Why You Should Start a Company in... Washington, D.C.

Serious about starting a tech company? It used to be that Silicon Valley was the only place to go. But emerging entrepreneurial hubs around the country are giving startup aspirants options. In this series, we talk to leading figures in those communities about what makes them tick.

When one thinks of Washington D.C.’s tech prowess, it conjures up images of “War Room”-style military centers buried deep underground. Internet companies do not automatically spring to mind.

But it’s a government-style telecom beast, MAE East to be specific, that laid the foundation for a thriving Internet community. This Internet exchange point, one of two launched by MCI in 1992, provided a good location for telecom providers, and thus MCI and AOL made D.C. their home. This Internet exchange point, launched in 1992, provided a good location for telecom providers, and thus MCI and AOL made D.C. their home.

Today, D.C.’s startup community reaps the benefits of those early tech companies, giving rise to capital from ex-AOL and ex-MCI executives who cashed out. They supplied the basis for Internet startups such as Summize, which Twitter acquired earlier this year to boost its search capabilities, and Living Social, which contends with Groupon in the social commerce space.

The government still largely sets the tone for new companies, talent and funding, however. Tige Savage, a former AOL executive who is now co-founder and managing director at Revolution, an Internet holding company launched with former AOL CEO Steve Case, spoke with Fast Company about what sets D.C.’s startup scene apart.

How is D.C. better or different for entrepreneurs than other cities?

In a historical context, D.C. has some advantages. The obvious advantage is that the federal government is here, and that manifests itself in a couple of ways. One is it's a very steady economy. We don't have the ups and downs of a lot of other areas which makes it a place that's attractive to start a business. Second is there's a lot of R&D money that comes out of the federal government – something like $15 billion a year – that is spent locally on R&D. Third, the federal government is a big customer. Fourth, there are things that are here because of the federal government; I'll use AOL and MCI as examples because a generation ago they were small technology companies that grew to be big technology companies.

What is happening in D.C.’s entrepreneurial ecosystem that makes it sustainable?

We have a pretty vibrant angel community of a handful of folks who made money in some of the local companies. People like Ted Leonsis, with whom we invest a good amount and who owns the Capitals and the Wizards, but he made his money at AOL. People like Steve with whom I and another guy co-founded Revolution and we're a supplier of capital to the market, less on an angel basis and more of an institutional basis. People like Nigel Morris who really used applied technology against a traditional business sector and created Capital One. He's more of an angel. There's a list of folks like that.

Does D.C. tend to breed, or attract, entrepreneurs?

There's a constant influx of really well-educated people, some of whom come here just for some stint during an administration or because they're interested in some issues or etc. and some of whom stay. They're attracted for whatever reason. They come here and it's a very dynamic city in terms of population. It's becoming more that there are people who live here, but historically “Nobody's from DC,” because everybody comes, they work for an administration, they leave. Everybody comes, they're on a military assignment, they leave. Everybody comes because they're working for a company that has to do something with the government then they leave. That's changed over time but government still changes every four years so there's a constant influx of oftentimes very bright people, a lot of whom leave but some of whom stay. I would say it still attracts people and it still breeds people.

Where do startups tend to cluster in the metro area?

It depends, it's a really good question. Living Social is based in Washington, D.C. A lot of the technology-oriented companies are based in Northern Virginia and a lot of the bio-tech companies are based in Maryland. That's not a steadfast rule but that's generally true and the reasons are legacy reasons. Those technology and telecom companies are over where MAE East was, in Northern Virginia.

NIH – National Institute of Health – is in Maryland so a lot of the bio-tech guys are brilliant scientists who've come to work either with or for NIH have gone out on their own. Just as AOL is a good example from 25 years ago of how being near resources that are here as a function of the government resulted in a $100 billion technology company, there are a bunch of companies in Maryland that are like that as well. Human Genome Sciences is a good example, they're a company that was the breakthrough genetics company, have gone public, etc. and they're in Maryland.

What kind of exits do you see in D.C. – is it a billion-dollar exit playing field?

I think that D.C. can mirror any other area in terms of kinds of exits, but just scaled for the size of the business in D.C. For example, on the extreme end AOL was the most valuable company in the world but that's an outlier. There are tuck-in acquisitions and there are the potential for independent companies so I wouldn't say that this is a breeding ground for just small little M&A exits. I’d say there are opportunities for big exits for sure. What's not here are all the acquirers. Go through the list of tuck-in acquisitions and who is going to be on that list? It's going to be Google and a bunch of companies like that, so what we don't have is that symbiotic thing going on. You've got to make it happen, you've got to be out on the West Coast. So I think the exits are there but that piece of the ecosystem is much less developed. There's only a handful of acquirers here unless you're an aerospace company or something like that.

But it depends where they are in the life-cycle. TechCrunch just got bought by AOL, so there's lots there. All I'm saying is if you look on the list of major acquirers, most of them aren't here.

For more from this series:

  • Why you Should Start a Company in...Austin
  • Why you Should Start a Company in...New York
  • Why you Should Start a Company in...Los Angeles
  • Why you Should Start a Company in...Chicago
  • Why you Should Start a Company in...Boston

Laura Rich is a freelance writer and co-founder of Recessionwire.

Add New Comment

2 Comments

  • Alex

    Great piece. For those interested in social enterprise in particular, check out Hub DC (http://hubdconline.org/about-h.... We're creating a center for social innovation that will act as an accelerator for social business creation and a platform for connecting entrepreneurs to resources around the world.

  • Shari Aponte

    Interesting piece. Based on what I’ve read, NYC seems to be challenging Silicon Valley in terms of a robust tech community. I never would have guessed Washington, DC to be in contention. It’s also encouraging to read entrepreneurs are taking the leap and starting their own businesses – even during this period of uncertainty.

    A major expense at the onset is office space. And, while many start ups often begin at home, if their business is successful they eventually move into professional space. For a small business owner looking for a competitive edge and wants to start their business in a professional location, visit: http://www.showusyouroffice.co.... Regus, a provider of flexible workplaces is giving away an office in the U.S. for one year.