Washington's Moment: The pieces are in place for the next great burst of business across the region
Monday, April 19, 2010
Business in Washington is not prone to expand in a straight line. Rather, it has grown in a series of great bursts.
There was the 1980s defense buildup, then a telecom and Internet boom in the 1990s, and an influx of dollars for homeland security in the 2000s. Each of these waves transformed business in the region, upending the corporate landscape and creating hundreds of thousands of jobs, all the while laying the groundwork for the next boom.
The pieces are now in place for the next great burst of business in Washington. There is a new wave of government activism underway, and with it, new opportunities for the private sector: Cutting down on paperwork in the health-care system, developing greener energy supplies, making information more secure, overhauling education. And following the last three booms, Washington has more skilled workers and capacity for businesses to grow than ever -- including hundreds of now-seasoned executives who have built companies, and are ready to do it again.
"When you're in a period of change like this, that's what creates entrepreneurial opportunities," said Mark Ein, chief executive of Venturehouse Group, the District-based venture firm.
The question now: Is Washington ready to seize its economic moment?
There are still plenty of headwinds facing businesses that try to capture these new markets. Capital is hard to get, a legacy of the financial crisis and the closure of many venture capital firms after years of poor returns. And if the political winds shift, so could government dollars; there has been no shortage of promising opportunities in recent times that have turned out to be mere hype.
In the depths of the downturn, for instance, when Washington became the financial capital of the world with its mega-bailouts, firms were lining up to claim their slice -- but few realized the lucrative paydays they sought.
That's because, no matter how much money Uncle Sam is spreading around to big banks, Washington's competitive advantage is not in financial engineering. It's also not in developing cutting-edge Internet content or the latest microchips. Rather, area business leaders said Washington excels at deploying armies of knowledge workers to solve complex technological problems -- whether that challenge is to build a communications network that can withstand a nuclear blast or a system that can mine vast databases to determine which guy getting on an airplane just may be a terrorist. We're not always the place for cutting-edge ideas, but we are a place that figures out how to execute those ideas on a wide scale.
"Is it likely that Washington will supplant Silicon Valley in terms of software development or semiconductors or Web 2.0?" asked Brooke Coburn, a managing director at the Carlyle Group who runs the D.C.-based private equity firm's fund that buys small companies. "That's extremely unlikely. But what the region offers is a different range of skill sets and knowledge base. If you can leverage those unique skills, you can build some great human-capital-based businesses."
The winners in the Washington economy of the 2010s will likely be the firms that can harness that competitive advantage -- at its core, the region's workforce -- to answer the challenges that the Obama administration and Congress are now focusing on, business leaders said.
Companies in the region are particularly well positioned to play a major role in improving the efficiency of the health-care system, trying to replace the immense paperwork in doctors' offices and hospitals with electronic databases. That is a major focus of the Obama administration; the stimulus bill passed in February 2009 included $19 billion for such efforts, and the health-care overhaul enacted last month included several programs meant to streamline the delivery of medical services.
The main advantage of Washington area companies and entrepreneurs in pursuing those opportunities is that the work is not all that dissimilar from work done for government agencies. The databases involved are enormous, the privacy and security concerns large, and the sheer complexity of the projects would tax workers in most of the country.
"The pure engineering talent to correctly create products like this are a tough resource to get outside this region and a handful of others in the U.S.," said Joseph Sander, chief executive of Harmony Information Systems, a Reston-based firm that provides software to help state and local governments manage care for the elderly. "We've matured as a region in the last few years, transformed into a region with a lot of capability for general IT applications."
Another government-influenced area where the Washington region has natural advantages is information security. As surely as military investments in the last century led to civilian uses -- the Boeing 707 was a more comfortable version of a plane built for the Air Force, after all -- so it is with the technology built to protect the U.S. government's computer networks from hackers here and abroad.
"We have some companies that do classified stuff that is going to make its way into the commercial world, and it's breakthrough stuff," said Jack Biddle, a founder of venture capital firm Novak Biddle in Bethesda.
Young companies in the security arena have a built-in advantage that some other industries don't have: While venture capital has dried up around the country amid the recession, financial crisis and a decade of poor returns, the government has taken a more active role funding early-stage companies, including through such institutions as In-Q-Tel, the CIA's venture capital arm.
A third area of government-encouraged innovation that is creating business opportunity in Washington is education. There was $650 million in last year's stimulus act for state educational technology grants, part of a broader effort by the Obama administration to encourage schools, colleges, and universities around the country to find ways that technology can make education more effective and affordable.
The Washington region, as it happens, already has some leading companies in those areas, notably Blackboard, the District company that provides software for education, especially at colleges and universities, and K-12, a Herndon firm that sells instructional software for younger students.
"Now you've got 3,000 young entrepreneurial technologists here starting companies," said Biddle, one of the early investors in Blackboard, which is now publicly traded. Former Blackboard executives have gone on to launch a slew of smaller education-oriented companies.
The picture is more muddy when it comes to another area in which the government is placing new emphasis, green energy. Much of the innovation that needs to happen if the nation is to reduce its carbon emissions and dependence on fossil fuels is in industries that are not typically headquartered in the greater Washington area. There may be more opportunity in the information-technology-oriented elements of making the nation more energy efficient, such as smart grid technology. There are a handful of local examples, including Gridpoint, an Arlington firm that develops software for solar panels and electric vehicles, and work on energy efficiency at Exxon's large office in Fairfax.
Wherever opportunities arise, veteran executives in the region describe a Washington that is better poised to seize them than in decades past. While the dot-com boom and bust of the late 1990s left in its wake lots of empty office buildings and failed business plans, it also had a more positive legacy.
That period also left an entrepreneurial infrastructure in Washington. There are now thousands of sales and marketing executives, lawyers, financiers, headhunters and others who are experienced at helping build companies -- not just toil in a giant defense contractor or government agency.
"In the 1990s, a lot of the discussion was about how there were no experienced managers and it was hard to find talent," said April Young, U.S. managing director of MMV Finance and a veteran of the local technology community. "Now if you start a company in Washington, you can find some really talented people. You don't have to move to Boston or Silicon Valley in order to operate it."