What DC is still lacking for entrepreneurship to thrive

If you want to know what’s going on with the founders and funders of the D.C. region, there is one person you need to know and read: Andy Medici, money reporter for the Washington Business Journal. Medici has his finger on the pulse of what makes our region’s economy tick, and has broken many of the stories that define how we see the region’s progress and opportunities. Recently, he’s worked closely with the region’s venture capital market to understand why it may not be running quite as well as people might assume.

ABERMAN: Well, venture capital is the hallmark of an emerging industry’s health. How does venture capital here compare with the rest of the U.S.?

MEDICI: You’re right. We hear a lot about venture funding, and big names, big companies, but we hear fewer in the D.C. area. See, D.C. is getting more venture funding in terms of absolute dollars, but it’s falling behind in its share. Back in the in the AOL days, the dot-com era, the region was about four to five percent of the nationwide total, but now we’re hanging out around one and a half percent. So, even though you’re seeing an increase in dollars, we’re falling behind in terms of our fair share. And that is a trend that I found, and it is a little disturbing.

ABERMAN: And I’ve been seen similar things in my information. I know you’ve been looking at this closely. As you go up and talk with people about this, what are their explanations for why the region’s fallen behind compared to other places in the country?

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MEDICI: Well, there’s a few, but ultimately it boils down to the types of companies that our region creates. We focus a lot on services, we focus a lot on government contracting. When we focus a lot on companies that aren’t as attractive to venture capitalists, and they don’t require the venture funding needed, they don’t grow as fast. So, when you think about the D.C. area, you think about the big consulting firms, you think about small shops, you think about government contractors, but they’re not attractive to venture capitalists, who are looking for big gains, who are looking for big scalability, who are looking for a place to put their dollars and see a good return.

ABERMAN: Because this region doesn’t produce these kind of product-oriented, rapidly growing companies, I assume that that also means you’re not seeing as many companies going public, because the public market, that’s where big companies go to raise capital, and be able to grow larger. Do you see that too? Is our initial public offering performance also down, compared to other parts of the country?

MEDICI: Yes, actually, there is a big downstream effect. When the money doesn’t go in, five, ten years later, you don’t see that come back out. So, for IPOs, we really only had one pure IPO, and that was Appian, which is a low-code software company out in Reston. But you have areas like Chicago and Austin, who have the same amount of venture funding, and they have four or five IPOs. So, it really is a mixture of the venture funding we’re getting as a share, which is lower, and the types of companies we’re producing, and it seems like we really are missing out on what people are calling the next IPO boom.

ABERMAN: Interesting, because when I talk with people who are involved in mergers and acquisitions, like Kevin DeSanto from KippsDeSanto, I understand that we’re in the middle of a boom in mergers and acquisitions, but I think that what you’re identifying is, there’s really two types of entrepreneurship in effect. There’s the venture capital model, product-oriented, high-growth technology, that way, which is very amenable to VC; and then there’s government contract and leveraging technology as a service, where you can grow a large company, but that’s going to be a private equity sale, or so forth. Right?

MEDICI: Yeah, the picture is complex, but what happens when we talk about mergers and acquisitions, what we usually end up thinking about is, companies from outside the region, let’s say Oracle, picking and choosing and buying up companies in this region. What we don’t have are our own companies that are doing the same. So, you don’t get that money that stays in the system and builds and builds and builds.

What ends up happening is, you have a lot of companies, a lot of people, a lot of talent, they end up leaving once these acquisitions are made. So, there are a lot of buy opportunities here, but ultimately, you want these big successful IPO companies, they can form a lot of those downstream companies. Think about the number of people who left AOL and formed their own company. It’s literally staggering.

ABERMAN: Yeah, because what you’re getting at, and I see this as well, I’ve seen this many times: often, particularly in the government contracting sector, the companies are owned by a family, a couple of founders, and the business will sell for a hundred million dollars, but only a few people see most of the benefits of that. The employees don’t get equity participation, or upside, whereas startups, the life lifeblood of the startup is that everybody gets options. So, yeah, we had the whole phenomenon of AOL millionaires, and other companies. Do you think that’s what’s missing here?

MEDICI: I do think we are missing the types of companies that have the time to grow and become solid, independent companies that have that lucrative exit. We talked about Appian, there are companies before, too, where you’ll have a few hundred employees have some access to the equity each. Sure, it’s concentrated in the handful, but a lot of them will have some benefit. They will invest, they will start their own businesses, they will put that back into the ecosystem, and we are missing a bit of that here.

ABERMAN: You’re going out and you’re talking with people all the time in the ecosystem, as am I. What are you hearing from people from the standpoint of solutions to this? Or do we just throw up our hands and say, we’re just never going to be amenable to the venture capital model, and we should just worry about growing our gov-con businesses?

MEDICI: Well, we’ve been hearing a lot from people about what the region does, and what we need to do to diversify away from government contracting, government services. Economist Steven Fuller has talked a lot about trying to find the industries that are next to the ones that we do now, but are more lucrative, pay higher dividends. We add a lot of government jobs, and during the times when the government might be cut, or when people aren’t as enthusiastic about government growth, that can be a drag on the economy.

We add a lot of home healthcare jobs, but are we adding the types of jobs that will turn into high-paying jobs later? And we really aren’t doing as much about that as we could, so, focusing on what we’re doing, the industries, and focusing on the types of companies we want to create, which are companies that make things, they make things that people want to buy, and they do it here.

ABERMAN: So was this region waiting for Godot by waiting for VC to turn up?

MEDICI: I think it’s interesting, because VCs here, they take their money and they invest it where they want to. So, they’re not coming here and deciding, oh, we don’t have enough money to spend here. They’re spending that money, it’s that they’re spending it elsewhere. So, what we need to do is, we need to make sure that the VCs that come here see a wealth of opportunity. And we want the founders here, who start these companies, and who struggle for so long, we want them to make sure that they have a fair shake.

Does that every startup deserves some money? Of course not, but does that mean that the people who start companies here get a fair shake at building something bigger? I think that’s definitely something we should look at.

ABERMAN: Well, as always, Andy, it’s great having your perspective, and I’m sure we’re going yo have you on again in the fall. Meanwhile, that was Andy Medici from the Washington Business Journal. Thanks for joining us.

MEDICI: Thank you.