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Beyond the boom of younger workers flooding in, Washington is grappling with longer-term economic challenges

The Washington, D.C. economy is preparing for the day when younger workers break up with it.

The fading of a Millennial-infused population boom in the nation’s capital that carried through the Obama years, combined with Trump’s efforts to slash the federal workforce, are but two factors that have the local economy locked in a painful transition from skyrocketing growth reliant largely on its federal patron to a more diversified and self-sustaining market.

The 68-square-mile city could be in for some more growing pains as the Trump administration has directed agencies, effective Thursday, to hire only in line with levels proposed in the president’s “skinny budget” submitted last month.

Meanwhile, businesses, economists and policy makers are grappling with bigger challenges for D.C.:

1. Population and the Millennial boom

From 1990 to 2000, D.C. was alone against the 50 states and Puerto Rico to see a decline in population, of 5.7 percent. In the decade following, Michigan earned that dubious title while Washington made up ground with a 5.2 percent increase. And in the more than half-decade since, the city enjoyed a 12.6 percent boom while the country saw population growth of around 4.5 percent.

The outlook depends on Millennials, who flocked to the city as a haven for jobs after the last financial crash. While the city remains attractive for its job and income prospects relative to other urban hot spots, expensive childcare could prompt outflows of those younger residents, according to a March report on millennials in D.C. by American University and commissioned by Kaiser Permanente.

For Neil Albert, president and executive director of the DowntownDC Business Improvement District, the city’s still doing just fine in this respect.

“We have strong assumptions of population growth, and the population continues to grow at a pretty healthy clip,” at around 800-900 residents a month, he said.

2. Homelessness and housing prices

Beneath the lush opportunities for young people and other middle- and higher-income job holders in the city is a still-plentiful army of homelessness, helping to show why the city remains challenged by rampant inequality. Washington ranked worst in homelessness among 32 cities whose mayors are members of the U.S. Conference of Mayors Task Force on Hunger and Homelessness, according to the group’s December report.

For homeless people to climb into an earnings bracket that will allow them to afford their own housing, the stock of low-income homes will have to increase.

“The elephant in the room is there’s no place for people to live — there’s not low-cost opportunities for people to live when they are trying to come out of homelessness,” said David Whitehead, housing program organizer at Greater Greater Washington, an advocacy group and community blog.

Rob Wohl, tenant organizer at the Latino Economic Development Center, said the city is putting forth “unprecedented” spending on affordable housing development, but is “still losing more low-cost housing than we’re building.”

An index of housing prices in Washington has increased nearly 30 percent to 217.12 since the post-recession trough in April 2009, exceeding the 26 percent rise nationally, according to S&P CoreLogic Case-Shiller data. Renting is also incredibly pricey, with the median monthly bill for a two-bedroom apartment listed at $3,050, the fourth-most expensive of the 100 largest cities in the country, Apartment List data show.

The soaring housing bills have pushed many longtime Washington residents out to the suburbs, though they also threaten the viability of city living for the middle class.

“I’d be worried that not investing enough in affordable housing could damage the ability to have a diverse economy and draw in the kinds of young people who could stay for the long term,” said Ed Lazere, executive director of the D.C. Fiscal Policy Institute.

3. Federal share of jobs

For decades, the economic engine of the city has relied on what Yesim Taylor calls “Fortune One,” or the government, rather than any Fortune 500 firm. Taylor, the founder and director of the D.C. Policy Center and former director of fiscal and legislative analysis for the city’s government, laments that the region isn’t diversified enough and has failed to attract high-value companies to house themselves alongside the federal government.

While the government’s share of jobs in the region has ebbed, it’s still quite high, according to Jeannette Chapman, deputy director of the Fuller Institute at George Mason University. In the immediate two years following sequestration, ending in March 2016, government jobs increased just 1.8 percent while all jobs in the Washington metropolitan area grew 3.5 percent, according to tallies by the Institute, which studies the city’s economy.

Chapman said she’s also concerned that most of the newly created jobs have been low-skilled, “resident-serving” jobs such as retail that simply respond to population growth and don’t build the economy for the longer term. Advanced industry jobs grew just 1.9 percent during that two-year period.

Even as the tech industry in the region has been “really, really, really, really good at delivering innovation in the services model,” the sector hasn’t yet adjusted as it should to a more product-oriented approach, said Jonathan Aberman, professor of entrepreneurship at the University of Maryland’s Smith School of Business.

“What you have is a very clear picture of an innovation community that is configured completely wrong to deal with the coming tsunami of government spending changes on technology,” said Aberman.

4. Restaurant glut?

One part of that shift in the mix of D.C. jobs has been a boost to the restaurant industry, in a city once mocked for its lack of foodie…

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Lean start-up methodology, a tool used by many successful entrepreneurs, has been used to describe the Trump Administration’s approach to governing.

While “failing fast and breaking things” is a phrase uttered by many entrepreneurs using the lean start-up approach, I am just not sanguine about its application to government leadership.

Lean start-up methodology starts with a key insight: that large and small companies are very different from each other. A small business is not a mini version of a large company. In fact, a fledgling company is not even a business at all; it is a small team with only one activity: discovering the fit between a product and potential customers. Start-up folks call this activity “customer discovery.”

During the customer discovery period, expenses are kept low and founders get out and talk with potential customers. Armed with at most an inexpensively built prototype, entrepreneurs hit the pavement even before the commercial product is completed. The goal is to first find out whether anyone will want the product before incurring significant expense or wasting years on a fruitless quest.

Frankly, I wish more entrepreneurs applied lean start-up tools. As an investor, I have met countless innovators who have built a product or service offering through considerable sacrifice and expense, without first determining whether a market for the product actually exists. Technology is surprisingly fungible, but the ability to satisfy a customer is rare.

There is no doubt that small, engaged teams encouraged to experiment are more likely to find a good product/market fit. This can be just as true in politics and government. I have seen customer discovery principles applied to effecting change within government and finding agile solutions to national security challenges.

However, in both business and in governing, there is a significant limitation to the agility and rapid experimentation at the core of the lean start-up process: it doesn’t enlighten a business leader or a government official on how to achieve consistency.

In business, the constant churn of experimentation and revision must evolve into building an organization that can scale and grow revenue through coordinated actions by larger groups who create and execute a business strategy for sustainable excellence. A consistent and predictable approach to sales, hiring, compensation and branding is a must. A constant feedback loop between customers and management is pivotal, so that as customer demand grows, the organization can obtain resources to satisfy its customers.

For governing, the same is also true.

In foreign policy, our allies examine our leaders’ statements and look for consistency in viewpoint. We also see it in the coordination necessary to provide services and engage in national security.

In business and in government, we rightly admire people willing to take the risk of trying something new, and we should encourage the continued use of customer discovery and rapid experimentation as tools to understand how our actions affect those we serve. However, we should not confuse “busyness” or chaos for progress, and breaking things for strategy.

The mistake many make when they apply the principles of experimentation and customer discovery is to forget that it is not the process that ultimately matters, it is the outcome.

Winning in business and in government ultimately requires the same skills: focus, strength and consistency. Mastering customer discovery is not the same as scaling a business. Winning an election through agility and creativity is not the same as governing.

The quicker we encourage the application of the lean start-up methodology to improve delivery of service to citizens, the better. The quicker our presidential leadership proves that deliberate, thoughtful consistency is being applied to the act of governance, the better many Americans will sleep.

This column originally appeared in The Washington Post.

 

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Most Americans are dismayed to learn that intentional disinformation likely affected our recent presidential election. The implications for our nation are large and the stakes are high. Interestingly, many of the questions swirl around who is responsible and what methods were used manipulate our sources of news.

What isn’t being so avidly discussed is why Americans fell for it. Sadly, I think the answer may have more to do with how we do business than we are ready to comfortably admit.

A growing number of Americans are generally disgusted with the status quo. Causes for the discontent include unemployment, technological change, imports, immigration, arguments surrounding morality and spirituality, and insecurities rooted way back to the economic dislocation of the Great Recession. So yes, there was a desire for a nontraditional candidate or approach, However, that does not explain why Americans are easily manipulated by information that is simply not true. That’s where business comes in.

Marketing professionals have long pursued a very simple goal: get people emotionally attached to a product so they will want to consume it. With the advent of mass media, this business model required even further simplification. The broader the reach, the more widely understood a message had to be: use the right toothpaste to get a good date. Drive a high-end car to be respected by others. Drink the newest beer to have a good time.

The evolution of the delivery of the marketing messages, from radio to TV, then to the Internet, onto mobile and beyond, created the conditions for more effective access to targeted consumers. However, each medium created pressure for brevity and spawned further simplification of messaging. All this while mass media expanded beyond anyone’s expectations and innumerable sources of information aimed at consumers exploded into a cacophony.

For marketers, the task of coaxing consumers was compounded by the challenge of rising above that noise. Anthropologists and psychologists have shown how the human mind determines which information to ingest and act upon. When information triggers a deep emotional response — and connects to a primal need — it will have a strong effect on behavior. It’s why so many advertisements are based on the fear of missing out or sex appeal.

Humans adapt to our environments and modify our behavior from what we learn. In an accelerating world of shorter and pithier soundbites, we instinctively seek simplicity by selecting which information suits us best. That, in turn, creates greater pressure on advertisers to find attractive ways to attract consumers’ attention.

Enter the marketplace of news. Decades ago, there were comparatively few journalistic outlets providing news at dedicated times of the day. But today, just like the flow of products competing for our attention, news is unending, often alarming, and all-too-often “breaking.”

Politicians scramble to win in this information environment. They market themselves and their ideas using methods learned from modern media and advertising. It is not surprising that our new president was a businessman, someone comfortable with winning media attention by rising above the noise with messaging that was catchy, easily understood and triggered emotional reactions.

After decades of watching commercials that told consumers what they need and how they will feel if they buy a specific product – where broader concepts are obscured or misstated – many Americans have not honed their ability to think critically about whether information is objectively true. They don’t recognize when a highly complex issue has been crudely summarized by the mass media to the detriment of one’s ability to form an educated opinion. Americans have been subtlety conditioned to value information that triggers an emotional reaction. There was no sinister intent – it was just business.

Long after today’s political scandal-of-the-day is resolved, a bigger issue will remain: Americans’ developed preference for shallow but exciting information. When ideas are sold the very same way soap is sold, the most important nuances will often get lost in the wash.

This column originally appeared in The Washington Post.

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While we appreciate the sacrifice and personal commitment members of our voluntary military make for all of us, we don’t hear much about how national service is a crucible for developing entrepreneurial skills.

Last week I asked several veterans about their businesses and how their service affected attitudes towards entrepreneurship. The similarities were remarkable even though each start-up is very different.

Blake Hall, founder and chief executive of ID.me identified the most important skill for effective entrepreneurs that soldiers have in spades: “the capacity to rapidly make tough decisions with limited information and limited resources in a chaotic and uncertain environment.”

His company is rapidly growing a technology product to solve the challenge of proving web users’ identities — a problem that ultimately touches on both privacy protection and ensuring the quality of information we receive. ID.me recently received a large amount of venture capital funding.

As a military leader, retired Gen. Stan McChrystal learned the benefits of agile and autonomous teams. He discovered how the ability to delegate and empower subordinates —  making them leaders themselves — is just as effective in commercial organizations as in military ranks. He believes national service makes Americans “problem solvers.” McChrystal Group now works with many Fortune 500 companies at the board level on issues such as organizational change and leadership development, providing sorely needed insight to many large businesses.

Another veteran, Mark Rockefeller, echoes the sentiment that the ability to improvise is what sets veterans apart. The founder and CEO of StreetShares remembers how often he and his colleagues were not merely following orders, but regularly improvising and acting “as the mayor, police chief, city manager, zoning board and dog catcher” in unpredictable situations during his service in Iraq and Afghanistan. StreetShares now connects more than 30,000 individual lenders with veteran-started businesses and provides valuable funding.

Some do not even wait until they their service is complete before applying entrepreneurial skills. Jim Perkins realized that many day-to-day operational issues in the national security establishment could be fixed by connecting field personnel with those who support them. His Defense Entrepreneurs Forum operates around the country, providing an operator’s perspective to solving government challenges. An invaluable resource to those in the government seeking innovation and efficiency and not satisfied with the status quo.

Over the years many veteran friends have shared with me the observation that once someone has survived the experience of being shot at, entrepreneurship isn’t anywhere near as scary. Yet, the stories I heard last week reminded me that understanding veteran entrepreneurship is more nuanced. Clearly, modern warfare, as complex and unpredictable as it has become, places a premium on improvisation and the ability to think and act decisively. It also provides the test of life experience through which people find their inner strength.

When those of us in the private sector think about veterans, it’s often as an employee. “Hire a veteran” is the patriotic urging.

However, if we really took the time to understand the skills our veterans have gained through their service to our nation, instead we might be asking for them to hire us. So many of them have the entrepreneurial skills to start new businesses and succeed.

We should be making sure that they have the resources necessary to unleash their entrepreneurial spirit. We owe that to them. And, we owe it to ourselves.

This column first appeared in The Washington Post.

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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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The term “artificial intelligence” is widely used, but less understood. As we see it permeate our everyday lives, we should deal with its inevitable exponential growth and learn to embrace it before tremendous economic and social changes overwhelm us.

Part of the confusion about artificial intelligence is in the name itself. There is a tendency to think about AI as an endpoint — the creation of self-aware beings with consciousness that exist thanks to software. This somewhat disquieting concept weighs heavily; what makes us human when software can think, too? It also distracts us from the tremendous progress that has been made in developing software that ultimately drives AI: machine learning.

Machine learning allows software to mimic and then perform tasks that were until very recently carried out exclusively by humans. Simply put, software can now substitute for workers’ knowledge to a level where many jobs can be done as well — or even better — by software. This reality makes a conversation about when software will acquire consciousness somewhat superfluous.

When you combine the explosion in competency of machine learning with a continued development of hardware that mimics human action (think robots), our society is headed into a perfect storm where both physical labor and knowledge labor are equally under threat.

The trends are here, whether through the coming of autonomous taxis or medical diagnostics tools evaluating your well-being. There is no reason to expect this shift towards replacement to slow as machine learning applications find their way into more parts of our economy.

The invention of the steam engine and the industrialization that followed may provide a useful analogue to the challenges our society faces today. Steam power first substituted the brute force of animals and eventually moved much human labor away from growing crops to working in cities. Subsequent technological waves such as coal power, electricity and computerization continued to change the very nature of work. Yet, through each wave, the opportunity for citizens to apply their labor persisted. Humans were the masters of technology and found new ways to find income and worth through the jobs and roles that emerged as new technologies were applied.

Here’s the problem: I am not yet seeing a similar analogy for human workers when faced with machine learning and AI. Where are humans to go when most things they do can be better performed by software and machinery? What happens when human workers are not users of technology in their work but instead replaced by it entirely? I will admit to wanting to have an answer, but not yet finding one.

Some say our economy will adjust, and we will find ways to engage in commerce that relies on their labor. Others are less confident and predict a continued erosion of labor as we know it, leading to widespread unemployment and social unrest.

Other big questions raised by AI include what our expectations of privacy should be when machine learning needs our personal data to be efficient. Where do we draw the ethical lines when software must choose between two people’s lives? How will a society capable of satisfying such narrow individual needs maintain a unified culture and look out for the common good?

The potential and promise of AI requires a discussion free of ideological rigidity. Whether change occurs as our society makes those conscious choices or while we are otherwise distracted, the evolution is upon us regardless.

This column originally appeared in The Washington Post.

 

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We all know that there are two main ways to make money in business: by selling yourself (a “service”) or selling something you create (a “product”).

I work daily on growing the greater Washington region’s innovation community, and I am constantly reminded of the fundamentally important distinction between these two business approaches. Our region’s ability to produce rapidly growing innovation companies depends on how successfully we make the distinction.

To illuminate the differences between service- and product-based businesses, I turned to members of the entrepreneurial networking group FounderCorps who have successfully built technology product businesses.

They all agree that a product-based business can grow more rapidly and achieve greater scale. “If you can find something that people want and can afford, it is easy to make lots of them,” said Dendy Young, principal of McLean Capital. This was echoed by Stefan Midford, chief executive of Natural Insight, a Sterling company that makes software to manage retail workforces, who said that a product, once created “can be sold to many companies and individuals.”

Once you understand the benefit that comes from making something once and duplicating it without customization, it’s easy to understand why “massive scale and rapid growth almost always comes from product companies,” observes Eric Koefoot, CEO of PublicRelay, which sells a media monitoring product.

Why can’t service-based companies flourish as fast? Jim Condon, principal of the consultancy CC Group, believes there is a very simple explanation. For a service business, he says, growing revenue generally requires “a commensurate growth in staff.” Ben Foster, an advisor to many local startups, adds another dimension: “service companies have to invest significant time and energy into every incremental sale, understanding the unique customer needs and building a custom solution to address them.”

So how does this affect our region?

Koefoot describes the greater Washington innovation community as being “disproportionately deep in services and businesses that deliver services.” Indeed, market data support this statement. For example, a recent survey by TandemNSI revealed that of almost 1,000 regional cybersecurity companies, only 1 in 20 is a product-based business. Similar patterns are found in the software and healthcare industries.

Because service-based entrepreneurship dominates the greater Washington region, our innovation community’s ability to provide new high-value jobs and wealth creation is constrained. We must shift to creating more product-based companies to achieve higher growth from our knowledge work.

The good news is that the greater Washington region is home to many successful product companies. Companies such as Cvent, AOL, Opower, Sourcefire, Blackboard, Weddingwire, Broadsoft and others. The challenge is to create enough density of success to allow innovators to learn how to change from a service to product-based business model.

“Many service companies fail when trying to convert to a product company – they need to be run, marketed and priced very differently,” Elizabeth Shea, CEO of SpeakerBox Communications, pointed out.

Conversion from service to product requires the development of an unexpected skill: the ability to say “no” to a customer that asks for customization, Foster added. That’s tough if you have been in a service business, where each customer relationship is based upon a unique transaction.

So local entrepreneurs agree that building a product-based business is a skill that can be taught, but that we must make an effort as a region in providing these lessons. And by acquiring this skill, we just might be able to reach our potential.

This column first appeared in The Washington Post.

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While Washington area success story Invincea being sold for more than $100 million last week is newsworthy, founder Anup Ghosh’s journey is in some ways even more important. To provide some lessons learned in the trenches, I asked him to share highlights of his experience.

Ghosh described a product discovery process that began long before he even thought about starting a business. As a program manager at the Defense Advanced Research Projects Agency, Ghosh realized that when it came to cybersecurity “as good as we were on offense, we were equally vulnerable to attacks from our adversaries. In other words, we were throwing rocks from glass houses and we needed to re-think defense.”

Over the years, I have heard from many current and former program managers that DARPA is an atypical government entity. It is tasked with creating advanced technologies to avoid technological surprise from our international adversaries. It moves fast, and demands a high level of commitment and engagement. “Sprint” is the word I hear most frequently when DARPA employees describe their work pace.

Program managers like Ghosh are term-limited and given a short number of years to identify new approaches to solve big problems. Ghosh’s description of working at DARPA was very consistent with what I had heard from others. When he completed his term, Ghosh had accumulated expertise and insight into an area of technological importance. Unlike some who returned to research, he wanted to develop a commercial product.

Conventional wisdom states that entrepreneurs go to angel investors to get capital to create a product. While this approach works well in markets with ample risk capital, such as Silicon Valley, it isn’t usually successful in our region, where such capital is hard to find.

So instead, Ghosh got creative and used resources more readily available locally. He joined George Mason University as a research professor, and sought out federal research and development funding to advance his technology vision. In effect, a university community and the federal government became his angel investors!

The tactic worked. Ghosh created promising new cybersecurity technology without outside capital. He was able to show venture capitalists a completed product and get the first of a number of rounds of funding.

With the capital, Ghosh grew an impressive team including Steve Taylor, a Mason alumnus now Invincea’s longest-tenured employee, experienced cybersecurity entrepreneur Norm Laudermilch as chief operating officer and head of product, and Mike Daniels, Network Solutions founder as chairman of the board.

It was an uphill climb as he hand-picked people who could grow a software product company. Finding these workers, and having them collectively win, is to Ghosh the most important part of the Invincea story. And that success deepens the talent pool of experienced software product entrepreneurs in the greater Washington region, thereby creating a fertile environment for a new generation of successful cybersecurity product companies.

Invincea’s story arc is a reminder that by watching how a creative individual took advantage of the region’s distinct advantages, we learn about a model for a software product start-up path that is easily repeated and scaled.

For the benefit of our nation’s economic future, as well as for our region’s economy, it is a lesson worth learning.

This column first appeared in The Washington Post.

 

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