March 2017

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Yes, when the federal government sneezes, the greater Washington’s economy gets a cold. And so, with the growing possibility of significant cuts in the federal discretionary spending that fuels so many of our inventive local businesses, just how will the region’s innovation community fare?

Greater Washington has made an extraordinary investment in supporting start-ups founded by first time and inexperienced teams. Recently, my team at Amplifier Ventures completed a survey of accelerators, incubators and co-working spaces in our region and found 128 such organizations. Prominent examples include WeWork, 1776, Mach 37, Eastern Foundry and Biohealth Innovation, along with lesser-known ones, and then programs in just about every university and locality, public or private, for profit and not-for-profit. As programs attempt to differentiate themselves with narrow distinctions, the market for start-up assistance appears very crowded.

Away from the hype surrounding some of these programs, success is not what would be hoped using the metrics at hand. Publicly available national rankings of the best-regarded accelerators and incubators do not include a single representative from our region. Very few graduates from these programs appear on lists of venture-funded companies, business exits or national lists of rapidly growing business. While our region’s start-up formation programs focus on getting businesses going, helping them grow into lasting commercial success is apparently more difficult.

Take the development of new products. Venture capital is a lagging indicator for success in this area. If our region were creating exciting product start-ups, capital would follow. Sadly, data continue to demonstrate that the greater Washington region is not a primary market for venture capital. In fact, our share of national venture capital declined to 2.6 percent in 2016, down from 3.4 percent in 2015.

Instead, our region excels in service-based innovation businesses. We are regularly near the top of lists of high-growth companies such as the Inc. 500. On that list in 2016, the percentage of rapidly growing businesses in the greater Washington region that identified as consulting companies increased dramatically to 46 percent (from 34 percent in 2015) and government contracting also dominated. Meanwhile, software and security companies represented only 5 percent of regional companies.

This pattern is also seen in the region’s cybersecurity industry. A recent survey of the industry by TandemNSI identified more than 973 cybersecurity companies operating here and only 38 were product-based innovation companies. The rest were service-based.

None of this should surprise us – entrepreneurs follow the money, and the primary customers in this region purchase technology innovation as a service. However, this business model and customer concentration does create a highly unstable situation if government funding shrinks.

Our region is missing something in how to approach the challenge of growing 21st century innovation-based businesses. The delivery of product-based innovation, not services, is accelerating in the commercial sector, and arguably in the government sector as well. Our efforts to grow product companies focuses almost exclusively on inexperienced teams and startups, and in so doing we are losing sight of the larger issue: how do we retool our existing business base and get experienced entrepreneurs to grow highly scalable commercial product businesses? Offering cheap real estate or business advice for five percent ownership in a company does very little to address this challenge.

We must find new approaches that focus on creating technology products that will be attractive to customers outside of the region in industries such as cybersecurity, artificial intelligence, precision medicine and others.

The pre-existing failure of our region to create large numbers of product-based innovation businesses will be exacerbated by changes in federal spending. We urgently need greater integration between our largest corporations, innovators and funders to build an open ecosystem that cuts across existing regional and organizational silos. We don’t need more places to create start-ups – we need a regional plan to help them grow.

This column originally appeared in The Washington Post.

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Some think of entrepreneurial behavior as being tied to profit making, but that’s not necessarily the case, as I was reminded by Liz Norton, founder of Stone Soup Films.

Norton grew up in Washington, D.C. and went to New York to build her career in media. She fell into the rhythm of New York life and says she adopted the myopic view many New Yorkers have about other places. Living in the Big Apple doesn’t leave much room for the second banana of your home town.

When she moved back to the nation’s capital in 2005, she says she was unsure whether she would be able to apply her honed skills in media and policy here. She wondered if there was room for her in a place where there wasn’t “a decent deli or children’s shoe store.”

What she found surprised her. The first thing she recognized was the large number of not-for-profit organizations and social ventures operating in the greater Washington region. As she met with them, she saw an interesting commonalty: a communications disaster. Time and again, the high cost of the videos that organizations were using on the websites or at fundraisers to spread their message, describe their work and share their mission would leave her “dismayed.”

That’s when Norton found an entrepreneurial way to solve a big problem. “I just made the decision to stop criticizing that work and figure out a way to do it better,” she told me as we prepared for her upcoming interview on my podcast What’s Working in Washington.

The challenge for Norton was coming up with a way to provide professional quality videos to groups who had fabulous stories to tell about how they were helping the community, and desperately needed to spread awareness but couldn’t afford the cost of production.

With her business instincts, she looked for volunteers with experience in media and production. Did these people exist in D.C.? Maybe Los Angeles, but in our nation’s capital?

Norton admits to initially having low expectations herself, “I was hoping for 15 to 20 when I started the organization.” She now has more than 700 volunteers – producers, graphic designers, technicians, videographers, editors — all skilled in media creation, providing their time to Stone Soup’s projects. Why were there so many more people with the right skills available? It turns out that big customers in the greater Washington region such as the federal government produce a lot of video with local companies.

So, in this way, proximity to the federal government provided an unexpected resource for a new entrepreneurial model. Stone Soup Films is an enterprise solving a large problem and helping organizations who are the lifeblood of what makes this region tick.

Norton says getting experts in their field to contribute their hard work without compensation is easy, because people enjoy the satisfaction that comes from helping others. For her volunteers, engagement and meaning are more important than money. She says this doesn’t surprise her, because people are good at their core.

Stone Soup Films brings out the best in our community to help our region’s not-for-profit community tell their success stories and find new resources.

It also shows how our region is innovative and entrepreneurial in all sorts of ways.

This column originally appeared in The Washington Post.

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Venture capital is an essential resource for entrepreneurial businesses, but new entrepreneurial approaches are changing the industry.

More and more new venture capital funds are popping up in the greater Washington region. Funds such as Blu Ventures, Gula Tech Adventures, NextGen Venture Partners, DataTribe, Lavrock Ventures and Strategic Cyber Ventures are writing smaller checks and providing more hands-on mentoring than larger incumbent funds can. They challenge the prevailing model for existing venture capital funds and fill a void in the greater Washington region.

Arguably, the venture capital industry needs to be disrupted. Over the last 10 years, the herd has been winnowed significantly. Venture funding has been consolidated into fewer but larger funds, with $1 billion funds becoming more and more commonplace. Our region’s best-known venture capital organizations — name brands such as Revolution and New Enterprise Associates — are able to raise more money because of their investment success. In this way, the market works fairly, rewarding those who can generate positive returns for investors.

But with this success comes concentration of capital, and that concentration comes at a cost. It is harder for large funds to make smaller investments, or even get involved in start-up investing at all.

“As funds get bigger and bigger, it’s hard for a billion-dollar-fund manager to be excited about a seed investment of $50K,” notes Ron Gula, co-founder of Gula Tech Adventures. After all, to move the needle on a $1 billion fund, each investment must yield large dollar amounts. A $50,000 investment “takes just as much effort to help that company get to the next level as a $5 million investment, but the $5 million has 100 times the return,” Gula says.

Next thing you know, larger funds are investing in more established companies that have proven growth or momentum. Businesses at this stage are not only less risky, but better able to absorb and apply larger capital raises.

They also lead to more conservatism in the investment process itself. Large institutions raise billion-dollar funds from institutional sources such as pension funds, endowments and sovereign wealth funds. These sources require a careful investment process and a focus on legal and financial compliance. However, this professionalization comes at a cost – the venture investor loses an ability to make quick decisions on a gut feeling or to “take a flyer.”

This is a phenomenon has been observed by many entrepreneurs. Dan Mindus, founder and managing partner of NextGen Venture Partners, believes that larger funds invest around financial metrics to ensure that both investments and oversight satisfy their institutional investors, and that means subsequent board service is less about mentoring and more about process. It also may make investing in people somewhat less relevant than investing in numbers.

Clearly, there is a market for smaller, more hands-on investing in our region. Funds where the investment process can be more accommodating to the unpredictability of early stage investing.

By nature, much about start-ups in the earliest stages is uncertain, and there is a strong need for help. Gula points out how many areas where an early-stage investor should help: “You need to motivate the team, make funding decisions, have input on general strategy, speak with customers, speak with analysts, speak with media and help with recruiting.” Steven Chen of Blu Ventures readily agrees and adds “post-investment active engagement” on the part of investors is “essential for early-stage companies.”

Leaders of these emerging venture funds are evidence of a clear entrepreneurial characteristic: starting a business where they see a market opportunity. Their ability to bring experienced and engaged entrepreneurial assistance to start-ups is a welcome positive development in the greater Washington region’s ability to establish and grow technology businesses.

Column originally appeared in The Washington Post.

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