strategy would be to establish Rockville as a global center for what might be called bio and health informatics — a hot, new area that involves using mountains of newly digitized patient medical records and genomic information to determine the most effective and least costly way to treat diseases.

This focus on using data to improve clinical outcomes is at the heart of the new health-care law and of keen interest not only to Medicare and Medicaid but to private health insurers and managed-care companies. Significantly, it would require the melding of Hopkins’ medical experience and expertise with the sophisticated data-management, data-mining and software-development skills that can be found at the government-oriented tech companies in the region.

This potential can only be realized, however, if long-standing institutional and political rivalries can be set aside and Hopkins’ top clinicians and researchers are willing to look beyond Baltimore and become more entrepreneurial. Some nudges and inducements from local governments and the Washington business community could be useful in that regard.

In the search for a world-class research university, Washington could also take a page from the playbook of New York Mayor (and Hopkins alumnus) Michael Bloomberg.

Two years ago, the billionaire mayor came up with the clever idea of offering 10 acres on Roosevelt Island in the East River — along with $100 million in infrastructure improvements — to the best university or team of universities willing to build and operate a new technology-oriented graduate research campus on the site. Stanford, Carnegie Mellon, the University of Toronto and the Indian Institute of Technology submitted competing proposals, along with the city’s own New York University, Columbia and the City University of New York. In the end, the city selected Cornell and Israel’s Technion — the MIT of Israel — which jointly offered to invest $2 billion over the next 30 years in a modern high-tech campus, including a commercial incubator and a $150 million revolving venture capital fund.

There’s no reason Washington couldn’t do the same thing.

A city that has financed a baseball stadium and new convention center could surely figure out a way to borrow or raise from private donors the $100 million to attract some of the also-rans from the New York competition to the nation’s capital. The similar challenge would be to build and operate an applied-technology campus with several thousand students and several hundred faculty, all focused on creating and commercializing the latest ideas in software and computer engineering.

The District just happens to control the perfect piece of land for such a campus on Poplar Point, on the west bank of the Anacostia less than a mile from where it drains into the Potomac. The site is within walking distance to Metro and is about as centrally located in the region as you can get — visible from Reagan National Airport in Virginia and just a few miles upriver from Prince George’s County. And it is directly across the Anacostia from the new baseball stadium and a number of new mixed-use developments, including shops, restaurants and apartments.

This the kind of bold effort that will be necessary for the Washington region to make the transition from a government-oriented tech sector to a full-blown and sustainable tech cluster. Expanding collaborations between existing institutions and existing companies are all well and good, but by themselves they are unlikely to create a new tech culture that is more entrepreneurial, more global, and more focused on the consumer and commercial marketplace. The challenge for the region is to create the new institutions, spawn the new companies, and attract a new generation of highly skilled researchers and workers necessary to create a genuine and sustainable technology cluster.

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