By: Theo Slagle, Director, Tenant Advisory Group
In the past, when people thought of Washington DC, ‘tech’ or ‘startup’ were not the first words that came to mind. There is however a growing and vibrant tech economy in the region. Evidence of this development is documented in Cushman & Wakefield’s recently launched ‘Tech Cities 1.0’ U.S. Report, authored by Robert Sammons and Ken McCarthy. The report’s findings surprisingly put DC as a top three hot spot behind the traditional tech players of Silicon Valley and San Francisco.
The ‘Tech Cities’ report takes particular market drivers into close consideration for determining its list.
There are key characteristics of an environment that supports, nurtures and promotes the formation of tech cities. We call it “tech stew.”
“Tech stew” essentially boils down to six key ingredients – local universities, capital, tech workers, knowledge workers, educated workers, and entrepreneurial spirit. Each thriving tech market has a distinct essence based on the proportions of each metric, which the following section defines and examines.
As someone who regularly works with tech companies in the region, I’m not surprised at all by DC’s number three ranking. When viewed through the lens of the report’s ranking criteria, its “tech stew”, DC nabbing this third place spot makes sense. And when you look at our region’s ranking within each tech stew ingredient category, it’s easy to see why we end up with such a high overall ranking.
Regionally, there is access to top universities like The University of Maryland—alma mater of Google’s co-founders, Georgetown University, The George Washington University, George Mason University, University of Virginia, and Virginia Tech University. Although DC ranked ten in the Venture Capital category on the report’s list, there has also been a marked increase in venture capital activity in the region in recent years, as noted here and here. DC has seen the amount of venture funding increase steadily year to year over the last 5 to 10 years even as venture activity has slowed nationally. Much of this funding is coming from local well-established firms who are not just investing in California tech companies anymore, but keeping their money in the area as well. But local VC firms aren’t the only ones who see value in betting on DC startups. EverFi, a local edtech company recently announced a $190 million round that included Silicon Valley regulars like TPG, and celebrity investors like Richard Branson and Bono.
This region is also one of the largest data center markets, with over 70% of the world’s internet traffic running through Northern Virginia. In addition, 55 of the world’s 500 fastest growing cybersecurity companies are headquartered in the region. This confluence of factors has contributed to Washington DC quietly growing into somewhat of a tech powerhouse, even if dwarfed by the likes of Silicon Valley and San Francisco.
Proximity to the federal government, one of the world’s largest customers for goods and services—including tech-related products, makes locating in DC a no-brainer for firms operating in particular spaces. Virginia-based tech firms primarily operate in the defense and cybersecurity spheres, while Maryland-based companies are predominantly involved in the life sciences. However, startups in the business services and consumer space have been sprouting in the area as well. Overall, the DC area has seen an increase in the number of tech startups that aren’t necessarily government-centric providers choose to locate here. The range of companies has widened considerably over the past five years, with technology consulting firms like Gartner (350,000 sf) and Advisory Board (525,000 sf) both preleasing space; Optoro, a logistics software company, and TrackMaven, a marketing analytics firm, have both recently located to downtown DC.
One of the other vital ingredients that makes up the so-called tech stew is Growth Entrepreneurship. Which the report explains as follows:
From a commercial real estate perspective, the interesting companies are those with a high-growth profile that has extended over several years. These are the companies that have the potential to become important contributors to local economies and to become mainstays of the local commercial real estate environment.
The Growth Entrepreneurship Index is made up of three components:
— Rate of Startup Growth.
This statistic measures how many jobs are created by startups over a five-year time period.
— Share of Scale-ups
Fast-growing firms contribute more to the growth of a local region. The focus of this metric is on companies creating large numbers of jobs. It measures the number of firms that started small and grew to employ 50 or more people after 10 years of operation as a percent of all employers.
— High-Growth Company Density.
This statistic measures the number of businesses that have at least $2 million in revenue and have averaged 20% growth over the previous three years.
While not strictly a “tech” index, the cities that lead in growth entrepreneurship tend to be leading tech locations, including Austin, San Jose, and Boston (all in the top five). However, cities such as Washington, DC and Nashville also have a very healthy startup environment.
According the report’s index, sourced from the Kauffman Foundation, DC leads in this ingredient category. This is more evidence to support my earlier point about the number of new companies choosing to locate in DC. Silicon Valley and San Francisco may have a large and established tech startup ecosystem, but their market is saturated while DC has both the infrastructure and room to grow.
This area also places number two in the Educated Workforce category, an essential factor in tech company growth and success. We place number five in the percentage of Tech Workers, which include those employed as everything from computer systems design specialists to biotech/pharmaceutical professionals.
Beyond becoming a growing scene for tech industry upstarts, DC also serves as a significant outpost for larger tech companies seeking proximity to policymakers. Washington DC houses an established hub of well-known tech companies such as Facebook and Uber’s East Coast headquarters, and both Amazon and Google have a very large presence on Capitol Hill. Engagement in DC’s policy world has become part of a smart business strategy for tech firms at almost all stages of growth. We see an example of this in the rapid growth of DC-based FiscalNote, a startup that helps companies track important government legislation, which has recently relocated to larger offices for the third time in 4 years.
In DC, the formula for rapid technological growth is ever present, despite an overall industry decline. With the significant presence of “tech stew” ingredients and the city’s tech growth potential, DC’s prospects for remaining a top tech city are quite positive. Cushman & Wakefield has anticipated this “tech boom” in DC and local brokers have experience advising startups concerning their real estate options. A clear understanding of what constitutes a tech city is key in making strategic real estate decisions for the tech companies that call DC home.
Theo Slagle is a Director with Cushman & Wakefield’s Technology Practice Group in Washington, D.C. Contact him at firstname.lastname@example.org