When the District’s financially troubled 1776 incubator merged with an out-of-town counterpart recently, it became the latest star of Washington’s tech scene to fade away after a few years in the limelight. The sort of permanence that helped make Silicon Valley a top technology hub has largely eluded the region’s start-up incubators.
The 1776 merger followed closely on the heels of a similar transition down the road at Mach37, Northern Virginia’s publicly funded cybersecurity accelerator, which said goodbye to its leadership team in July after a deal to take it private fell through. And the Maryland Technology Council merged with another organization and rebranded in January after cycling through four chief executives in eight years.
Both of the region’s government-subsidized incubators — 1776 and Mach37 — had a mandate to become self-sufficient and operate under private ownership. But the people involved in these initiatives say it was hard to serve the local community while also remaining in the black.
Part of the problem is incubators’ core constituencies are cash-strapped start-ups with little money to spend on membership fees.
“Accelerators generally aren’t able to meaningfully cover their operating costs off the revenue they get from start-ups,” said Evan Burfield, who was chief executive of 1776 until Oct. 16.
After its first year, the 1776 incubator embarked on a slew of new initiatives designed to build out other sources of income. It tried to expand to Silicon Valley but quickly divested its holdings after it found the region already was saturated with co-working spaces. It opened a Dubai office in partnership with an Emirati investment group, but it is unclear whether that initiative will continue under the incubator’s new ownership.
It even built out a software component of its business through an incubator-focused social media platform called Union, an effort that has since been spun out as a separate company.
Both 1776 and Mach37 tried selling corporate sponsorships, and had some success getting deep-pocketed companies to pay for co-branding arrangements and other partnerships. But turning a profit was a challenge, much to the disappointment of investors.
“By the time you pay rent, salary and program costs it becomes very hard to run that in a profitable way,” said Donna Harris, Burfield’s co-founder who left the organization last year. “I don’t mean that in terms of making a killing, but just in terms of breaking even.”
Others say the region’s geography presents a challenge for running successful incubators, which typically rely on a combination of public and private buy-in. The fact that the Washington metropolitan area spans two states and the District complicates efforts to arrange funding and build support.
State-run start-up investment programs usually come with strings attached, such as requiring the receiving start-up to establish residence in the state for a period of time. Regional cooperation on the matter is complicated by the question of which region should reap the benefits. In addition, elected leaders typically want to see some return on their investment quickly, to show good stewardship of taxpayer dollars.
“The amount of time it takes to be able to point to success when you’re investing really early in companies just isn’t fast enough for the political cycle,” said Rick Gordon, who managed Mach37 until June. “For accelerators who are founded in a political environment it’s just really hard . . . the fact that they were able to do it as long as they did was an incredible success.”
Gordon tried to buy the incubator himself over the summer but the deal fell through. He said the relatively low management fees that the incubator would get from its start-up investments was not enough to cover the cost of operations. Mach37 netted partnerships with companies like General Dynamics and SAP NS2, a U.S. subsidiary of software giant SAP to try to make up the difference.
There are a few groups that have soldiered on, largely by watching their overhead costs and taking care not to spread themselves too thin.
The Northern Virginia Technology Council continues to be one of the region’s most successful trade organizations under the nearly 20-year leadership of Bobbie Kilberg, and has sought to partner with the region’s incubators rather than compete with them.
“We do partner with incubators and accelerators, and consider them resources that help to enrich our technology ecosystem,” Kilberg said in an email.