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Is D.C. the Next Great Tech Startup Hub?

WASHINGTON -- The District of Columbia is hardly known as a hotbed of activity for tech startups, certainly not on the order of New York or Boston, let alone Silicon Valley or San Francisco.

In fact, the primary association between the nation's capital and the tech world is found in the thick roster of defense contractors and other IT players that provide software, hardware and services to the departments and agencies of the federal government.

But city officials and members of Washington's nascent startup community, buoyed by new pro-growth economic policies and a surging population, envision a new chapter of economic expansion driven by a flowering of innovative young tech firms backed by angels or venture capitalists.

In remarks at a conference organized under the DC Week festival of tech- focused events, Victor Hoskins, D.C.'s deputy mayor for planning and economic development, touted the early results of several initiatives that the city's administration has taken to boost the tech scene here as a path to new growth that could offset declines in government spending on IT and other areas as federal budgets flatten or contract.

"As the federal government sector shrinks, and it is shrinking, we have had huge growth in technology," Hoskins said, noting that when he joined the administration of Mayor Vincent Gray nearly two years ago, the relationship between the city and the tech community was "really nonexistent."

City officials are quick to point to USA Today's recent rankings of the most favorable cities for tech startups, which pegged Washington at No. 5, behind only the San Francisco area (including Silicon Valley), Boston, New York City and Los Angeles.

Hoskins cited the legislative package that the D.C. Council unanimously passed earlier this year to keep LivingSocial headquartered here, providing for tax incentives in exchange for a commitment by the company to remain in the District and hire 1,000 additional local workers.

"They're really our flagship company," Hoskins said of the daily-deals site.

Gray celebrated that measure -- the Social Ecommerce Job Creation Tax Incentive Act in longhand -- as a message to the startup community that the District is open for business. Then, last week, Gray signed the Technology Sector Enhancement Act into law, eliminating the prior system of geographic technology zones by broadening incentives for tech companies regardless of where in the city they are located, among other provisions intended to court startups.

But one measure that Gray had sought to lower the top capital-gains rate that local angel investors would pay from 8.95 percent to 3 percent was excluded from the final bill, though the administration intends to renew that fight in the Council in the coming months.

"That makes a big difference to investors," Hoskins said. "We really are going to work on this capital gains issue because we feel that it is really important to the investment community."

David Zipper, who serves under Hoskins as director of business development and strategy, said that the capital gains provision was widely misunderstood, drawing fire from critics within the council and around the city who mistakenly believed that it would grant a windfall to outside investors, though D.C.'s taxing authority ends at the city's boundaries, and would thus only apply to local businesses and their Washington- based backers.

Zipper explained that much of his job involves brokering meetings between leaders of established local commerce groups such as the Greater Washington Board of Trade and the startup community. In that way, he explained, the administration is working to break down cultural barriers between two very different segments of the economic scene, warming traditional Washington with its lawyers and lobbyists (ideal candidates for angel investments, but whose idea of backing a startup is often a restaurant) to the burgeoning tech sector.

"Those sorts of bridges are how we can make the tech community an integral part of the city for a very long time to come," Zipper said.

He also described the administration's plan to transform a long-vacant portion of the campus of St. Elizabeth's Hospital in one of the poorest parts of the city into an "innovation center." The mayor's team has named Microsoft as one of its preferred candidates to set up shop in the planned tech hub.

Zipper and others pointed out the shifting dynamics of the model for funding startup tech ventures, with cloud computing, open source software and other industry trends lowering the cost of setting up a business, potentially diminishing the importance of the traditional venture capitalist. "Frankly, you're seeing venture capital become less important," he said. In place of the VC, individual angel investors or even new crowd-funding services such as CircleUp can serve as incubators for small ventures that require minimal capital outlay to get going.

"I feel that D.C. as a whole is starting to really understand that there's a huge opportunity," said Zvi Band, a Web developer and entrepreneur who co-founded Proudly Made in D.C. and the D.C. Tech Meetup, both community-driven efforts to boost Washington's startup scene. "We see every day that the barriers get lower and lower."

The barriers may be coming down, but in the Washington region, by some measures the most affluent in the country, many would-be angel investors are still sitting on the sidelines, leaving entrepreneurs to court VCs in Silicon Valley or New York to fund their startups, according to Julie Kantor, co-founder and chief strategy officer at Barrel of Jobs, a social recruiting service.

A D.C. native who is bullish about the city's startup scene, Kantor nonetheless cautioned that in addition to the funding challenges entrepreneurs face, broader demographic factors imperil Washington's tech community.

She pointed out that the city has become a favorite destination for recent college graduates, the sort of people who would eagerly seek work at a startup. "People want to work for startups in the same way they wanted to work for nonprofits 10 years ago," she said. But while the city has been rapidly adding younger residents, it is less hospitable to middle-aged people with school-age children, who are more likely to head up startup ventures than the proverbial kid working out of a garage or dorm room.

And that's a problem in a city at once trying to cultivate a tech hub while struggling to improve a public school system with facilities of wildly varying quality. "D.C. [really] needs to keep the middle class that can't afford private schools," Kantor said. "[But instead,] it's forcing a lot of people like me to consider moving."

Indeed, facing no good options for their daughter bound for middle school, Kantor and her husband recently elected to put their Washington home on the market and relocate to the suburbs, a decision they made with a heavy heart.

"D.C. is going to be great for young people out of college. We're going to lose the middle class," she said. "The school challenge is real."

Zipper, of the deputy mayor's office, acknowledged that the challenges facing the city's schools ripple far beyond education, amplifying Kantor's concern about the impact on the Washington startup community.

"People see this as a social issue, which it is, but it's also an economic-development issue," he said.

At the same time, he pointed out that Washington stands to benefit greatly from a population surge that is seeing an influx of about 1,000 new residents a month, driven by well-educated, upwardly mobile young people. In the tech scene, that stands as a sharp contrast to the dynamics of the region about a decade ago, when the regional industry was concentrated in the Virginia suburb of Tysons Corner, anchored by high-flier AOL, which then made its headquarters there before eventually relocating to New York.

"Let's not take for granted that we have these young people coming in," Zipper said.

The potential of that workforce has not gone unnoticed by entrepreneurs scouting around for a location to base their next tech venture, according to Daniel Doll, president and COO of SoapBox Soaps, a "for-purpose" ecommerce venture that sells soap online and for each bar purchased donates another to needy children in the area and around the world.

"I think people are starting to recognize that D.C. has a ton of untapped talent," Doll said, "that D.C. is not just a community where people have to go to work for the government."

Kenneth Corbin is a Washington, D.C.-based writer who covers government and regulatory issues for CIO.com.

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