A recent flurry of initial public offerings and private investments in businesses is helping local start-up companies scale up. Kojo examines the entrepreneurial ecosystem in the Washington region and the growing tech hub located in and around the District of Columbia.

Guests

  • Mark Ein Owner, The Washington Kastles
  • Bill Flook Staff Reporter, Washington Business Journal

Transcript

  • 13:33:58

    MR. KOJO NNAMDIEven with a sequester and government shutdown and a lingering recession, venture capitalists are bullish on business in the Washington region. A new report says venture capital flowed to local companies at a record clip this summer, close to half a billion dollars in the third quarter of the year. That's the highest total since the pre-recession end of 2007, and pushes the region past the $1 billion mark for venture capital this year.

  • 13:34:23

    MR. KOJO NNAMDIHalf of that money went to spur growth at three local companies that deal in health systems consulting, analytics and crowd services. A number of other companies pulled in substantial amounts as well. The venture capital boom is good news for the D.C. region, both for young companies in the suburbs looking to propel themselves to the next level and for a hopeful wave of text start-ups based in D.C. Joining me to look at the entrepreneurial culture in Washington is Mark Ein. He's an investor and entrepreneur. He's also owner of the Washington Kastles World Team Tennis Team. Mark Ein, good to see you again.

  • 13:34:58

    MR. MARK EINThanks for having me.

  • 13:34:59

    NNAMDIAlso in studio with us is Bill Flook. He's a staff reporter with the Washington business journal. Bill Flook, thank you for joining us.

  • 13:35:05

    MR. BILL FLOOKGlad to be here.

  • 13:35:06

    NNAMDIBill, what are a few of the companies that led the list of venture capital recipients this year? Is there a pattern or an industry that stands out?

  • 13:35:13

    FLOOKWell, what really drives these numbers are the big deals, these big sort of private equity-like deals. The big ones this last quarter were Evolent Health. That's a health systems consultancy in Arlington, and Clarabridge. That's a data analytics company out in the Dulles quarter. Those together counted for about 180 million of that almost 450 million we're talking about here.

  • 13:35:37

    NNAMDIWho else?

  • 13:35:38

    FLOOKYou know, some infrastructure companies. A company called Virtustream that does sort of the cloud infrastructure that other companies host their applications on. We had a couple smaller deals. You know, a company called EdgeConneX raised -- reported about 33 million, absolutely won't talk about it, which is kind of rare. But mostly this is driven by these sort of eight-figure deals.

  • 13:36:01

    NNAMDIMark, let's look at the different waves of technology start-ups in our region. How does the current generation of entrepreneurs differ from those who set up shop here during the tech boom say of the late '90s?

  • 13:36:11

    EINYeah, I think that's a really interesting topic because in tech boom 1.0 at the end of the 1990s and beginning of 2000, the real emphasis around the world and around the country was on tech infrastructure. So it was much more about building the core infrastructure that would then carry the applications in the pipe. So it was telecom infrastructure, a little bit of wireless infrastructure.

  • 13:36:35

    EINAnd so in this region, companies like MCI and UUNET and Nextel were the companies that were growing. And interestingly, the people who work in those companies, they're really engineering-driven, telecom-equipment driven. Those kind of people like to be in a more orderly suburban environment. And so northern Virginia was really where you saw the big explosion of those kind of companies.

  • 13:37:00

    EINTech boom 2.0, the one we're in the middle of, is much more about the applications. The people who drive those companies are much more what's called the creative class, people who would prefer to be in an urban environment. And that's what you're seeing. You're seeing that a lot of the growth now, while it is spread around the region a lot more, is centered in Washington, D.C. itself. It's drawn people from all over the countries. Millenials from all over the world and the country are moving to Washington, D.C. to come start and work in these companies.

  • 13:37:28

    NNAMDIMark Ein is an investor, entrepreneur and owner of the Washington Kastles World Team Tennis Team. He joins us in studio to talk about D.C.'s entrepreneurial ecosystem with Bill Flook, staff reporter for Washington Business Journal. We're taking your calls at 800-433-8850. What local startup to you think will be the next super store, 800-433-8850? Or you can send email to kojo@wamu.org.

  • 13:37:53

    NNAMDIHow has the recession affected the start-up sector in our area? It seems that there are a lot of companies doing public and attracting investment in spite of the nation's economic slowdown. I'll start with you this time, Mark.

  • 13:38:06

    EINYeah, I mean, it's pretty clear we're in the middle of a tech boom around the country, around the world. And the stock market, despite maybe what's happening more generally economically, is obviously performing great. A lot of that is interest rates stay very low so people are looking to earn returns. But we're also in the middle of a very transformative time in the world. And so the rise of things like mobile applications and the entire mobile ecosystem are driving a huge amount of value creation. And people want to participate in that. And so from seed stage all the way to IPO stage, there's a good amount of capital looking for the right opportunities.

  • 13:38:43

    NNAMDIBill, despite the economic slowdown?

  • 13:38:44

    FLOOKYeah, I mean, despite sequestration, despite the shutdown talks, despite the default fears, all of these fundings and some recent IPOs too in Maryland, all these seem to be happening kind of ignoring what's going on with the federal government. They seem to be on their own parallel track. And part of that is, you know, a lot of these companies are not necessarily dependent on federal spending. They're dependent on, you know, the economy at large but they're not -- these are not the contractors that you typically think of in Washington, D.C.

  • 13:39:16

    FLOOKAnd they seem to be ignoring, or at least moving ahead in spite of what's been going on.

  • 13:39:23

    NNAMDIGo ahead, Mark.

  • 13:39:24

    EINI just wanted to say that one of the things you can't ignore is that a lot of these new companies aren't just expanding the pie, but they're taking away from traditional companies. So I've seen media as a space that we all know. You know, the online advertising space is not just growing exponentially but it's taken away from traditional media. And so no matter what's happening in the macro economy, this shift from one type of company, one type of business to another, one platform to another is one that's going to happen regardless of what's happening more broadly.

  • 13:39:52

    NNAMDIWell, a lot of companies that started in this area have made it big and they had early ties to the government. Now many of the entrepreneurs are people who have already worked in a successful startup and are forging out on their own with something new. Talk about some of the companies that exemplify that kind of shift.

  • 13:40:10

    EINYeah. And that's super -- that's incredibly important because to really create a vibrant entrepreneurial ecosystem, you need these sort of iconic benchmark companies to break through to become extremely successful to where the people who work there and the investors do very well. They make a good amount of money and then they reinvest, and the people who work in them go start the next wave, and if you look at Silicon Valley, it's obviously the greatest example of that and that's in -- in the first wave we saw that with infrastructure companies that did successfully, and then people would start the next ones.

  • 13:40:44

    EINAnd hopefully we're seeing a bit of that here. So just a couple of examples, Bill mentioned Clarabridge. Sid Banerjee who started that used to work at Microstrategy. So that's one example of sort of a second generation entrepreneur. You can look on the investor side, Revolution, which has really now become the hottest and one of the biggest investors in these companies in the Washington region was started by Steve Case and Ted Leonsis and Donn Davis all out of AOL.

  • 13:41:12

    EINAnother company that recently announced a fundraising Vox Media is Jim Bankoff who had been at AOL, and I think these examples just prove the point that for an ecosystem to really grow and become all it can be, you need a couple really great companies to break through become big successes, and then they can spawn a lot of other success behind them.

  • 13:41:31

    NNAMDIBill, a year ago the DC Council voted to enhance the package of financial incentives for tech starters, but it failed to pass an Angel Investor Tax Credit that Mayor Vincent Gray wanted. Can you explain the incentives DC has in place to attract tech companies?

  • 13:41:47

    FLOOKOne thing they did while not passing the angel investor incentives with expand citywide some of the patchwork of various tax breaks that they allow for startups and the argument that they have is, well, Virginia especially has a much more robust system of tax breaks that they've carved out both for tech investors and for tech entrepreneurs. But that wasn't enough to get the angel investor credit, or the angel investor breakthrough.

  • 13:42:18

    NNAMDIOn now to the phones. Here is Andrew in Washington DC. Andrew, you're on the air. Go ahead, please.

  • 13:42:25

    ANDREWThank you, Kojo. I've got a small startup and I'm actually right outside of DC in Maryland, and we do a very specific mobile web application. And I've had a lot of trouble finding seed funding in the DC area, and I'm wondering if the guest has any tips on how to find those angels and the investor -- you mentioned Revolution as one of the -- I don't know if it's an angel group or BT group, but you know, even after kind of draining the friends and family connections and all the rest of those, it's often been found, even though we have, you know, validated (unintelligible) at least connecting with those angels. I wonder if you have any tips for that.

  • 13:43:12

    NNAMDIYou know, I'm glad you raised that question because, Mark Ein, you like to point out that overnight successes happen after 10 or 15 years.

  • 13:43:22

    EINYeah. That expression, it took 15 years to become an overnight success, rings of the ears of everyone in this world over and over and again. So it -- look, it's a great point. It is one of the criticisms that people do have about this region. They feel where entrepreneurs sometimes raise this issue that they feel like there's not a vibrant enough angel investing community. I'd say that to the tax break question that you asked, this legislation actually went exactly to encouraging this. It was a capital gains tax break if you invested in startups in Washington DC and held onto them, so it was exactly targeted at creating incentives to do this.

  • 13:44:01

    EINYou know, I've been an investor in startups for a long time, and I'd say that, you know, unfortunately, there is no silver bullet for this. Raising startup capital is the first great test of an entrepreneur. Some people, because of prior success or relationships, have it easier than others, but I've also seen a bunch of companies that had a very difficult time that managed to find a way to scrape together whatever they could that ended up becoming some of the more successful companies.

  • 13:44:29

    EINIn fact one of the companies in our portfolio that from the tech wave 1.0 1999 has done the best was the one that struggled the most raising the money and I've asked entrepreneur why, and he said, you know, when everyone else could raise a lot of money, I couldn't, and so I was forced to build my business and get the money from my customers faster than others would because I didn't have the backing. And you see that. A lot of the great companies -- I mean, Microsoft was started with the customer. Microstrategy local was started by getting a customer.

  • 13:44:58

    EINNot every business lends itself to that, but sometimes you have to be very creative in how you go about finding that initial capital to get your business off the ground.

  • 13:45:07

    NNAMDIBill?

  • 13:45:08

    FLOOKAnd Mark, that's an excellent point, and a lot of what we're seeing now is companies that came through the dot com bust and were not able to raise a dime, managed to preserve, got revenues early instead of relying on venture capital, are now in a position to have big exits and own a lot more of their company that they would otherwise had they taken venture capital early. You know, ScienceLogic is a good example.

  • 13:45:29

    FLOOKI was talking to the CEO, Dave Link. He, you know, that company was founded in 2003 when no one was handing out any venture capital, and they managed to -- got into the DNA of their company, they managed to become profitable, get customers, and rely on that instead of outside capital. Now they're in a position to go public, and they're positioned to make a lot of money for the founders.

  • 13:45:50

    NNAMDIAndrew, that might be the advice that you want to listen to. We've got to take a short break, but if you'd like to join the conversation, give us a call at 800-433-8850. What do you think makes the Washington region a good place for startups? What should the District do to attract and especially keep more tech startups? 800-433-8850. You can send email to kojo@wamu.org. I'm Kojo Nnamdi.

  • 13:48:06

    NNAMDIWelcome back. We're having a conversation about DC's entrepreneurial ecosystem with Bill Flook. He's a staff reporter with the Washington Business Journal. He joins us in studio along with Mark Ein who is an investor and entrepreneur. He's also the owner of the Washington Kastles world team tennis team. We're taking your calls at 800-433-8850. DC is enjoying its status as a hot place to work and live, especially for young techies. What will the District need to do to keep tech startup companies from moving out of the city as they grow, Mark Ein?

  • 13:48:38

    EINYeah. And this is something I've given a lot of thought to over the last couple years, and I think the city, as you said, has become a hotbed for startups. When you look over the last 20 years, actually DC has always been a really good for companies to start. The challenge has been keeping them here. So some of the more iconic companies in our region, like Nextel, MCI, Freeman Billings Ramsey, Cvent, were all started in Washington, and they hit a certain point and invariably basically almost all of them moved out.

  • 13:49:10

    EINAnd when you study it, there's really a variety of factors that have created that problem. One is just it's more expensive, so some companies move for that. Some people move because they thought their employee base was maybe getting older, or wanted to be out where there were other school systems, but then there are things more in the control of the city. One of the things that fascinated me, when I asked companies over the last 20 years -- literally went back 20 years to MCI, you got a consistent response they felt like the city didn't care.

  • 13:49:39

    EINAnd they felt like when they would go to Northern Virginia the government there would woo them. They'd really shepherd them through whatever process they needed, and the District government didn't care. I would say that our city government over the last three years has really take note of that and done an amazing job to reach out to the tech community to be a helpful hand to the community, and to celebrate the tech community, and I think they're doing really well with that.

  • 13:50:03

    EINAlso, traditionally, real estate's been harder to find, and I think that as some of the new merging neighborhoods have come into play in Washington, that's also become easier. So I think a lot of the lessons learned over the last 20 years have been learned by the government, and they're doing a lot to hopefully, as you said, not just create an environment where companies will start, but where they'll stay here for a long time.

  • 13:50:27

    NNAMDIBill?

  • 13:50:27

    FLOOKYou know, you talk -- there's so much energy flowing into and out of DC tech right now. I mean, there's -- it's gotten national attention, and it's easy to forget that it's still a rather small early stage community when you look at the tech startups within the city itself. I man, other than Living Social, there's not that many new startup companies that became big employers. Another major problem too is that you look at the last quarter, of that about $450 million raised in the region, only about seven percent of it went into the District.

  • 13:51:00

    FLOOKI mean, that's as much of a story as the old Dulles corridor being able to command a lot of fundraising than it is about the District coming up. So it's a problem of the maturity isn't there yet to -- it might be, but right now the big employers and a lot of the funding is still out in the corridor.

  • 13:51:21

    NNAMDIYou mentioned Living Social. Let's look at the gap between hype and success. Living Social got a lot of attention a couple of years ago and won tax breaks from the District to stay in the city, but now the company seems to be shrinking, not growing, and doesn't have enough employees to take advantage of the tax breaks. Was the city wrong to offer those tax breaks in the first place, Mark Ein?

  • 13:51:44

    EINNo. I don't think so. Because I think, as both Bill and I have said, I think it's absolutely critical if the city is going to remain a vibrant tech hub that you need to not just have companies start, but it needs to stay, and if the city doesn't help with that, they 're not going to be competitive and we're going to lose them. The city was very smart in that they created a requirement for Living Social to take advantage of those, and so it was one of those things that if the company continued on its path they were going to get the tax breaks, but the District would get the benefit of the employment that they were looking for, and if they didn't meet their growth plans, then they wouldn't get the breaks and that's in fact what happened.

  • 13:52:22

    EINBut I -- I would also just say that, again, back to it takes 15 years to become an overnight success, you also, you know, success in the tech world is not a straight line, and things go up and down and companies have good times and bad times, and the stories are legion for any of the great companies. You can look at Apple Computer and where it was and then what -- how low it sank and where it is now, and it just -- that's what happens. And so I'd tell -- say -- I'd be careful not to judge a company at any single point in time, but actually what happens over a longer period.

  • 13:52:53

    NNAMDIBio tech can have an even longer timeline than Internet tech, Bill. What does that mean for investors of the local economy?

  • 13:53:00

    FLOOKWell, we also have -- and these are two separate communities, the sort of information technology software community on one hand, and the bio tech community mostly based out in Maryland along the I-270 corridor. Those are -- they're different animals. Bio techs require massive amounts of funding to get to pill number one. They require much more well-heeled investors than you would for you say, you know, a seed stage software startup. But what we're seeing now is a tremendous, sort of unprecedented IPO boom out in Maryland.

  • 13:53:33

    FLOOKYou know, two bio techs have gone public in recent months, which is very rare, and another one's on its way. This would be after a drought of years of no biotech IPOs. And what these are, are basically funding events to push their clinical trials through to fruition, and these are basically -- this is something that's happening across the country right now.

  • 13:53:54

    NNAMDIOn to the telephones. Here's Janna in Washington DC. Janna, you're on the air. Go ahead, please.

  • 13:54:00

    JANNAYes. I just wanted -- I think it would be helpful for your listeners if your panelists might mention some of the organizations that do exist. There's the Mid-Atlantic Venture Association. There's a group of angel investors, I believe it's NewVantage, and so there are opportunities, and you can research these to some extent online.

  • 13:54:27

    NNAMDIOkay.

  • 13:54:29

    JANNAThat's all I wanted to say. Thank you.

  • 13:54:30

    NNAMDIThank you for mentioning that. And we got an email from Roger who said, "Your listeners may be interested in the Startup Weekend program backed by the Kauffman Foundation. Washington DC will be host to one of the events in November. Venture capitalists and angel investors typically attend." So thank you both for mentioning that. Some people are comparing Washington to Austin, Texas and other places with a strong community of tech companies, but we haven't had a big breakout success story since America Online. What will it take for the Washington region to become a bonafide tech hub, Mark?

  • 13:55:05

    EINWell, it takes those breakout successes is what it takes. The good news is that there have been a lot more startups. There's a lot of activity at that stage. Bill identified a lot of companies that have now graduated to where they're getting expansion capital. Companies are going public, and it takes time. And I think for the ecosystem to really be vibrant, sustainable, and grow meaningfully over the long term, you do need those breakout successes, but you gotta walk before you run, and the good news is we have a lot of seedlings and a lot of trees that are growing, and hopefully a few of them will blossom into the kind of big breakthrough successes that we both hope for and need.

  • 13:55:47

    NNAMDIBill Flook, how are tech incubators like the one called 1776 and a new one called Idea Space helping to nurture small tech startups in the District?

  • 13:55:58

    FLOOK1776 is -- basically within the span of a year it became the center of attention for the DC tech community, before there was no one single area where you could say, bring a traveling dignitary or bring a tech executive if you just wanted to meet a good sampling of startups. There was really no big obvious space. I think the story on 1776 is not yet written because it is so new. There's a bit of hyperbole built up around it, and there's also a bit of probably overheated criticism built up around it at the same time.

  • 13:56:30

    FLOOKWe have a cover story on it coming up on Friday where we explore some of these things. But, you know, it's certainly indicative of the energy right now that is surrounding startups in the District, especially in the very early stage. The idea that DC can become more than it is right now.

  • 13:56:46

    NNAMDIMark, we've talked with you in the past about tennis and your Washington Kastles team, but I cannot let you go without asking about soccer. What's your role in the Buzzard Point property that the city is eyeing to build a soccer stadium for DC United?

  • 13:57:00

    EINSo I own a piece of land and have an option on another piece of land that I think is center field for where they hope to build the stadium. That said, I have not really been personally a driver of this at all. People who've read it can follow it. It's really been the city and the (word?) companies have been driving this more. So I'm more a follower than a leader in this, and so, you know, I think the city hopes that we can find a way to work together as they have with (word?) where they can secure the land and the idea is that the owners of the team would put in the money to build the stadium.

  • 13:57:36

    EINI think that part of town is an amazing part of town. That's Pacific Point is a great point. I think this a very interesting potential application.

  • 13:57:47

    NNAMDIAnd it's one of the factors including the Washington Kastles that its attracting businesses here to Washington DC. Mark Ein is the owner of the Washington Kastles world team tennis team. He's also an investor and entrepreneur. Good to see you again, Mark. Thank you for very nice.

  • 13:57:59

    EINThat's very nice. Thank you.

  • 13:58:01

    NNAMDIBill Flook is a staff reporter with the Washington Business Journal. Bill, thank you for joining us.

  • 13:58:05

    FLOOKThank you.

  • 13:58:05

    NNAMDIAnd thank you all for listening. I'm Kojo Nnamdi.

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