Are D.C. Startups Seeding the Next American Revolution?

Donna Harris reaches for her bag, which is slumping against an overstuffed beige couch in the basement kitchenette of a Washington, D.C., theater.

“I’ll be back,” she calls to her business partner, Evan Burfield, a tall 38 year old whose forearm tattoo is hidden under a checkered shirt sleeve. He’s sitting at a nearby lunch table, simultaneously checking email and interrogating a nervous entrepreneur about revenue projections.

Harris ordinarily favors jeans with layers of pearls, but today she’s sporting a more formal dress and suit jacket. She shuffles out, gathering up a handful of the millennials she has promised to deliver to the White House, which is hosting a global entrepreneurship event/photo op, including appearances by Mark Cuban and other “Shark Tank” judges, across town.

It is great timing for White House staffers, who make sure President Obama gives the nervous entrepreneurs a shout-out during his remarks. It is less convenient for Harris, whose startup-incubator-venture capital fund 1776 is hosting a pitch competition just a few blocks away.

Photo by Vjeran Pavic for Re/code

In just two years, Harris and Burfield’s 1776 incubator has assumed the role of standard-bearer for D.C.’s tech scene, which could use a few new high-profile success stories.

More than 270 entrepreneurs work in 1776’s loft-style space, which sits across the street from the Washington Post. The firm recently gobbled up a rival incubator in the Virginia suburbs and acquired Hattery, the San Francisco-based shared work space.

1776 might look like a typical incubator, but it represents perhaps D.C.’s best hope since AOL of producing a breakout tech star, something the city has long yearned for.

LivingSocial looked promising for a while, but the local daily-deal site floundered, got hacked and began shedding staff after revenue started dropping. Home automation startup SmartThings was based in Georgetown, but it moved to Palo Alto after being acquired by Samsung last summer.

Washington may seem like an unlikely tech innovation hub — it’s better known for subcommittees, bickering congressmen and humiliating government tech failures like Healthcare.gov — but the metro area has a long history of employing a lot of tech talent, even if much of it toils for government or military contractors. And as technology has evolved to allow startups to get involved in intimate parts of our daily lives — from “smart” homes and cars to wearables that track our vital signs — the need for companies to be closer to policy makers who set rules to protect consumers has grown exponentially.

When it comes to being a tech hub, Washington often feels like the forgotten middle child. Maybe that’s because many local tech companies focus on large enterprises — government agencies, the military or other companies — instead of consumers. Or maybe it’s because Washington tends to attract a different sort of entrepreneur or millennial than Silicon Valley — the student-class presidents and studious do-gooders.

“D.C. is traditionally a government town, and being risk-averse is part of the history here, and is still a part of the fabric,” says Jeff Reid, founding director of Georgetown University’s Entrepreneurship Initiative. “But it’s changing.”

Photo by Vjeran Pavic for Re/code

Strengths and weaknesses

Former Rosetta Stone CEO Tom Adams could have gone anywhere to launch his forthcoming mobile “active learning” app, which teaches business skills. Instead, the 42 year old set up shop a four-minute walk away from Rosetta Stone’s corporate headquarters in Arlington, Va., about five miles and one bridge away from downtown D.C.

Between Rosetta Stone and education platform company Blackboard, which is based in downtown D.C., the Washington area has a fair number of “edtech” startups like Adams’ Pedago, which counts eight Rosetta Stone alumni on its 10-person staff. “There is a talent pool,” says Adams. “It’s no different than anywhere else. Can you quickly get a team together and be productive?”

About 79 of every 1,000 jobs in the Washington metro region are in tech, according to an analysis of Bureau of Labor Statistics data by NerdWallet. Many of those jobs are with military or intelligence contractors, particularly in the cyber-security area. The region is also awash with millennials. Washington gained an average of 12,500 of them annually between 2009 and 2012, according to a Brookings Institute report, more than anywhere else in the U.S.

Photo by Vjeran Pavic for Re/code

A recent American Institute for Economic Research study ranked D.C. the top destination for recent college graduates among major metro areas. The area also boasts more residents with advanced degrees — about 47 percent have at least a bachelor’s degree — than any other metro area in the U.S., according to U.S. Census Bureau data.

The Washington area has had many of these advantages for years, but that hasn’t resulted in the local tech sector becoming a much more significant economic force in the area. Washington rated above average in just one category in a recent study of the local characteristics of eight tech-city hubs commissioned by 1776 and the U.S. Chamber of Commerce.

“Despite relatively strong performance on other indicators, local entrepreneurs perceive the D.C. ecosystem to have weak engagement across a variety of roles, as well as a weak overall network,” the report found.

To put it another way, D.C. is a company town, but the company is still government, not technology.

“The talent is here. You don’t necessarily have a great amount of advisers or support groups like you would in Silicon Valley,” says Anup Ghosh, founder and chief executive of Invincea, a Virginia-based cyber-security company that uses “secure virtual container” technologies to keep hackers out of corporate data systems.

Photo by Vjeran Pavic for Re/code

The D.C. area ranked ninth last year in venture capital funding, with $1.08 billion doled out to 121 companies, according to the PricewaterhouseCoopers and National Venture Capital Association’s annual MoneyTree report. That was down from $1.58 billion in 2013. It is practically a rounding error compared to the $24.5 billion VCs spent on companies in Silicon Valley last year.

While the Washington area has a collection of angel investors and venture firms — most notably New Enterprise Associates, which has a large office here — local entrepreneurs complain that they often have to go elsewhere for money.

“If you’re trying to change the world, you want a partner who’s trying to change the world,” says Adams, adding that some local investors are too focused on the bottom line. “Whenever I go to industry investor trade shows and run into the West Coast investors, they aren’t interested in short-term cash flow.”

“Visionary companies will be going to where those investors are,” he says.

Embracing the wonk

One recent morning at 1776’s offices, three photographers set up lights to do promotional shots of Harris and Burfield, who had just announced their acquisition of an incubator across the Potomac River in northern Virginia. One is from a property management firm that helped make the deal happen.

“Where do you want us? In front of the sign?” Harris asks, as the pair position themselves in front of a giant metal cut-out 1776 logo like world-weary starlets on a red carpet. They’ve done this so many times they jokingly run through the various poses they’re always asked to assume.

There’s the “arms crossed,” says Harris, who also demonstrates the “back-to-back” and the “one arm around each other’s back.”

They’ve had plenty of practice posing in the two years since opening 1776. In some ways, the pair have become the poster children for D.C.’s tech scene.

Their airy, photogenic shared workspace has also become a must-stop on the itineraries of politicians visiting Washington and in need of a techie photo op. President Obama stopped by last summer to talk about improving job numbers.

British Prime Minister David Cameron made an appearance in January to talk up how Britain is tech-friendly before a meeting with President Obama at the White House, where they discussed the U.K’s tech-unfriendly interest in outlawing some encryption technologies used by U.S. firms.

So many politicians want to use the space for photo ops that Harris and Burfield now require them to actually do something for the 1776 community, whether it’s meeting with local startups before the cameras start rolling or having their aides added to the incubator’s growing network of regulators and elected officials.

1776 embraces the wonk. There aren’t many incubators where members are invited to events as diverse as “Is Authoritarianism Staging a Comeback?” and “UX Design & Habit Formation.”

Photo by Vjeran Pavic for Re/code

The incubator/seed-stage funder focuses on startups that touch government-regulated markets, like health care, education, energy and transportation, and are trying to solve complicated issues. One company in its portfolio, Water Lens, provides real-time mobile chemical analysis of water and other fluids. Another, called Babyscripts, offers a blood-pressure and weight-tracking service that allows high-risk pregnant women to remotely record and transmit their vitals instead of making an in-person visit.

Since much of the regulation in those areas comes from D.C., the idea of 1776 is to connect entrepreneurs with an expanding network of lobbyists, regulators and other local experts who can help them avoid trouble.

“The government and the culture surrounding government can be a negative for startups, but it can be a positive,” says Georgetown University’s Reid. “You’re seeing startups that are getting into regulated industries. They need to be close to the policy makers.”

The incubator gives the D.C. startup community a centralized base, which has historically been somewhat lacking. It was launched, in part, with the help of $380,000 in grants from the D.C. government, which has desperately wanted to encourage buzzy tech startups to base themselves here.

Harris and Burfield met through the Startup America Partnership, an organization launched at the White House on January 2011 — but funded privately — that was designed to encourage entrepreneurship. Harris was executive director of the group and Burfield, who grew up in the Washington suburbs and started his first software company at 19, joined to run Startup DC, a local affiliate.

There are so many resources in Washington — tech workers, venture capital, well-connected lobbyists and regulators — but they have typically operated in different worlds that rarely intersected, says Burfield. “That’s the key concept behind 1776 from the beginning: Can you create a program, and can you attach a funding vehicle to it, that allows you to tap into all of these different resources?”

The original investors included a local hospital system, Comcast* and Microsoft. There is practically a shrine to Redmond, Wash., near 1776’s shared kitchen area, where a quote from Microsoft CEO Satya Nadella adorns one wall in the “Microsoft Innovation Lounge.” Nearby, a Bill Gates quote, “It’s fine to celebrate success but it is more important to heed the lessons of failure,” is stamped on the back of a gray sofa.

1776 isn’t all-inclusive and there are plenty of startups in the area that it doesn’t help. Companies trying to build consumer applications in non-regulated fields aren’t going to find much guidance there.

“We cheer on people creating a great dating app,” Burfield says. “But what we want to help [are] these companies doing incredible things, applying digital disruption to health care or how to create a sustainable future from the energy standpoint.”

“They’re not going to build an app that goes viral,” he says.

Photo by Vjeran Pavic for Re/code

The real competition

Gary Hensley is shifting back and forth as he waits outside the auditorium of Washington’s Shakespeare Theatre, waiting to be led downstairs to be interrogated by judges at 1776’s global Challenge Cup pitch competition.

It’s the firm’s second-annual global pitch competition — a weeklong extravaganza of wonky panel discussions, cocktail parties and hours of sometimes painfully earnest pitches from 81 startups that won local competitions in 16 cities globally.

The private session with judges is the real competition, not what happens onstage later, one of the founders of Kenyan e-book seller eKitabu says to Hensley as they both wait.

Hensley murmurs noncommittally, but he’s more nervous about the prospect of going onstage for his two-minute pitch in a few hours. His company, EdBacker, is an online fundraising platform for PTAs and schools.

Photo by Morgan Gress/1776

This is Hensley’s second time in the competition, but the first time he’s made it to the global finals. He’s a hometown favorite who is well known to the 1776 crew, which has already invested in his five-person startup. A few years ago, he sold his first software startup to Pearson, the giant education publisher.

Now, the 38 year old splits his time between 1776 and his Northern Virginia townhouse basement, where he juggles running his startup with being a single dad to two stepkids, an eighth-grader and first-grader. Hensley’s wife passed away in early 2014.

No one comes to fetch him to meet the judges, so Henley picks his way downstairs, where he runs into a harried 1776 staffer who tells him they’re running late, and leaves him in a hallway lined with racks of costumes and old posters of Shakespeare plays that have been performed upstairs.

He’s eventually ushered into the theater’s “green room,” which is essentially a lunchroom with a few beige couches. Sitting at a dining table across from the judges, he rattles off his pitch. He’s grilled on revenue projections, how the company could make money from corporate advertisers, how it could expand to cover more schools and PTAs.

Hensley knows his numbers, rattling off five-year revenue projections and how much money the company makes per school. Within 15 minutes, he’s back upstairs.

“What do you think?” he’s asked.

“I don’t know. What do you think?” he responds.

Later that afternoon, Hensley takes the stage to present his well-rehearsed two-minute spiel to cheers from the audience. (“Hometown crowd,” Hensley shrugs later.) He speaks fast, but clicks through his four-page PowerPoint slide smoothly. He answers a few questions about his business model and expansion plans and walks off the stage, visibly relieved.

The judges pick three winners to advance to the competition’s final. Hensley is not among them.

Photo by Morgan Gress/1776

From AOL to NSA

Some of Silicon Valley’s largest tech companies may be deeply unhappy about the National Security Agency and snooping by U.S. intelligence agencies. But those activities have been great for D.C.’s tech scene.

The cyber-security industry is booming in Washington, thanks to government contractors who compete fiercely to snap up techies with security clearances.

“We’re moving from a world where war is fought with bullets and bombs to one where it’s fought with bits and bytes. The whole world is changing in that realm,” says John Backus, a managing partner at New Atlantic Ventures, a local early-stage venture firm.

One of the firm’s portfolio companies, Invincea, is among the Washington-area cyber-security companies that have been able to take advantage of their physical proximity to the U.S. intelligence community and the Defense Department to build products for the private sector. Before starting the company, founder Anup Ghosh was a program manager at the Defense Advanced Research Projects Agency (DARPA), where he helped develop cyber-security programs.

He was able to take some of that intellectual property with him when he left and, thanks to some key government contracts, launched Invincea in 2006. “I got my start working in the federal government, and got them to fund some of the original IP development,” Ghosh says. “The government is a fabulous customer. They want to solve the hardest problems. And they can spend in a very big way.”

The Washington area might be best known as the birthplace of America Online and the millions of disks and CDs that sprang forth from the D.C. suburbs to land in mailboxes across the U.S.

But its origins as a tech hub started far earlier, thanks in part to telecom companies such as MCI Corp., which located in Ashburn, Va., a piece of the “technology corridor” of Northern Virginia, which stretches from Arlington to Dulles International Airport. MCI became the second-largest provider of long-distance service in the U.S. for some time before being purchased — first by WorldCom, and later by Verizon.

Like other tech areas, the region was hit hard by the dot-com bubble burst, but the impact was lessened somewhat, because many tech workers were able to burrow into federal agencies and government contractors — particularly after defense and intelligence spending soared following the 9/11 terrorist attacks

That exodus of talent hurt the local startup scene. But Ashburn has continued to thrive, partly because of defense contractors and “data center alley,” with connections to Comcast and other East Coast Internet providers. And while AOL and MCI floundered, many of their former executives and employees stayed to work at the next generation of tech startups, as well as with the large defense contractors who employ a bulk of the tech talent in the D.C. area.

“Some people came, made money and stayed. And they proceeded to reinvest time, energy, wealth and effort back into the market,” says Tige Savage, who helped co-found of Revolution LLC with AOL co-founder Steve Case. “We’re now backing companies that are the offshoots of LivingSocial.”

Nearby, on a shelf in Case’s office sits a toy replica of the “Rise of the Rest” tour bus that he’s been travelling in this year to highlight startups in smaller cities across the U.S.

“You should come along!” Case booms, as he settles into a chair to talk about his theory that there are plenty of innovative startups outside of Silicon Valley. They just need to be found and funded.

Case likes to talk about his theory about Internet innovation. The first wave of tech growth happens from 1985 to 2000, when the Internet was being built in most of the U.S., he argues. Over the next 15 years, companies built apps and services that rode on top of the Internet. The third wave, Case says, will be about integrating the Internet more intimately into our daily lives through connected objects or services in regulated areas, like health care, energy and education.

Case doesn’t have the largest venture firm in Washington, but Revolution is arguably the most high-profile. Co-founded by another AOL alumni, Ted Leonsis — who owns D.C.’s professional hockey and basketball teams, along with the downtown arena they play in — Revolution has invested roughly $250 million in Washington-area startups over the past five years.

“Silicon Valley will continue to be really strong, and will continue to be the pride of America and the envy of the world,” Case says. “But in this next wave, I think you’ll be surprised by how much of that happens in Washington and the rest of the country. I think capital will start figuring that out.”

Social good, financial success?

At 1776’s first global pitch competition last year, the top winner was a startup called HandUp, which allows homeless people and others in need to post videos and to solicit donations online. The San Francisco-based startup is a public benefit corporation, however, and while it might help make the world a better place, it may not provide much of a financial return on 1776’s $150,000 investment.

Photo by Vjeran Pavic for Re/code

Companies that get to the finals represent a mix of social entrepreneurism and capitalism — wanting to improve the world while seeking to make a healthy profit. There are three criteria, Harris says: Are they compelling? Are they world-changing? Are they scalable?

On Saturday night, the company that had the winning combination of those attributes was Twiga Fruits, Kenya’s leading exporter of bananas, pineapples and avocados. It won a $150,000 investment, the judges said, because it was the “most promising, problem-solving startup” in the competition.

Three other startups won $100,000 investments, including Cognotion, which develops software to train entry-level workers; Radiator Labs, which has created a system to make old radiators more energy-efficient and smartphone-controllable; and Reliefwatch, which uses mobile phones to track diseases and local supplies for health-care organizations.

“Twiga Fruits was selected because they are already highly profitable, are throwing off enormous cash and have a swing-for-the-fences strategy that could make them the Amazon.com of Africa,” Harris says. “Their distribution capabilities are revolutionizing the way food is sold in the world’s most untapped market, and their conscientious treatment of vendors is a cherry on top.”

* Comcast owns NBCUniversal, which is a minority investor in Revere Digital, Re/code’s parent company.

This article originally appeared on Recode.net.

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