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Many in the greater Washington business community woke up this morning to a very uncertain work week. A federal government shutdown, whether it lasts days or weeks, raises serious challenges to our region’s economic prospects.

Virginia Gov. Ralph Northam (D) in a public statement on Friday said the federal shutdown would have a disproportionately negative effect on our region’s economy and would put jobs and economic growth at risk, adding it was “past time for leaders in Washington to get their act together and come to an agreement on long-term funding solutions for the federal government.”

The already extant business uncertainty caused by past short-term funding agreements and sequestration will be exacerbated by this current shutdown. Bobbie Kilberg, chief executive of the Northern Virginia Technology Council, pointed to the many members of her group doing business with the federal government that would lose revenue in the near term and have a difficult time planning for future growth. Since our region’s government contractors receive approximately $1.3 billion in revenue each week from federal government procurement, a shutdown or the unpredictability of short-term spending deals

In addition to the potential harm to businesses, the federal shutdown will leave hundreds of thousands of federal employees with a lot of spare time and no paychecks. Federal rules do not allow non-essential individuals to work for the government without pay, so many federal workers will be furloughed for the duration of a shutdown. Just look at the numbers: The federal government is responsible for 367.900 civilian jobs in the Washington area with a weekly payroll of $777 million, along with another 64,500 military jobs accounting for $122 million in weekly payroll and benefits.

Jeannette Chapman, deputy director and senior research associate at George Mason University’s Stephen S. Fuller Institute, cautioned that the harm from a short shutdown was more reputational than economic. A short shutdown would reinforce the view held by many nationally that the D.C. region is defined by government dysfunction. She believed the actual economic harm from a short-term shutdown would be small, “somewhat similar to a snow storm,” and any lost economic activity would be mostly made up post-shutdown.

However, the longer the shutdown lasts into weeks or longer, she identified much greater economic harm. Chapman pointed to households of government employees that do not have savings to cover expenses during the shutdown, workers that generate income from government contracting jobs who get paid hourly wages only when they work, and family-owned businesses that serve government personnel (such as restaurants and dry cleaners) as all being particularly vulnerable.

She was also concerned that there was no assurance that government workers would receive back pay after their furloughs ended. There is no federal obligation to pay back wages, leaving the issue to be addressed in federal legislation when the government reopens. After each prior federal shutdown, legislation was passed to provide for back pay, but that might not happen in the current political environment. The economic hole created if furloughed government employees are not paid back wages could be significant. Chapman pointed out that even if only 30 percent of furloughed civilian workers didn’t receive back pay this would take $233 million out of our region’s economy for each week of lost pay. This is money that will be lost forever – dragging down our economic growth and creating financial distress for many families.

Our region is disproportionately and adversely affected by a national political dispute in which our region’s economy is collateral damage. This is the downside of our region’s strong interdependence with the federal government, a relationship that over time has created significant wealth and business opportunities.

As we look at the likely harm to our region, we should be justifiably angry at our national politicians for endangering our region’s economy as a result of their failure to govern. However, we should also turn our anger into energy that we focus on the opportunities before us.

Bob Buchanan, president of the local advocacy organization 2030 Group, reminded me that the shutdown is juxtaposed with Amazon identifying our region as having three of the 20 finalists under consideration for the home of its second headquarters project. We shouldn’t lose track of the desirability of our private sector work force and our community.

He is right. I know from my own work that a growing number of businesses are locating in our region and growing in areas such as healthcare, software, education, consumer products and hospitality without any connection to the public sector at all. The reality of our region’s economy is that we have a vibrant and growing private sector business community.

In life, we often learn much about ourselves by how we react to adversity: are we victimized by circumstances or do we meet challenges head on? This can be a moment when we take stock of the many advantages our region has, and we increase our commitment to growing our non government business community.

We can choose to endure the dislocation of a federal shutdown, and hope for a return to business as usual. Or, we can take the opportunity to show the world that Washington, DC is much more than a company town and celebrate our economic diversity.

I think our region is up to this challenge. What do you think?

 

 

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Jonathan Aberman was quoted in this article on CNN/Money “Three Amazon Fnalists are Inside the Beltway. What gives?

“Real software and tech innovation isn’t just product innovation, it’s services solutions, and just being skilled at managing technology, and we’re really the leaders in that in the world,” said Jonathan Aberman, a D.C.-area tech investor. “So I think Amazon’s interest in this region shows how informed they are about the nature of technology talent.”

Given its longstanding desire to diversify away from the federal government and businesses that depend on it, the D.C. area could benefit enormously from having a large Amazon campus in any of the three jurisdictions, Aberman said.

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It’s critical that community leaders understand our region’s workforce trends. A recent workforce report from LinkedIn is essential reading.

 With more than 143 million individual members in the United States and 3 million job postings a month, LinkedIn has a large and current data base to use in identifying employment trends.

LinkedIn’s report shows that of the 20 largest metropolitan areas in the United States, Washington, D.C. and its suburbs have the slowest percentage increase in hiring during 2017. Measured against an average hiring increase of 10.8 percent, our region had a hiring increase of only 3.5 percent. That’s worse than the San Francisco Bay area, which had a hiring growth rate of 3.9 percent. Places with diversified local economies and affordable housing performed much better than the national average, with the three fastest growing areas being Houston, Phoenix and Dallas-Fort Worth.

LinkedIn also follows migration of workers and population based upon the profile locations of its members. This effort highlighted the troubling fact that nationally two of the 10 largest losers of workers were nearby: Norfolk was fourth and Baltimore was ninth. The areas with the largest number of lost workers were Providence and Hartford.

Meanwhile, no locality in our region was among the top locations for inward job migration. Places like Austin, Denver and Seattle were top destinations. Our region did rate as one of the most active job markets from the standpoint of inbound and outbound migration taken as a whole, with Washington, D.C. and its suburbs being the sixth most-active region. Austin, San Diego and Orange County, California led the way in migration activity.

LinkedIn also tracks what it describes as emerging jobs–careers where the worker’s skills and role are directly relevant to the growth of technology-driven businesses. Our region attracted workers in many of the emerging job categories, including data mining, business development and relationship management, and sales. It was not alone in looking to attract these workers, however, as our region faced strong competition for these valuable workers from the San Francisco Bay area, New York City, Los Angeles and Dallas.

Unfortunately, according to LinkedIn, we are not winning this competition.

Our region is not attracting workers at the rates of competing regions. In fact, we are losing workers. The top three locations for outbound migration from our region were the San Francisco Bay area, Denver and Seattle. Observers who have suggested that we are losing people who want to be software product entrepreneurs will likely find vindication in this data. Meanwhile, within our region, Washington, D.C. and its suburbs gained workers through inbound migration from Baltimore, Norfolk and Charlottesville. Redistributing workers may create pockets of growth, but does not provide for regional growth overall.

What is clear from the LinkedIn data is that we have jobs going unfilled because we are not attracting, retaining, or training a sufficient number of workers, particularly in emerging job categories. This conclusion is consistent with a recent report produced by the Greater Washington Partnership, as well as past reports prepared by regional experts such as Steven Fuller.

At some point we must acknowledge what data and experts are telling us: without concerted action, our region will have a continued mismatch between our workforce and available jobs. In the long term, employers will either find the workers they need here, or they will relocate their businesses to elsewhere. In the near term, every available high-paying job that is unfilled is an economic opportunity lost.

Unless we ensure that our region is focused on being an enticing place to live, and develop effective processes to develop the skilled workforce we need, we will continue to lag behind competing economies around the nation and the world. And over time we will likely fall further and further behind.

If you aren’t concerned, you aren’t paying attention.

 

 

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The federal government is the primary customer of a substantial portion of our region’s technology businesses. So it bears watching what it does. Industry participants tell me that the coming year looks promising, but even so, there are reasons for concern.

Bobbie Kilberg, president and chief executive of the local trade group, the Northern Virginia Technology Council, and someone with her finger on the pulse of our region’s technology economy, is optimistic that 2018 will be a good year for the government contracting industry. She points to the Trump administration’s attention to IT modernization and innovation, focusing on what she describes as the “plumbing of administration.”

This modernization trend dovetails closely with areas where our local businesses have proven technology expertise. John Wood, CEO of Telos, a company that focuses on data security and integrity, said the federal government’s rapid adoption of cloud-based software should play to a regional strength. Michael Isman, managing director of Deloitte Consulting, said there will likely be opportunities in digital reality, blockchain data storage, and automation.

Anita Antenucci, senior managing director at the law firm Houlihan Lokey, a mergers and acquisitions expert, points directly to our local expertise in serving the specific needs of the government customer. Emerging technologies that are driving changes in the private sector are just as necessary to the government, if not more so. When the government has what Antenucci describes as “demanding and urgent” challenges, it is our local businesses that satisfy the need. She points to cybersecurity as a specific example of this phenomenon. Chuck Brooks, a nationally-recognized observer of technology trends, agreed with Antenucci, adding that “the growth in both the number and quality of cybersecurity companies in greater D.C. has been amazing.”

Owners of businesses that deliver technology solutions and products that government needs will have an additional opportunity: the potential to sell their companies to motivated purchasers. Kevin DeSanto, managing director and co-founder of KippsDeSanto and an expert on mergers and acquisitions, sees current stock market and interest rate trends as providing strong incentives for larger companies to be aggressive about purchasing smaller businesses in 2018. Antenucci strongly echoed this sentiment.

Although reasons for optimism abound, there are also reasons to fear that the pace of government purchasing might be slower than the urgency of the need for new technologies would suggest. Paul Leslie, CEO of Dovel, a government contractor with a focus on health care and life sciences, said in 2017, the pace of government purchasing of technology services was slowed by the steep learning curve of new political appointees getting comfortable with their roles. He was hopeful that with their greater comfort “we will see a release of that acquisition bottleneck this year.”

While that issue is important, the biggest challenge to our region’s government contracting industry is political risk. Wood spoke for many of his peers by observing that while the general public might be inured to it, the lack of a predictable annual budget is a “grossly inefficient way to operate” and makes it very difficult for companies that sell to the federal government. Kilberg agreed this was a serious issue, explaining further that “the serial adoption of continuing resolutions to fund our federal government rather than federal budgets has impeded the ability of businesses to plan or expand with confidence.” Continuing resolutions that extend funding for short periods, and don’t provide for funding for new programs, can be as harmful to our local economy as sequestration or budget cuts.

Based on what I learned, the prospects for government contractors in 2018 reflect both the best and worst of our region’s close relationship with the federal government. This year will provide many of our region’s most entrepreneurial businesses with the revenue opportunities to grow their businesses, while leaving our region more open than are competing regions to economic hardship resulting from political dysfunction.

While some will say that the outlook for our government contracting industry should remind us that diversifying our innovation community is an important goal, I also take it as a reminder that it is essential for those of us who care about our region’s future to remain politically engaged.

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New Year’s Day offers an opportunity to reflect on lessons learned from the prior year. So last week I asked members of the business community the biggest lesson last year had taught them.

For many, the biggest lesson involved politics in some way. Some saw this as a positive thing, pointing out that bringing people together to achieve a goal, a behavior characteristic of successful entrepreneurs, had become a part of politics. Fran Craig, chief executive of Unanet, a software product business, pointed out this similarity: “Everyone can contribute so all can win. This was true in getting out the vote and [in] moving a technology business forward.” This sentiment was shared by Shekar Narasimhan, founder of the real estate investment firm Beekman Advisors, adding that taking an entrepreneurial approach to political action means that “business people can engage in the political arena without fear and can make a difference.”

There were limits to this view, though. A number of respondents thought the polarization of our political discourse meant that business people should be careful to separate what they did personally from their business operations. Chris McAuliffe, CEO of Theragen, a medical device startup, raised the concern that if a business itself became politically active in the current political environment, it risked alienating a significant portion of its market. He advises businesses to “remain politically agnostic in favor of delivering value to your customers.”

Another theme that surfaced was the importance of continued progress in regional coordination. Bob Sweeney, managing director of the Global Cities Initiative, and an expert on our region’s economic development activities, pointed to how greater Washington region’s pursuit of Amazon’s second headquarters  highlighted our region’s ability to collaborate. Sweeney worked with representatives of eight different jurisdictions to promote our region to Amazon, and he was pleased with their ability to find commonality in how they described our region’s assets, providing what he described as a “fantastic regional story.”

Bob Buchanan, chair of the 2030 Group, a regional advocacy group, echoed the lesson learned from the Amazon bid. However, the bigger question for him was whether our region’s political leaders truly listen to the business community or just give the appearance of engagement. His concern is that the “business community does not carry much weight” with our political leaders when it comes to addressing the region’s significant transportation and housing challenges.

Some respondents focused more narrowly on their own experiences and shared lessons for other entrepreneurs. Tien Wong, chairman and CEO of Opus 8, a technology investment firm, shared that his most important lesson of the year was to “always see the positive in every situation, even when it seems to be bad,” because doing so allows more creativity in responding to challenges. Ben Foster, a serial software product entrepreneur, pointed out that even as technology allows businesses to be buried in data about customer behavior, there is still no substitute for actually talking with customers if you wanted to understand them. Jamey Harvey, CEO of Courage, a software services business, added that it was essential to “never take the most important partners in your life for granted.”

What I learned from these responses is that the unique tapestry of our region – the proximity to the federal government, an economy that stretches across multiple political jurisdictions and a diverse range of entrepreneurial opportunities – draws to it many interesting and thoughtful people who get up every morning and make great things happen. It’s why I am happy to live here and why believe that our region is one of the leading entrepreneurial communities in the world.

Happy New Year, everyone. Let’s make 2018 a year to remember for good things.

 

 

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Many people see improving our roads and Metro as a shared goal that our region can rally around. I’d like to add another rallying point to this conversation: developing and expanding our region’s digital technology workforce.

Last week, the Greater Washington Partnership released a report that looked very closely at employment in digital tech industries — software development, data management and analysis, software technology engineering and IT management. Digital tech workers are among the highest paid in the country, and expanding digital tech employment drives the growth of leading regional economies.

Additionally, there are a broader range of jobs that aren’t digital tech industries but still require digital literacy. For example, many jobs in health care, law, accounting, advertising and media require comfort with digital technologies.

Taken together, digital tech jobs and digital literacy are highly important. Nearly two-thirds of the new jobs created in the United States since 2010 have required digital skills, and as digital technologies become increasingly integrated into the economy, the percentage can be expected to rise even higher.

Evaluated against these two realities — the need for digital tech workers and a broader workforce that is digitally competent — our region has a challenge.

There is good news. The report reminds us of our long history of leadership in digital tech employment. We should be proud of the role that our workforce has played in building the Internet, aerospace, wireless telecommunications, robotics, cybersecurity and bioinformatics industries, among others. Today 1 in every 16 jobs in our region is in digital tech.

But the GWP report has bad news for us, too. Although our region has one of the largest concentrations of digital tech workers in the country, we do not currently rank among the top 50 U.S. regions for job growth in this important job category. Over the past five years, the number of digital tech workers in our region has grown just 3 percent — only 8,000 net additional jobs — compared to a 12 percent national growth rate.

Moreover, it appears that our region educates digital tech workers who take their educations elsewhere when they look for work. Over the past five years, our region has produced a surplus of tech degree graduates. We had almost 14,000 digital tech degree graduates more than we had regional digital tech jobs filled. Yet at this moment, there are upward of 35,000 unfilled digital tech jobs in our region. It appears our graduates are either leaving for greener pastures, or are graduating with skills insufficient for the jobs that are offered.

Clearly something is not working in our region’s economy. The GWP report raises a number of reasons for this market disconnection. Our region’s employers as a group are not effectively signaling to educational programs the skill requirements for the digital tech jobs they have. National security requirements appear to inhibit the ability of government-reliant employers to employ applicants without bachelor or advanced degrees. Our traffic and housing issues result in quality of life concerns that encourage digital tech workers to migrate to other regions. A regional overreliance on service models for technology innovation encourage people who want to create digital tech product start-ups to go elsewhere.

I have no doubt that these are issues we can address as a region. We could identify mismatches between education and hiring by collecting and analyzing data and sharing insights. Direct involvement of our largest digital tech employers in creating educational syllabi, combined with internship and apprenticeship programs that they sponsor, could broaden opportunities for students to gain practical experience and have the right skills. For those that currently leave our region to pursue entrepreneurial opportunities elsewhere, we must give them reasons to stay by better supporting start-up business formation.

We have the resources to meet the challenge of digital tech workforce development. Let’s form a public/private partnership and get to work.

 

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Despite all that has been written about the proposed tax restructuring being considered by Congress, there has not been much discussion about how it will affect the D.C. region’s technology community. This restructuring will dramatically affect our technology economy and we will need to adjust. Let me explain.

As things stand now, if the tax restructuring is adopted as proposed, a corporation’s income from operations will be treated much more favorably than individual income derived from a well-paying job. In addition, income from a passive investment in a business will be treated much more favorably than the current income derived from the owner who works in the very same business.

These changes will put many of our existing businesses and most talented individuals at a comparative disadvantage. As I have pointed out in other columns, our technology community currently skews very strongly towards owner-managed businesses that are structured to provide current income.

Simply reorganizing as a corporation will not be suitable for many of these owner-operated businesses. Many provide current income to owners, many of them running small businesses, that is used to support families. Some must be structured to provide current income to investors as well. In certain instances, licensing and government rules require that these businesses be structured as owner operated. For all of these businesses, their effective tax rates will be higher than a corporation would pay. Depending upon the size of the businesses and its profitability, this will create a tax disadvantage that could amount to hundreds of thousands if not millions of dollars of taxes.

On the other hand, the changes in corporate tax rates, and the favorable tax treatment for passive investing will be a huge opportunity for investors. They will benefit from better tax treatment on current income from investments as well on long-term capital gains. This favorable treatment will have two important effects. First, it will give passive investors a large new pool of capital to invest derived from the large tax subsidies they will be provided. Second, it will encourage business owners who have the option to trade current income for longer-term business value, since the tax rate on a sale of an interest in a business will be much lower than the rate on current income paid by the owner.

Another area where the proposed tax changes will have a big effect will be our universities. Changes in the tax benefits to be gained from research and development may shrink funds available for sponsored research. Changes in the tax treatment of research fellowships will discourage students who don’t otherwise have the ability to pay for their graduate degrees.

Our highly paid workforce will also see changes in their tax bills, due to changes in the tax deductibility of local and state taxes and mortgage interest. These changes will adversely affect our region’s ability to attract and retain highly paid technical talent when compared to competing regions. The higher pay our region’s employers can offer will become less appealing, if it results in higher taxes and participation in a housing market where valuations are constrained or falling due to the loss of current tax benefits for owners. Transportation, education and infrastructure challenges in our region will also become more expensive to solve, if they require additional local taxes to finance improvements that are doubly taxed.

Taken as a whole, our region is facing a large adjustment if the tax restructuring occurs. How adversely we are affected will be driven by whether we can make up for the negative aspects by creating enough new businesses that will be attractive to investors and corporate buyers. For many years, I have argued that our region’s future requires that we change the model we use for technology-based business creation. That need is now even more immediate.

It is ironic that many of the people who most avidly support these likely tax changes are the same people who have consistently stated that “government shouldn’t pick winners or losers.” Hard to see the revision of the tax code as anything other than that.

But that doesn’t mean we can’t adapt to the new rulebook and make our own future.

 

 

 

 

 

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For many people, last week was the moment when Bitcoin registered as something they should know about, as it saw a sky-high boost in value.

Bitcoin is a currency. Society uses standardized currency to exchange things of value. When you sell something, you can either trade for some other good or service the buyer is selling, or you can receive currency – in other words, money – that you can then use to buy something from a different seller. There is nothing magical about a currency – it could literally be anything – provided everyone in a society agrees to accept it as such. 

Currency must have some consistency in its per unit value. If currency does not have a clear value, it is hard to buy things with it; the seller will always want more while the buyer says “only this much.” Additionally, a currency has to maintain its value over time, since the holder may not want to spend it right away. Currency only has value if we all believe it has value. 

This truth has made people uncomfortable for generations. History has shown governments have often forced its citizens to use a currency that is not desirable as a store of value, or undermined its value by unilaterally changing the value per unit of its currency (a devaluation), or creating large budget deficits that it finances by unilaterally creating more currency (inflation). This is why you often hear central bankers talk about inflation as a bad thing – they are afraid that an erosion in the value per unit of a currency will make it less desirable. It’s also why nations who have currencies that are not as stable will often put in place “exchange controls” which make its citizens unable to use other currencies that might be more stable or desirable.  

Bitcoin’s underlying operational structure – the blockchain transaction ledger system that supports it – is not subject to government scrutiny or regulation. Bitcoin is thus incredibly useful for people who want to hide their transactions and money from governments. But, it’s also attractive to people who fear government actions that could cause a devaluation of the currency they are currently using.  

Right now, people are taken with the rapid rise of the price of Bitcoin as a financial phenomenon. I think that they should be focusing on two things that are much more significant. The first is that much of the demand for Bitcoin is coming from nations that have exchange controls where citizens are using the anonymity of the Bitcoin market structure to avoid these controls.  

The second, which concerns me much more as a U.S. business person, is that the people are signaling that they think that it is worth much more than the U.S. dollars they are using to purchase the Bitcoin. As Congress is about to explode the U.S. budget deficit through some very ill-advised tax cuts, they should take note of this market signal. 

Since World War II, the U.S. dollar has been the primary international currency. This has benefited us tremendously. More than any other factor, this primacy has allowed our country to have low borrowing rates, low inflation and low energy costs. If the U.S. dollar loses its attractiveness because society finds a preferable currency for exchange (whether it is Bitcoin or any other currency) – the implications for the U.S. economy are grave: higher interest rates, higher inflation, higher energy costs and lack of price stability. 

History is littered with governments that eroded the value of their currency through financial imprudence. Our nation is not immune from this fact. If international investors, and our own citizens, lose confidence in the U.S. dollar we will pay dearly. Bitcoin’s rise could be a sign of trouble to come.  

That’s why it should matter to you. 

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Last week, the chairman of the Federal Communications Commission announced his intention to eliminate net neutrality in furtherance of the White House’s conviction that Internet access should be an unregulated, private business activity. Many Americans who aren’t tech savvy don’t see this as a big deal. To the contrary, it is a big deal. Their ability to participate in society and the economy is about to get hurt.

To illustrate why this is so, let me analogize to a public benefit that all Americans value: access to electricity.

Imagine that access to electricity was handled the same way that access to the Internet will be under the FCC’s approach. Would you be happy with a situation where your ability to obtain electricity was limited to a single provider who could charge you whatever they wished, offer you whatever service level they thought appropriate, and limit your choice of alternatives?

We all know that electricity comes into your home through a single line owned by an electric company. Because of government regulations and investment, access to electricity is substantially universal around the United States. Innovative companies that provide electricity in new ways can get access to consumers and businesses. Profit is balanced against consumer access.

This didn’t happen by accident. The balancing of the interests of industry and society occurred because in the 20th century a broad societal consensus was reached. Electricity is essential to modern life, and all Americans should have fair access to it. Depending upon the circumstances, sometimes electricity was provided by government entities, sometimes by for-profit companies, and sometimes by cooperatives. Power produced by innovative and cost-efficient producers, such as solar, had to be carried over other companies’ transmission lines so it could reach consumers. The ability of the owners of those transmission lines to maximize profit was balanced against the social good that electricity provided to all.

The analogies to access to the Internet are striking. There are many parts of the United States where access to the Internet is not achievable solely on a for-profit basis, because the population density is too low, the geography too challenging, or the residents too poor. Many Americans with access are finding that they are not able to pay ever-increasing prices. Businesses grow ever more reliant on the Internet. School systems assume that their students have access at home. More and more of the information our citizens need to make informed decisions is delivered over the Internet.

In the second decade of the 21st century, it is becoming abundantly clear that access to the Internet is essential for our nation to grow and our citizens to participate in its abundance. The proposed changes to net neutrality suggest the Trump administration and many in Congress put their faith in the free market to provide the Internet access all Americans must have. Even though I am an investor and businessman, this is a circumstance where I think that this faith is misplaced. Why would for-profit Internet access businesses ever provide services or make investment decisions that aren’t based solely on maximizing profit?

Let’s not fool ourselves for the sake of adherence to ideology. Without some the introduction of other considerations imposed by regulation or government action, the Internet providers will not have any reason to modify their pursuit of maximum profits or provide uneconomic services. They are public companies, not social enterprises. But treating Internet access as a luxury and not a basic right is unfair to our citizens, to our business community, and ultimately to the country as a whole.

In the 19th and 20th centuries, our political leaders recognized that access to electricity required a balancing of commercial and social interests. In light of how essential access to the Internet is to the 21st century citizen, shouldn’t there be a similar balancing?

 

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I regularly hear people complain that our region lacks venture capital. Last week I asked members of our entrepreneurial community about this perceived funding gap and what they thought we should do about it.

The first thing I learned was that the venture capital funding gap was most profoundly felt when a start-up needed capital to accelerate its climb towards success, what I’ll call “acceleration capital.” The entrepreneurs pointed to many start-ups successfully finding their initial risk capital from friends and families, or smaller venture funds, and raising the first $250,000 to $1 million necessary to get started. They also reminded me of the many innovative companies in our region that have raised hundreds of millions of dollars of venture capital to fund business expansion. They all agreed acceleration venture capital was the hardest to find.

Some thought our start-ups were not perceived as compelling in comparison to those in other regions, so that acceleration capital went elsewhere. Our region didn’t promote itself well, didn’t have a culture of risk taking, or suffered from a heavy focus on service-business models, were each identified by entrepreneurs as potential causes of this competitive disadvantage.

Others didn’t see it as an issue relating to our supply of compelling companies. Ed Barrientos, a long-time angel investor and chief executive of Brazen Technologies, told me he felt “the number of viable start-ups has been relatively constant for the last 15 years.” He thought that the perceived funding void was just a function of “signal to noise” because more companies were starting here than previously, so that there were more businesses competing for the same pool of capital.

Entrepreneurs who had been investors provided the perspective that the acceleration funding gap was a national problem. Gene Riechers, a successful venture investor and former technology executive, pointed to a national consolidation of the venture industry into a smaller number of large funds. This consolidation has forced the venture industry to concentrate on deals that can put a large amount of capital to work quickly – making acceleration deals burdensome and unattractive.

Riechers cautioned against waiting for new VC funds to be raised that would focus on acceleration capital because the industry trends that led to consolidation were likely to continue for a number of years. His advice was to look for acceleration capital elsewhere.

But where?

A few entrepreneurs thought that the region’s wealthy would be a good place to start. Ben Foster, a business mentor and serial entrepreneur, felt that a regional effort in educating local wealth managers and millionaires on the investment opportunities that start-ups present could create new sources of acceleration capital.

Others thought that greater integration with larger regional businesses was the best path – customer revenue could provide growth funding. An example was James Quigley, founder of GoCanvas, an app technology company, who would like to see the business community “engage in the ecosystem and invest.”

Naturally, people raised the role of government in solving the problem, although not as a direct investor. Mirza Baig, a partner in Aldrich Capital and an investor in start-ups, thought state governments should look to trigger acceleration venture capital through economic and tax incentives. Others pointed to the federal government as a source of research-and-development funding that could be leveraged to accelerate high tech companies.

A few also asked whether we should be worrying about venture capital funding to fill this void at all. Mary Tucker, chief executive of UPIC Health, a health care start-up, pointed to the growing number of investors looking to make socially impactful investments, adding that “perhaps the answer is not to focus on the doughnut hole – I’m squarely in it right now – but rather expand and build on social VCs in the region.”

Clearly, we have an issue that is unlikely to go away. I think it’s time to take an entrepreneur’s approach to solving the problem. We’ve identified some potential solutions. Let’s pick one and get started.

 

 

 

 

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