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.