After Boom and Bust, Diversity and Maturity
Success of Blackboard and Other Firms Reveals Stability in Local Tech Industry

By Kim Hart
Washington Post Staff Writer
Monday, May 14, 2007

Michael Chasen and Matthew Pittinsky were among the original members of Washington's tech brat pack.

A decade ago, at the respective ages of 25 and 24, they quit their jobs as KPMG consultants, rented a tiny office around the corner and opened Blackboard Inc., selling software that connects students with their teachers and coursework. The software, now used in thousands of classrooms across the country, took root about a split second before the dot-com boom devoured the area.

"When we raised money, there were only two or three venture capitalists that even considered Internet companies," said Chasen, now one of the youngest chief executives for a company listed on the Nasdaq Stock Market. "Just a year later, I was one of a hundred other CEOs my age. . . . Today every single one of those companies has gone out of business."

But even after the bubble burst, Blackboard, based in the District, had enough customers and money in the bank to survive. It went public three years ago and last week broke through the billion-dollar market cap.

Now it has become the poster child of the Washington area's technology industry -- a sign of its increasing resilience, diversity and maturity. Local venture capitalists, economists and executives often cite Blackboard when they say the technology sector has stabilized after several fitful years. Instead of being dependent on federal spending spikes or devastated by a slump in specific economic sectors, Washington's technology companies are seeing steady growth in a more balanced market.

"I think what you're seeing now is a lot of enthusiasm, but it's tempered enthusiasm," Chasen said. "So people aren't making bad investments." Instead, he said, they're holding out for "companies with real business models and stronger management teams."

That, along with a hefty amount of private equity, is helping local companies attract out-of-town talent while keeping their own workers from leaving. Similarly, investors don't have to work as hard to convince entrepreneurs that this economy can support fledgling technology firms.

"It's not as risky to start a company here anymore," said Hooks Johnston of Valhalla Partners, a Vienna venture capital firm. "If it doesn't work out, there are a lot of other opportunities in the field."

Twenty years ago, government business formed the backbone of the technology community. In the 1990s, the rise of local companies such as XM Satellite Radio and AOL helped broaden the industry and bring consumer-oriented investment to the region.

But after the dot-com crash, the region reverted to its core customer -- the government-- and was buoyed by the post-Sept. 11 federal spending boom. Now, growth in federal information technology spending has dropped to about 5 percent after several years of growing at a clip of close to 9 percent, according to Input, a Reston market research firm. So the market is beginning to round out once again, with many firms expanding their customer base to Fortune 500 companies, universities and health-care systems.

"I think we're currently at an inflexion point on the curve," said John McClain, a senior fellow with George Mason University's Center for Regional Analysis. "So if they want growth, they'll need to find other clients, and we're well positioned to do that."

Lee Technologies, a Fairfax firm that secures data centers and technology facilities, has done just that. While its biggest client is the Department of Defense, the company also works with Microsoft, J.P. Morgan and Time Warner.

"If there's a been a drop-off, I haven't noticed," said George Newstrom, Lee Technologies' president and chief operating officer, who also served as Virginia's secretary of technology from 2002 to 2004. "Just look at all the office buildings going up along the Dulles corridor. That doesn't look like a slowdown to me."

Still, he acknowledged that a well-rounded customer base helps insulate companies from economic blips. After the stock market took a nosedive a few months ago, he pointed out, local tech stocks rebounded more quickly than the rest of the market.

And firms are merging and buying at full force, which "means our companies have value," said Bobbie Kilberg, president of the Northern Virginia Technology Council.

Local companies may be getting bigger, but they're hardly at the level of Microsoft, Oracle or Google. It's mid-size firms that drive the area's technology industry, analysts said.

Vispi Daver, a partner with Sierra Ventures in Menlo Park, Calif., has invested in five local firms, including Sourcefire, a Columbia network security firm that recently went public, and Approva, a Reston software company. He said Washington area firms lack relationships with the West Coast power players that are crucial in forming partnerships and striking deals.

"There's really no overlapping network of resources between the East and West coasts," he said. "That is extremely valuable to an early-stage company trying to grow."

Tech workers have benefited from the area's tight labor market. Many are able to move seamlessly from a government contractor to a start-up or software firm and back again.

In fact, while California dominates the tech employment scene numerically, Virginia has a higher concentration, with the most private-sector tech workers per 1,000 employees in the country, according to the most recent Cyberstates report by the American Electronics Association. The District gained almost 4,000 high-tech jobs between 2000 and 2005, and Maryland posted the highest growth in research and development spending in the country.

John Slye, an analyst at Input, said that as more federal workers retire, government agencies will rely more heavily on private contractors for their technological needs. "There's so much work to do in the federal space, and they're overstretched now as it is," he said.

In addition to being the largest purchaser of technology, the government is also a significant incubator for ideas and entrepreneurs. Federal research labs churn out as much talent for this region as Stanford does for Silicon Valley and the Massachusetts Institute of Technology does for Boston, venture capitalists said.

Unlike West Coast start-ups or New England universities, however, government labs and private contracting firms "typically aren't places where an entrepreneurial culture thrives," said Jonathan Silver, who founded District-based Core Capital Partners. "These institutions don't have the culture to nurture entrepreneurs to spin out of these places," he said. "The real value is in the spin-out."

Others argue that plenty of entrepreneurs have spun out of marquee companies. AOL alumni have formed start-ups in droves and the co-founders of WebMethods and MicroStrategy have parlayed their know-how into new ventures. And those who found success starting businesses before the dot-com era are trying to do it again.

It's even happening at Blackboard. Chasen said he's seen half a dozen start-ups spin out from his company over the past few years to take advantage of the area's educational resources.

"I think the tourists have finally gone home," said Art Marks, who co-founded Valhalla Partners in 2002. "We're on the steady upward slope with a self-sustaining entrepreneurial community."

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