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

By Kenneth Corbin, CIO
November 06, 2012 03:00 PM ET

CIO - 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.

Start-ups rush to the cloud

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.

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