MR. KOJO NNAMDIFrom WAMU 88.5 at American University in Washington, welcome to "The Kojo Nnamdi Show," connecting your neighborhood with the world. Later in the broadcast, what's not working out at the Corcoran and why it might leave the city, but, first, it's the Holy Grail for a city aiming to develop its tech sector, a homegrown startup skyrocketing to success. In just five years, D.C.'s own LivingSocial has grown into a big fish in the tech pond.

MR. KOJO NNAMDIIf you're not familiar with how it works, LivingSocial offers discount coupons online for local restaurants, services and products. It's now in 20 countries, but the District wants to make sure its headquarters stay local and is offering a tax deal worth more than $30 million to keep LivingSocial here. Critics say it's potentially a giveaway with no guarantees. Others say it's key to nurturing and developing a local tech industry.

MR. KOJO NNAMDIThe debate won't end with LivingSocial. The D.C. Council votes tomorrow on a range of tax goodies for tech companies and investors, and joining us in studio to discuss it is David Zipper. He is the District's director of business development and outreach in the Office of the Deputy Mayor for Planning and Economic Development. David Zipper, thank you for joining us.

MR. DAVID ZIPPERThanks for having me.

NNAMDIAlso with us in studio is DJ Saul. He is the chief marketing officer of iStrategy Labs. He's also a co-organizer of the D.C. Tech Meetup and D.C. ambassador to the global entrepreneur network Sandbox. DJ Saul, thank you for joining us.

MR. DJ SAULThank you, Kojo.

NNAMDIEd Lazere is here. He is the executive director of the D.C. Fiscal Policy Institute. Ed, good to see you again.

MR. ED LAZEREGood to see you too, Kojo.

NNAMDIYou can join the conversation if you have questions or comments. Do you think tax breaks for businesses ultimately pay off by bringing revenue to a city? What do you think of the $32 million tax deal that the District is offering LivingSocial to stay in D.C.? 800-433-8850. You can send us a tweet, @kojoshow, email to kojo@wamu.org, or simply go to our website, kojoshow.org. Join the conversation there.

NNAMDIDJ Saul, I'll start with you. You are something of an ambassador for a network of international technology investors, and part of your role is traveling around the world, events and conferences to talk about the D.C. tech scene. D.C. may not be the first place people associate with a tech industry, so what, in fact, do you say to people?

SAULThat's exactly right. And, you know, a part of me always gets a twinge of disappointment when I hear people in, you know, Tel Aviv or Zurich or even in the U.S. here in New York, Austin, San Francisco, talk about their own tech communities with such enthusiasm and excitement and vigor. And D.C. is, you know, starting to enter into that conversation but, in my opinion, you know, not readily enough. So, you know, when I'm out there domestically or around the world and I'm talking about the D.C. tech scene, a lot of it is about the growth, especially in the last couple of years.

SAULAnd almost every time LivingSocial is mentioned very, very early in my -- in that conversation, one, as you mentioned in the opening, the rapid rise. On the other hand, I talk a lot about the PayPal ecosystem that spun out of the early investors and founders and employees of PayPal and what that did for the San Francisco and Silicon Valley, what that did for that scene and how that absolutely could apply to Washington, D.C. and is already starting to, so a lot of excitement around that.

NNAMDIYou mentioned LivingSocial. As this discussion gets underway, full disclosure here, it's my understanding that your company is competing for a business grant sponsored by LivingSocial and Chase Bank, correct?

SAULOne of thousands of small businesses. It's called Mission: Small Business. It was launched and announced a couple of months ago. Voting just wrapped up. So if you're a small business over the last couple of months, you were able to apply for this. Basically, explicate a business plan not unlike your current business but a new product you might be working on or a new opportunity you're going after and it's a quarter million dollars. Up to eight of them will get funded.

SAULAnd again, as you mentioned, this is Chase and LivingSocial together supporting small business. I personally know upwards of 20 to 25 companies just here in the District of Columbia that are going for it, which is very exciting. And I can only imagine the thousands of applicants they got.

NNAMDIWhat would you say are the biggest hurdles for tech startups here in the District?

SAULAbsolutely, it would come down to, I think, three core things: talent, capital and real estate. All of those could be their own half-an-hour or hour-long show. I think that's -- when it comes to talent, we talk a lot about density and a solution to that problem coming merely from getting smart talent and young talent in the same physical location, whether we're talking about a building or a municipality, a city.

SAULSo when you think about, you know, a designer and a developer who are well-versed in Web technology, getting them together with a good idea and a budding entrepreneur, you can create a startup for an incredibly low amount of money, especially comparatively to the last decade. So when you think about talent, D.C. has -- is a very exciting conversation.

SAULWhen it comes to capital, again, you can think about the venture capital community and the angel community, and that's where we have this interesting problem of regionalism, problem and potential solution of regionalism when you have angel investors clustering in Northern Virginia and Maryland and not so much in D.C.

NNAMDIWhat's an angel investor?

SAULAn angel investor is a class of investor, typically high net-worth individuals who are writing checks to early-stage companies, so maybe 10, 20, $50,000, upwards of, say, a quarter million dollars-plus as opposed to an institutional venture capitalist who's writing, you know, half a million to five, 10, sometimes more.

NNAMDII'm excluded. David, the mayor introduced two bills related to tech companies, and both are before the council tomorrow. Let's start with the Technology Sector Enhancement Act. Can you talk about that?

ZIPPERAbsolutely. The Technology Enhancement Act is really meant to address several of the issues that DJ spoke about. And I should mention, first of all, taking a quick step back, that the District -- from the District's perspective here in the mayor's office, it's only been the last 18 months that we've really engaged the tech sector for the first time. Mayor Gray allocated a staff person for the first time ever in the mayor's office, Jennifer Boss, who works with me to focus exclusively on the tech sector.

ZIPPERAnd the last 18 months, we've been able to make some headway, bringing Fortify.vc, which is the first tech accelerator in the region into the District. And we met with well over 100 tech companies -- the mayor, deputy mayor and Jen and myself -- and the feedback we got is very much in line with what DJ was saying in terms of what the needs are. LivingSocial addresses some of the -- the LivingSocial bill addresses some of those, which we can talk about later.

NNAMDIYeah.

ZIPPERBut the Technology Enhancement Act, specifically, there's several changes within it. First of all, there's a program in the city called D.C. Tech Incentives. They provide a suit of incentives for tech companies here in the city, including a hiring credit, a corporate income tax credit or tax abatement, I should say, things like that. And we want to make sure that program is available citywide rather than in a gerrymandered geography that exists today.

ZIPPERThat's within the bill. We also are changing an area -- basically a timing problem that exists for startups today because that bill -- they created -- the D.C. tech incentives program was actually created 10 years ago, and it's a very different tech sector today with people like DJ really being front and center as opposed to the IT consultants and contractors who are the crux of the tech sector here in D.C. a decade ago.

ZIPPERAnd the third piece of the bill, the Technology Enhancement Act, is designed to create more angel investors in the city, help address that capital problem that DJ referred to by creating a 3 percent capital gains rate for D.C. residents who invest in local tech companies and hold that asset for at least two years. So it will just make it easier to raise money for tech companies and encourage District residents who might otherwise invest in -- I don't know -- real estate or mutual funds instead invest in a tech sector -- the tech sector right here in the city.

NNAMDIIn case you're just joining us, that's the voice of David Zipper. He's the District's director of business development and outreach in the Office of the Deputy Mayor for Planning and Economic Development. He joins us for a conversation on incentives for tech companies in the District in general and a deal with the company LivingSocial in particular. Also with us is DJ Saul. He is the chief marketing officer of iStrategy Labs.

NNAMDIHe's also a co-organizer of the D.C. Tech Meetup and D.C. ambassador to the global entrepreneur network Sandbox. Ed Lazere is with us. He's the executive director of the D.C. Fiscal Policy Institute. Ed, how does the District compare to Maryland and Virginia in terms of tax incentives for tech companies?

LAZEREOh, I think we're actually pretty generous, Kojo. The bill that David Zipper was just talking about it offers a really rich set of benefits, including five years of no corporate income taxes and then permanently after that paying corporate income taxes at the Virginia rate, taxes to relocate employees to the District, taxes on equipment are abated as well. It's a very generous set of incentives.

LAZEREAnd I actually think that's part of the problem is that we're focused too much on taxes as a way to encourage the tech sector not other issues. I'm really encouraged that the mayor is pursuing the technology industry and that we have seen some early successes with federal government. With a future that's uncertain in its size, diversifying our economy makes a lot of sense. But there's just lots of research that shows and a lot of natural skepticism out there as well that tax breaks aren't the thing that attract companies.

LAZEREWhat attracts companies are, as DJ said, having a talent pool, and D.C. is a magnet for college graduates already. So that makes us an exciting city. We've already put lots of investments into downtown with housing and retail and the Verizon Center that makes this a more exciting city. You've heard LivingSocial say we want to be in D.C. D.C. is in our DNA. Our employees don't even have cars.

LAZERESo we've created a climate that is attractive to the tech sector, and that's the right approach, not the tax side, because the tax side more often than not is rewarding companies that would get benefits -- that would be here anyway. The taxes are unlikely to make a big different to what the research generally shows.

NNAMDISo you don't think that special tax deals are necessary to attract and keep tech industries?

LAZEREWell, let's look at LivingSocial, where we did in fact think there was reasonable given the presence of LivingSocial and its prominence, we knew there was going to be some support for some deal, and so we didn't push hard against it. But what the city offered them is about 30 million over probably five to 10 years, so three to $6 million a year. Last year, LivingSocial lost in the hundreds of millions of dollars, and when they go and flip to be successful, they're going to make hundreds of millions of dollars a year.

LAZEREIt's really hard to see how five to $6 million a year for five years, which is big money in terms of loss to the city, how that really made the different for LivingSocial staying here or not. It's pretty clear they wanted to stay here already.

NNAMDITwo questions about, David -- about that, David Zipper, one, why is it necessary to offer one particular company a different deal, and, two, can you tell us more about the terms of the specific deal?

ZIPPERYeah, happy to. Absolutely. So LivingSocial, for some context for your listeners outside, it's a company that was founded only four years ago here in the District with -- they had four employees four years ago. It's a hungry machine. Today, it has 5,000, headquartered right here in Washington, 5,000 employees worldwide, 1,000 here in the District. As DJ mentioned before, it's really our flagship.

ZIPPERIt's the company that resonates in Tel Aviv, in Zurich, wherever you go. It's really our flagship tech company, and they actually have, you know, there's this issue of preparing people to enter into the tech sector. They have a training program to bring people into the city, called Hungry Academy. They're really the standard bearer of the tech sector. They -- and they have plans to create -- actually expand from 1,000 employees here in the city to 2,000 employees within five years.

ZIPPERAnd we expect another 700 jobs to be created on top of that 1,000 through construction and through multiplier benefits as those new employees are spending money and living in the city. So for -- this was really an exceptional opportunity and one that -- to create jobs, we felt we absolutely have to respond to. And with all due respect to Ed, I think he's really mistaken in terms of whether LivingSocial is thinking about leaving the city.

ZIPPERThey retained Jones Lang LaSalle, international real estate firm, looking not just at their -- look at expanding in the region but actually looking at other parts of the country -- Seattle, Austin, New York -- and, you know, there's examples. DJ and I were talking about before the show began of other tech companies that have left, not left the region but actually -- not left the city, I should say, but leaving the entire region.

ZIPPERWe want to make sure that didn't happen, and that's why we've introduced this bill that we can talk to that actually doesn't provide a single dollar of grants. It actually elongates the time period when LivingSocial can claim several credits that are already part of the D.C. tech incentives program.

SAULYou know, Kojo, there's a lot of frustration out there, I think, among residents and even among other businesses when one company gets such a large tax break. You know, small businesses that are struggling are wondering, why does LivingSocial get to go without paying any taxes while I have to pay my taxes in full? And I think that's a very legitimate concern. Our position on LivingSocial was, if they're going to stay, let's argue that we're going to give them a tax subsidy to get something in return. When in reality, we didn't get that much out of the deal.

SAULThey are committed to staying in the city for 10 years under this deal, which is probably the best benefit from this tax break. But beyond that, they're not really expected to expand your -- David says they're going to grow to 2,000 employees. But the reality is they're at 1,000 right now, and the legislation the council is about to pass allows them to basically claim most of the tax benefits staying right where they are.

SAULIt would've been better, we think, for the legislation to say, well, we want some of those new employees that you're going to hire worldwide to be here in the city if we're going to give you a tax break in return. And we didn't get that. We didn't really get any growth in LivingSocial out of the deal.

NNAMDI800-433-8850 is the number to call if you'd like to join this conversation. Do you think cities and state should lure businesses with tax breaks, especially big tax breaks? 800-433-8850. Of course, big depends whom you're talking to. You can also send email to kojo@wamu.org, send us a tweet, @kojoshow, or go to our website, kojoshow.org. The effort is in terms of the deal with LivingSocial to keep it from relocating. Ken in Washington, D.C., has a question. I'm pretty sure this is Ken Archer who wrote a piece on this in the -- on Greater Greater Washington. Ken, you're on the air. Go ahead, please.

MR. KEN ARCHERYeah, thanks so much. Yeah, my questions are this. So last year, Sears hired a site relocation consultant to get relocation bids from every state and used that to get over $100 million from Chicago where they've been since 1890. Yes, Chicago only offered $3.5 million to retain Groupon. And so, first, I was wondering how do you know if a company like LivingSocial is bluffing or not, when they can, like Sears, present these bids from other states that then they have no intention of actually taking?

MR. KEN ARCHERAnd, second, I was curious if David had, in talking to LivingSocial, the negotiations appealed to that much smaller, more results-oriented subsidy that Chicago gave to Groupon, $3.5 million returned for 250 added jobs, as a precedent to help frame those negotiations so it wouldn't get up to this $32.5 million level.

NNAMDIDavid Zipper, how do you know whether they're not bluffing at poker or not?

ZIPPERWell, you never know. You know, you sort of have to make the decision whether you're going to negotiate with them in good faith or not, to start with. And LivingSocial made it very clear that -- we saw their numbers. We worked with them through it -- that they were going to pay hundreds of millions of dollars more to be in the District over the next 10 years than they would have to pay if they moved really outside the entire region. And it was just too great of a risk, you know?

ZIPPERIt's possible that, had we done nothing at all, they might have stayed, but they very likely might not. And I don't think that the city can afford that risk, and the mayor felt like it wasn't a risk we could take either. That said, you know, there was a point made earlier, which I think is a good one, which is that we don't know, like, I think, Ed made the point. LivingSocial lost money last year. I won't pretend to know if LivingSocial is going to make money next year or where it'll be in a few years.

ZIPPERSo as part of the deal -- and this was a very important part of the deal we worked out with him -- there's no money being given upfront. There's actually no benefit at all to LivingSocial until 2016. So if the business isn't around in 2016, or if it's not employing at least 1,000 people in D.C. at that point, they're not going to get any extension of credits, which are really what comprise the bulk of that $32.5 million that they're getting. So we try to protect D.C.'s interest in that way.

NNAMDIThe tech community has drafted a letter to the D.C. Council and the Deputy Mayor for Planning and Economic Development mentioned in an article in today's edition of The Washington Post. They say that the current legislation does not address some key issues for smaller tech companies and startups, like help leasing space, more support for startups and using District land as a startup incubator. You already addressed one of these points at least already, DJ Saul, so I'd like for you start. I'd like to go around the table on this.

SAULSure. Well, I would say that my answer would be very different a couple of years ago in terms of the relationship between the tech community and the mayor's office, for example, and the city. So I think David mentioned Fortify.vc who just opened an excellent office, co-working space, incubator of sorts. And they're also -- they're writing checks, Kojo. They're also funding multiple companies right in that space. I was there last week.

SAULThe energy that was in the space was very, very inspiring, and, again, I'm a person who travels around the world, meeting entrepreneurial ecosystems and ingratiating myself and really other excellent spaces. And I was proud. I was excited. I was just smiling the whole time I was walking through the office, and that would not have happened without an enhanced relationship with the city here in D.C., so...

NNAMDIWith that said?

SAULSay that again?

NNAMDIThat said.

SAULThat said, I think that there's a tremendous amount that can be done. I mean, this is an excellent start. I think that when I started, I mentioned what happened with PayPal after they went public, and their initial employees and founders went on to fund the likes of Facebook and LinkedIn and YouTube, SpaceX, Tesla, Palantir, so many more. I'm not promising that LivingSocial is going to go public, but, as David mentioned, the risk is too high if they were to leave. So I think that this is an excellent start and yet another relationship builder between the tech community and the District of Columbia.

NNAMDIEd Lazere, in addition to tax deals, as I said, the tech community is talking about help leasing space, more support for startups using District land as a startup incubator.

LAZEREWell, I think that's a perfect example of what I was trying to say at the beginning, is that tax incentives are a very blunt instrument. If you offer a tax break to any tech company who comes here, chances are eight out 10 would've been here anyway. So it's not a really a very efficient way to go. If you do target…

ZIPPERYou don't know that.

LAZEREWell, actually, we do know for most tax incentives that people who -- the businesses and residents who claim them are those who are likely to be here, anyway. We actually don't know who's claiming D.C.'s tax incentives now, so we have no real way to answer. We certainly would like to see that result. But that said, a more targeted investment like finding a place in the city where tech businesses can locate and helping those initial startup companies as opposed to a blanket tax break for companies that potentially will be here for a long, long time, I think that is a better approach.

LAZEREI also just want to, if I can, Kojo, talk about the other bill that's before the council tomorrow that would set this 3 percent capital gains rate. I just want to put it in context. Three percent capital gains tax rate is lower than the lowest income tax rate we charge for any D.C. worker, so lower than you and I pay on our paycheck, lower than a minimum wage worker pays. It's actually lower. It's about half of what the maximum tax rate is in Virginia.

LAZERESo we're saying to wealthy investors who are about to make a lot of money, please, stay in the District. If so, we'll let you pay less and at a lower tax rate than anybody else. And I also want to point out, this tax break that's being pushed by the mayor isn't just about encouraging new investments. It would apply to companies that have already made investments, not even aware that if there would be any tax breaks on the horizon.

LAZERESo we're talking about LivingSocial, for example, which just announced today that it might go public next year where the investors put money in, not expecting any tax break, expecting to make potentially hundreds of millions of dollars next year when they go public. And the city is going to say to them, because some of their executives are threatening to be moved to Virginia, please stay. If you do, we'll let you pay a lower tax rate than anybody else. That just seems like that's really wrongheaded.

NNAMDIDavid Zipper, I guess the bottom line in all of this is what would be the financial benefit to the District in dollars both from the LivingSocial deal and from the other piece of the legislation that's being offered to the council tomorrow.

ZIPPERRight. Right. Well, first of all, I should just say that one place where -- and I don't agree on the tech sector in general, I would say.

LAZEREI don't know about that.

ZIPPERYeah. Well, I think that I would love to bring you to some tech companies. I think you'd learn a lot. But where I think we do agree is that we don't know what the D.C. Tech Incentives program has done on the margin because there's not been a study that's done. The information is held very close by the OCFO's office, and I'd love to see that study be done. That said, I think that it just -- that I just said that he wants to --- he supports the idea of helping the startups within D.C. to get funding and to find a place to begin and go forward.

ZIPPERThat's terrific. That being the case, that's exactly why there is this 3 percent rate that's being proposed in the Technology Enhancement Act because it's so hard. I think, DJ, you made the point in the very beginning of the show. It's so raise your capital when you're just standing your business and you need angel investment.

ZIPPERAnd if we can -- now, this is what New York City has done very effectively, and I used to work in New York doing economic development there. In the last few years, they found ways of encouraging people who have assets they can invest to tilt some of their portfolio away from other stuff like real-estate investment or investing mutual funds and put that money into the local techs scene. It's worked in New York, it can work in D.C., too, and if it works here, we're going to create a lot of new companies, diversify the economy and create a lot of jobs.

SAULYou know, Kojo, everything I've read just -- it doesn't really support that. You know, these angel investors, by the way, are not so angelic. They are taking a greater risk than, say, even a venture capital company would. So they may be angelic in that way, but they're in it to make money. It's not lending money to your neighbor or cousin who's starting a business.

SAULIt's an investment in real company where real returns are expected. And for that reason, the most important issue in deciding whether to invest in a company is whether you think it's going to succeed or not, and these angel investors are often expecting a ten to twentyfold return. The tax rate doesn't matter. A low tax rate does not turn a loser investment into a good investment. That's what all the literature says.

SAULIt doesn't seem to make sense that you're going to shift your money to a bad investment because the tax rate is lower. You're going to invest in a company that makes sense, regardless what the tax rate is. And when your return is likely to be ten or twentyfold, in the end, what you pay in taxes is really not the most important issue and whether you make money on the deal.

LAZEREAnd yet we know several angel investors in the District right now who are planning to move outside the city to Virginia, and because of this bill that's before council right now, they're staying. They're waiting to see what happens.

ZIPPERI'd like to know who they are, and I think it's really unfortunate that there are people who are disloyal enough to the city to say, unless I pay less in taxes than anybody else, I'm going to move to Virginia. And I also don't know if they moved to Virginia, why their investments would go to Virginia. If you decide to build your mansion in McLean, you can still invest in the place where the tech companies are companying or coming, which happens to be D.C...

NNAMDIDJ Saul, you have something to say here.

SAULYeah, real quick. They're just not coming into the District of Columbia. I think the startup, especially the entrepreneurs, they want the same thing that angel investors should want, which is to run into each other at the local coffee shops and Starbucks, right?

NNAMDIOK. But I'd like to explore the idea, before we go, of a tech ecosystem and what a big tech company means for startups and others around it.

SAULSure. So I think it's important to highlight the Hungry Academy, which David mentioned about 10 minutes ago. So this is an initiative that LivingSocial put employees to recruit rookie developers going from zero to code in about five months. OK, so if -- me personally, I have very, very little acumen when it comes to actually laying down some code to build a cool piece of technology, right? So I would be able to enter into this program. Five months later, I sign an 18-month commitment to work for/with LivingSocial as a very now-talented developer.

SAULAt that point, I can go on to form my own company. So that's a very, very concrete example of what happens anyways when someone joins a large, successful, growing company like LivingSocial where they can go on -- whether they're on the marketing, sales, business development, communications or the developer cubicle office area -- where they can go and learn an incredibly valuable skill in today's very new and growing economy and be able to start their own companies.

NNAMDII'm running out of time. Very quickly, Ed Lazere, your organization feels that this deal could be improved for the District, specifically how?

LAZEREWell, most important, it would be better if we said at LivingSocial, you'll get your $32.5 million if you actually expand to 2,000 employees as you say you will in the District so that when you're adding employees worldwide, you should be thinking about the District first and not necessarily last. And that's not part of the deal now. That's really what we'd like to see change. That's the most important thing.

NNAMDIHow would you respond, David Zipper?

ZIPPERWell, I actually would respond. I should most like respond to what DJ said because I think it's so critical.

NNAMDIOK.

ZIPPERThe question was about the importance of having an anchor.

NNAMDIYep.

ZIPPERAnd what I -- many of your listeners, I think, will remember AOL and the impact AOL had in Tysons 15 years ago. AOL had so many people who went off, executives -- or some young people went off to form other companies.

ZIPPERThat included Tim O'Shaughnessy who went to work at Revolution, which was an AOL-backed company and eventually founded LivingSocial. We're already seeing LivingSocial employees found companies themselves. This is a once-in-a-decade opportunity for the region, let alone for the District, to have a flagship like this that creates so many spin-offs and so much economic opportunity.

NNAMDII'm afraid that's all the time we have. We'll have to see how this plays out. Ed Lazere, thank you for joining us.

LAZEREKojo, thank you.

NNAMDIEd Lazere is the executive director of the D.C. Fiscal Policy Institute. DJ Saul, thank you for joining us.

SAULThank you, Kojo.

NNAMDIDJ Saul is the chief marketing officer of iStrategy Labs and co-organizer of the D.C. Tech Meetup. He's D.C. ambassador to the global entrepreneur network Sandbox. David Zipper, thank you for joining us.

ZIPPERIt's been a pleasure.

NNAMDIDavid Zipper is the District's director of business development and outreach in the Office of the Deputy Mayor for Planning and Economic Development. We're going to take a short break. When we come back, the future of the Corcoran seems to be up in the air. We'll try to find out why. I'm Kojo Nnamdi.