Charles Newhall III, managing partner of Baltimore-based New Enterprise Associates, just can't understand what makes Washington business so timid.
"We clearly have excellent educational resources here, equal to the Boston area," said Newhall, one of the region's leading venture capitalists. "We have the emergence of a major venture capital pool -- over $1 billion in the last 10 years.
"We have a wealthy and well-educated population here. We clearly have a life style in the Washington/Baltimore area that's attractive. . . . We're only an hour away from other major metropolitan areas, and there's already a network of support services like legal and accounting firms.
"So why . . . haven't we had more new-company start-ups?" Without hesitation, Newhall offers his best guess: "In this area, you don't have an entrepreneur mentality as you do in Silicon Valley or Boston's Rte. 128 -- you have a consultant mentality like the Beltway Bandits."
One of Washington's few entrepreneurs agrees.
"If any town has all the ingredients, it's this one," said James V. Kimsey, who runs Quantum Computer Services Inc., a local high-tech company. "Instead, it's a wasteland. There's a few lone, struggling, straggling pioneers, and it shouldn't be that way. "It's just that Washington has the sleepy southern-town proximity to the federal bureaucratic mentality that enervates entrepreneurs."
The numbers are equally cruel:
A Technologic Computer Letter survey of 250 computer-related new-venture deals for 1985 -- representing more than $1 billion of investments -- includes only three companies from the District, Maryland and Virginia.
Inc. Magazine's just-published list of the 100 fastest-growing publicly held companies shows 23 from California; 13 in New York; 11 in Texas; five in New Jersey and a grand total of 1 in Washington and its two adjoining states.
Business Week's May 26 ranking of the "100 Best Small Corporations" in America features but one company from the Washington area.
Venture Economics, which tracks venture capital investment in the United States, offers preliminary data showing that of more than 1,000 companies receiving venture funding in 1985, only 39 were in the District, Virginia and Maryland. Of the roughly $2.5 billion invested in new start-ups, a total of $48 million went to Washington-area companies -- that's less than in California, Massachusetts, Texas, New York, Colorado or Minnesota.
"We're talking about very small numbers," said a Venture Economics researcher.
MCI Communications Corp. Chairman William McGowan, arguably Washington's best-known entrepreneur, keeps his own numbers: "I was going to give you four or five other names of local entrepreneurs ," said the man who drove MCI to more than $2.5 billion a year in annual sales, "but I couldn't think of any."
The low level of entrepreneurialism seems to confirm the cliche that "Washington is populated with people more conscious of life's perils than its adventures."
"People here don't want to take risks," said Avner Parnes, one of the area's biggest entrepreneurial success stories. Parnes, an Israeli emigre, parlayed a $150,000 investment in a couple of stores in 1981 into the MBI Business Systems computer-store chain. In April, Businessland agreed to buy MBI for $75 million -- giving Parnes a personal windfall of close to $4 million.
Parnes, too, is surprised by this region's lackluster performance: "There is tremendous potential here. The Greater Washington area is the biggest economic secret in America. It's the best place in the country to get started."
But the region has been a consistent underperformer during an unprecedented entrepreneurial explosion in the past five years that has boosted employment and economic growth in other parts of the country dramatically.
"As a fund, we consider the Washington area to be first-rate in the medical and software area," said Frederick R. Adler, who runs one of the country's largest venure capital funds and who has invested in local start-ups. "But the number of entrepreneurs who have produced good business plans is disproportionately low. We don't see enough well-thought-out proposals. I'm absolutely surprised we don't see more situations from there."
There are numerous theories and excuses to explain why Washington has a dearth of entrepreneurialism.
"It may well be that the area doesn't have sufficient managers who have entrepreneurial leanings," suggested Adler. "You need people who really want to 'go for it.' "
"We lack good high-tech managers," said NEA's Newhall. "We don't have a Hughes or a Texas Instruments or a Hewlett-Packard as a base to draw from."
Despite the presence of a Martin Marietta Corp., a Fairchild Industries Inc. and an MCI, "there's a lack of corporate headquarters in this area" that corporate spin-offs can come from, said William Gust, a general partner with Browe Venture, a Maryland-based venture capital fund.
The cultural values of the area are likewise limiting; this is a city that thinks a Michael Deaver is an entrepreneur. While the three "L's" -- lawyers, lobbyists and legislators -- may be the cornerstone of Washington's economy, they are not widely regarded as fertile sources of enterprise.
"The thing that drives venture capital funding is the flow of entrepreneurs," asserted Mark L. Radtke, a vice president of Venture Economics. "Entrepreneurs are coming out of corporations and, to a lesser extent, academe. If you think of the federal government as a source of entrepreneurs, it goes against the classic profile of an entrepreneur as a risk-taker."
And, despite the enormous concentration of scientific and engineering talent in the federal government, few have managed to emulate their Silicon Valley or Rte. 128 brethren by breaking away to launch companies.
Indeed, the technical experts that do leave the government mostly set up consulting companies or technical service firms (called "body shops" by the venture community) rather than actually making something.
"That does tend to be true," sighed Benjamin Vandegrift, a lawyer who runs the MIT Enterprise Forum of Washington/Baltimore, a spin-off of the Massachusetts Institute of Technology Enterprise Forum -- a nonprofit group that encourages regional entrepreneurialism. "A lot of the work that's done around here is in the consulting area, where people sell their brains."
Vandegrift points to such consulting houses as Planning Research Corp. and BDM International Inc. as successful examples of the "consultant" strain of entrepreneurialism common to the area. Working in the government sector -- with its budget, rather than profit, orientation, "doesn't lend itself to rapid decision-making and risk-taking necessary for success in a small entrepreneurial company," which makes consulting a logical small-business option, he said.
What's more, the cost and risks associated with launching a consulting firm are minuscule compared with those involved in creating, say, a high-technology company.
"Those guys go into business with government contracts in their pockets," said MCI's McGowan scornfully.
The federal government excuses aside, some feel that Washington's problem is that there are no successful local "role models" for aspiring entrepreneurs. NEA's Newhall claims the growth of Silicon Valley was kindled by the corporate leadership offered by Bill Hewlett and David Packard of Hewlett-Packard fame as role models, while Ken Olsen's success with Digital Equipment Corp. was the impetus behind Rte. 128. These entrepreneurs blended technical skills with the ability to grow a company.
By contrast, said NEA's Newhall, "There's been a lot of money lost in this area backing good technical teams that lacked general management ability. We've had a number of firms that have cratered."
Indeed, in the biotechnology realm, where several local start-ups have sought to capitalize on the proximity of the National Institutes of Health, the failures are more notable than the successes. Rockville-based Genex Corp. was launched at roughly the same time as California's Genentech Inc. and heralded as a major player in the field. Now, Genex struggles along in painful retrenchment while Genentech continues to soar.
Similarly, high-flying Columbia Data Products Inc. of Columbia, Md. -- a hot manufacturer of IBM personal computer clones -- fell into bankruptcy and liquidation, making several venture capitalists and banks very unhappy and significantly poorer.
Some potential entrepreneurs argue that the area is starved for venture capital, but Browe Venture's Gust insists "that's nonsense -- we'd rather do deals in our own back yard, if we could."
Of course, there are several more successful case studies of Washington entrepreneurialism. McGowan's MCI Communications Corp. is perhaps the best example -- but somehow, the firm's comparative success hasn't inspired other entrepreneurs. More recent entrants, such as Verdix Corp. and Presidential Airways Inc., perhaps represent a ripple in the entrepreneurial pond.
But virtually all of these companies -- unlike their coastal counterparts in the Valley and on 128 -- are regional or have a uniquely government flavor. For example, MCI's Washington location is in large part due to the legal and regulatory battles that had to be fought in Congress and at the Federal Communications Commission -- a form of regulatory entrepreneurialism.
Presidential Airways picked the Washington area precisely because it sensed that Washington Dulles International Airport enjoyed significant growth potential. Verdix, a designer of software tools for the defense establishment, relies on the robustness of the defense marketplace to assure its continued growth.
While Silicon Valley and Rte. 128 companies generate products and services that ultimately compete in the global marketplace, Washington-area entrepreneurs seek markets more domestic and governmental in nature. Yet "that is slowly changing," contended MIT Enterprise Forum's Vandegrift, who conceded that he "sees the glass as one-quarter full instead of three-quarters empty."
It's not clear whether the passage of the Gramm-Rudman-Hollings budget-trimming law may alter the area's cultural values; whether the growth of small business in the suburbs may kindle action; or whether combined university/state action may nurture a gradual change in the environment here.
"If we don't have it a change in entrepreneurial attitudes ," warned NEA's Newhall, "this area will never realize its promise. We'll be stuck with Washington as a government center and Baltimore as a branch plant town."
Perhaps the most encouraging sign that the venture outlook for the region is brightening a little is that the entrepreneurs are beginning to find and fund each other. MBI's Parnes says he's made personal investments in four local companies; while MCI's McGowan is enthusiastic about an optical-disc technology company he invested in.
"I'm sure it will be a winner," he insisted.