Despite Obstacles, DC is a Hotbed for Innovation

October 17, 2014

Washington, DC is now one of America's leading laboratories of innovation. Our federal city has more opportunity for growth than ever before. How did it get there? What's the city doing right and how can it do better? What can other cities learn from the District of Columbia's example? It's time we take a peak inside Washington.

That's why 1776, DC's own startup incubator, recently held a series of off-the-record conversations with leaders from every corner of the city. A particular focus was made on the industries that directly improve our lives—energy, education, healthcare, and smart cities. What they had to say was revealing.

The bottom line: Washington's startup economy has massive potential, the evidence of which should be clear right now. This is encouraging news because startups generate dynamism in the broader city economy, which helps spur growth in jobs and GDP while also acting as a magnet for human and financial capital. 

In the eyes of participants, innovation is everywhere and DC is now competing everywhere. That makes the startup economy (and the general ecosystem around it) more important than ever. As one local businessman put it rather whimsically, "Entrepreneurs are the bread and butter for our community. We're toast without them." 

While DC's economy is doing better than that of most cities, it's not nearly as good as the best startup economies. There's still a lot of work ahead. Looking into that future, making DC into another Silicon Valley isn't really the goal. It's not going to be about making DC into a tech city, but helping keep it an innovation city. 

What does DC have going for it? Five strengths stood out from the day's discussion: culture, agglomeration, ecosystems, capital, and talent.

 

DC's Culture is an Asset

If you want to know what's meant by culture, look no further than a few blocks north of 1776's offices in downtown. Past the squared-off buildings and faceless eateries, you suddenly emerge onto broad avenues of hip loft apartments and throngs of organic twenty-somethings. New cafes and markets seem to spring up weekly, and few of them appear to suffer from DC's past reputation for staidness. No, this is the "it" factor in spades. DC is proving more livable than ever. 

The result of this rise in culture is an attractiveness to young creative types, or what Richard Florida called the "Creative Class." It's not without cause then that DC now attracts 1,100 new net residents every month (a figure that could arguably be higher if DC's housing supply kept up with demand). 

As many of the participants made clear, the agglomeration of talent into DC is helping the city finally meet the great expectations of the early 90s, when a startup culture first began bubbling up from the Internet's founding in a smattering of Defense Department projects in northern Virginia. (Fun fact: DC basically owned the Internet for years before Silicon Valley took over.) Now we're reaching a threshold where DC's abundance of talent is being met by the institutions necessary to sustain its growth, and being linked together in ways that sustain innovation. 

The result is that a small number of local firms have become phenomenal successes, pouring talent and resources back into the local economy. Groups like 1776 and General Assembly are now coming alongside some of the key innovators. 

Sure, DC's "win" column may not be as impressive as Silicon Valley's, but DC has nearly as much local experience to draw on. It just looks different. That coder may have worked on a defense contract instead of tweaking the latest social app. The project leader working at one of 1776's treadmill desks likely first cut her teeth at a big multinational. 

 

The Role of Big Institutions

Big companies and the federal government tend to be the key players in DC, and this helps supply a steady presence of customers and cash. Some firms, like Microsoft, provide local venture funding. They also broker connections, seed talent, foster mentorships, and more. That's in addition to simply serving as a buyer of what these startups are selling (or of the startups themselves, as RideScout recently saw with Daimler.)

The federal government is clearly the biggest player in DC—there's no way to avoid its monumental structures or teeming workforce in the city. Even if that local weight were cut thanks to budgetary squabbles, the federal government is still more stable than any startup (ever). 

These federal institutions often have a say over the industries in which DC's startups are operating. If entrepreneurs were looking to access and inform government, this is the place to do it. As Evan Burfield, 1776's co-founder, has pointed out, "Many of the most important challenges facing our world sit squarely in the middle of some of our most highly regulated sectors." Successfully changing or circumventing the government's byzantine regulatory structure could promise rich rewards, perhaps even on the dominating scale that would make the Peter Thiels of the world happy.

 

Rising Capital In DC

Speaking of rewards, let's talk capital, too. DC can chalk up another win for its access to financing at scales both large and small. Many participants throughout the day noted that there's been a significant rise in early stage angel and seed investing. Those resources flow to the roughly 98% of local startups that are just getting off the ground and looking for the right product market fit. That's given space for ideas to flourish in DC.

Venture capital (VC) firms are also sprouting up to a height not seen since the dot-com era. These firms direct their resources to the much smaller share of startups that are needing tens of millions of dollars to fund rapid, near-exponential growth. Unfortunately, some local participants stated that the number of VC firms doesn't appear yet to have resulted in an equal rise in the amount of funding available. Thankfully, capital is biased but not hindered by geography. If a DC startup has a good idea, it will get funding in DC and beyond and not be limited by its location, which is really what matters.

Last but not least, Washington, DC, enjoys what is perhaps America's best talent base, full stop. Something like 65% of DC's metro area residents boasts a bachelor's degree or higher  The closest competitors (and they're not even that close) among America's large cities are, unsurprisingly, San Francisco and Boston. 

This base of intellectual capital has a few other things going for it. For one thing, and in a way that's rather hard to quantify but is impossible to miss, DC simply has a lot of go-getters. They aren't content sitting still or meandering through their careers. This seems like a particularly useful trait in light of the often brutally long hours necessary to get a new company off the ground. 

Many startups also exhibited a strong belief in the value of effecting social good through their work. They wanted to improve the lives of their fellow citizens. This spirit was clear in the startups around the table at 1776; they were tackling everything from excess waste to powering clean water supplies. In short, the spirit of DC translated into small business working for good.

 

It's Still Not Easy in the District

What then are the downsides to doing business in DC?

An entrepreneur these days must navigate both the far-flung offices of local administration as well as the "deep state" of fixers and brokers who know the government inside and out. Every roundtable without exception voiced a frustration with the level of effort required in understanding just what procedures they must follow and who holds sway over which department. Of course, if there's a tarnished silver lining, it's that in our regulated age making it in DC means you can make it anywhere. 

DC's regulatory environment is poor, that much was clear. For one thing, the processes are hard and the costs high for gaining basic business licenses and permits. These sentiments echoed the Chamber Foundation's own findings from its Regulatory Climate Index, which described an urban America full of opportunity but still weighed down by needlessly inefficient red tape. While the city has a few select staff to help out, they were talked about in the same way one would describe a rare bird.

Or take real estate. Not only is it expensive to rent space in DC -- let alone find it at all -- it's an inflexible process for fast-growing companies that often need to keep shifting locations. One startup leader described spending the last few years personally going to the DC city government every few months to change the address on the company's permit. She believes that if DC was the first city in which her company launched, it wouldn't exist today due to the city's onerous regulations.

Moreover, startups believed that the city government in practice misunderstood them at best and was hostile at worst. I say "in practice" because in person, many of the startup leaders  seemed to hold those few in government they knew personally in high regard, which is why DC officials called for more effort on both sides directed toward building strong relationships. Without a foundation of trust, new technologies or new faces are going to be approached by government with caution rather than permissiveness.

One participant noted that "If you're early to market in San Francisco, that's great. But if you're early to market in DC, you're dead," and went on to cite the stories of the first food truck adopters. While the situation on the ground for these trucks appears to have improved, the memories remain fresh.

 

Incentives and Tax Breaks Are Nice, But...

When it came to the government incentivizing new startups in DC, the businesses around the table placed less weight on incentives and tax breaks than on freeing up the business environment in general: reducing barriers to innovation, establishing certainty, and then getting out of the way. While both groups clearly cared for startups to flourish, both sides seemed to do well in keeping the lines of dialogue open on what they each see as their core interests.

Quite simply, it came down to building social capital.

What makes DC special are its people. They build companies. They help the disadvantaged. They foster community. They see the city as a teeming laboratory. And it's for these reasons too that Washington's startup environment stands out in a nation bursting with competitor cities.

What will strengthen DC's startup economy going forward then is really a question of how to best invest in its people. Attract and retain the best and brightest. Reduce the barriers to entrepreneurship. Let people run with their ideas and make available the resources to make them to come to life. All of this activity creates space in which DC's wealth of resources can thrive.

For how deeply cities like Washington, DC are woven into the fabric of America, it's with their people we can see, to use 1776's motto, where revolutions begin.