Bacon's Rebellion

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Two Cheers — Venture Funding Rebounds in D.C. Metroplex

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James A. Bacon
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Good news/bad news business story out of the Washington area… Venture capital funding is rebounding. Washington-area companies scarfed up $330 million in funding during the first quarter — 55 percent more than in the same quarter of 2014 and the best first quarter since 2001, reports the Washington Business Journal. That’s just what the regional tech economy needs to shake off the effects of federal sequestration and to start growing again.

The not so good news is that the D.C. metropolex, which includes Northern Virginia, is a loooooong way from establishing national leadership in the venture space. The total funding for metro Washington barely amounted to a rounding error for Silicon Valley.

Broken down by state, Virginia ranked 12th in the country for venture funding in the 4th quarter of 2014 (the most recent data available online today), according to data compiled by PricewaterhouseCoopers and the National Venture Capital Association. The $156 million raised by Virginia firms compares to $7.6 billion for California and $1.9 billion for Massachusetts.

Why so little? Northern Virginia has the best educated population of any region in the United States and one of the most tech-savvy workforces. Supposedly, corporations and capital like to locate in markets where there is  a deep labor pool of technical talent. The usual response is that, well, California has Stanford and Berkeley, and Massachusetts has Harvard and MIT, and all Northern Virginia has is George Mason University… and… and… Marymount College. (OK, that’ s not entirely fair. The George Washington University engineering campus is in Loudoun County.)

But what world-class R&D powerhouses can be found in New York or Florida, both of which raised way more money? And how do you explain that Maryland, home to the Johns Hopkins University, which ranks No. 1 in R&D spending, ranks even lower than Virginia?

Clearly, the presence of a strong research university is an advantage when it comes to raising venture capital, but it’s hardly a prerequisite. I’m happy to be proven wrong on this, but I keep coming back to the fact that the corporate culture of Washington-area tech firms is geared to operating in sync with the metabolism of the federal government, not Silicon Valley. Yes, there are exceptions — and, I’d wager, they’re the ones getting the venture funding. But there don’t seem to be enough to change to fundamentally alter the nature of the Northern Virginia economy.

If Northern Virginia is ever going to wean itself from its dependence upon the federal government, we’re going to have to see a lot more venture funding than $150 million a quarter. As for the rest of Virginia, it would be nice to see any venture funding at all!

— JAB

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13 responses to “Two Cheers — Venture Funding Rebounds in D.C. Metroplex”

  1. TooManyTaxes Avatar
    TooManyTaxes

    “I keep coming back to the fact that the corporate culture of Washington-area tech firms is geared to operating in sync with the metabolism of the federal government, not Silicon Valley.” I think this is fundamentally true. We have very many smart people, but we are generally oriented to meeting the needs of the federal government and not other markets.

    One example, I did some work about 8-9 years ago for a tech company in Tysons. It was focused on taking developments made by DARPA on cognitive radio and frequency sharing to the commercial market place. It did some government contract work, but the volume was small. Fast forward, virtually everything it does is for Uncle Sam. Despite very bright people, the firm could not jump to the civilian market. Just a data point. But still informative from what I viewed.

    1. Cville Resident Avatar
      Cville Resident

      That is a very interesting post.

  2. LifeOnTheFallLine Avatar
    LifeOnTheFallLine

    Business happens where business has always happened. New York has been the center of global finance long enough that even if it lacks a strong R&D presence via a university it’s still going to pull in some dollars. Florida, likewise, is still benefiting from the massive amount of space-tech money and development that went on down there. And Illinois, through Chicago’s exchanges, are in a position similar to New York.

    Virginia – with its proximity to DC and with it the NSA, CIA, FBI, etc. along with the heavy military presence – had its chance to split the difference with California during the Space Race. The difference is, they decided to spend money making university education widely affordable and to attract top-tier research and academic talent regardless of race or creed. We decided to pursue Massive Resistance.

    1. James A. Bacon Avatar
      James A. Bacon

      Er…. Massive resistance was more than 50 years ago.

      Still haunting us, eh?

      1. LifeOnTheFallLine Avatar
        LifeOnTheFallLine

        California is still prospering off being prepared to benefit from the microcomputer revolution (two of the original ARPANET nodes were at California public universities – UCLA and UCSB – for example) because they prioritized a different set of social and educational values.

        I picked Massive Resistance as a symbol for policies the state chose instead of smarter ways to go. In the 50s and 60s, Virginia was uniquely situated to benefit from the explosion in defense and research spending by dint of location and the existence of two of the oldest, most prestigious universities in the country and we lost out because we were busy doing other things.

        California decided to spend its money educating people and we decided to spend our money denying people access to education.

        But you’re right, the state funding tuition grants for private academies for white children, localities shutting down entire school systems and all the time and money the state spent fighting repeated legal battles probably didn’t have any long term impacts. And it was certainly a smarter use of state funds than keeping public universities tuition free for in-state residents.

        1. LifeOnTheFallLine Avatar
          LifeOnTheFallLine

          Then again, VCU and Virginia Tech have both graduated more Nobel prize laureates than UVA and William & Mary, so maybe the prestige of those latter institutions is a little pumped up…

    2. virginiagal2 Avatar
      virginiagal2

      Virginia has a higher percentage of college graduates than California (44% versus 37.6%, as of 2009, the date of the dataset I found.)

      It also has a lower poverty rate (9.2% versus 13.2%) per the 2014 numbers from Wikipedia.

      Virginia’s most common job title is computer software developer. California’s most common job title is truck, delivery, and tractor drivers. (Both per NPR report of Census Bureau data)

      Don’t sell Virginia short.

      1. LifeOnTheFallLine Avatar
        LifeOnTheFallLine

        So you’re saying that to compete with California for venture capital – you know, the subject at hand – we need more impoverished truck drivers without college degrees?

        Or did something about pointing out Virginia’s racist policies make you feel some need to “defend” the commonwealth?

        1. virginiagal2 Avatar
          virginiagal2

          The subject isn’t competing with California. Silicon Valley has a fairly unique situation, that hasn’t translated to generalized wealth for the state as a whole, and that a lot of places have tried and failed to replicate.

          A better comparison for us to look at are places like Austin, Houston, Salt Lake City, Raleigh.

  3. JohnS Avatar
    JohnS

    Let’s not overthink this.

    Elite research universities produce grads who start tech companies. Tech start-ups gobble up the vast majority of VC funding. Is it really a surprise that Massachusetts and California dominate here?

    Nothing against Virginia’s higher ed institutions but they can’t hold a candle to Stanford, MIT, Harvard and Berkeley’s of the world. They couldn’t “back then” and can’t now.

    The question is where these companies will take root once established, and how much of contender Virginia is here.

    1. Cville Resident Avatar
      Cville Resident

      I agree that nobody’s touching the Stanford-Berkeley brainpower. It’s also worth noting that while a university isn’t a prerequisite, access to capital is….NY and FL are major financial centers….

    2. virginiagal2 Avatar
      virginiagal2

      The current fastest growing tech sector city is Austin. Houston, Raleigh, and Salt Lake City are three others in the top ten. I think our schools hold up perfectly well against them.

      Massachusetts actually doesn’t dominate in tech job growth.

  4. Richard Avatar
    Richard

    IN DC?NOVA the low hanging fruit is government contract work. That’s where the strongest entrepreneurs are going. It’s not just about education or skills, it’s primarily about entrepreneurs who see an opportunity to make money, and the money in DC is in providing services to the government.

    30 years ago in Raleigh much of the top scientific talent was in the universities and in IBM and Glaxo and Burroughs Welcome. Glaxo and Burroughs Welcome merged and there were massive layoffs of experienced workers; IBM restructured and had massive layoffs of experienced workers; that turned out to be a good thing as may of the more experienced went on to other smaller software and biotech ventures that have now blossomed. Professors at Duke NC State and UNC saw opportunities to monetize their research and with the universities’ blessings they got involved and their research became the basis of new companies. SAS, the largest US big data software company was started by a NC State professor, Jim Goodnight, and is now a huge employer that has consistently been rated one of the top best places to work in the US. A whole infrastructure of finance professionals, lawyers, accountants sprung up to support the entrepreneurs and the new ventures. But all of this wouldn’t have happened I think if IBM, Glaxo, Burroughs Wellcome, and the universities hadn’t attracted the talent, and if there hadn’t been the disruptions caused by mergers and layoffs. Another important factor is that Raleigh was and is an easy place to live and raise a family – good schools, housing, lots of smart people, progressive and business-friendly government, college basketball, good barbeque, and an easy-going live and let live culture! (IMO some of these factors are at risk with current state government!}

    So, right now if you want make a lot of money in DC/Northern VA government contracting (or real estate) is the way to go. The culture won’t change unless the money isn’t in government work anymore. Maybe if the money isn’t in government work, the brains and money will shift to actual research and invention.

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