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The Potomac KnowledgeWay: A Transformation in Progress
The Potomac KnowledgeWay: A Transformation in Progress
 
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Mario Morino, The Morino Institute
Presented to Friedman, Billings, Ramsey & Co.,
December 4, 1996
1999-2016, Morino Institute. All Rights Reserved.

An August 26, 1996 article in Forbes Magazine, "Foothold in Enemy Country," portrays the changing nature of the greater Washington, DC area through the eyes of America Online founder Jim Kimsey. The article noted that initially "Kimsey didn’t think much of the area. No venture capitalists. Hardly any good corporate lawyers. Lots of people who wanted to work post office hours. He felt the proximity to the federal bureaucratic mentality enervates entrepreneurs." The article later notes what Jim says of the region now, "The atmosphere is dramatically different."

I am pleased to have this opportunity to tell this story of the transformation of the region and its economy-- the change being witnessed by Jim Kimsey and others. The Greater Washington region-- centered in Northern Virginia, the District of Columbia and Suburban Maryland-- is moving from its staid, conventional, federal government/embassy row roots and blossoming into a new age, creative, center of innovation-- the Potomac KnowledgeWay.

A Time...And A Place...Of Opportunity

We are in the middle of a dynamic entrepreneurial movement that makes this area a hot spot for start-ups and venture investing!

This entrepreneurial movement is creating a new economic engine that is emerging here (and around the country) from the convergence of two forces: a renewed spirit of entrepreneurism and a communications revolution that is forever transforming the way we connect and collaborate.

The explosive growth in entrepreneurial activity is being triggered as more individuals confront the financial upheavals and uncertainty caused by consolidations, mergers and corporate restructurings-- upheavals and uncertainties exacerbated in this region by the reinvention and downsizing of the federal government.

The communications revolution is changing how people communicate with one another, redefining how organizations engage their constituencies, and radically altering how we get information. The new financial delivery systems fueling disintermediation and other changes in capital markets are potent demonstrations of this revolution at work.

As the two movements converge, they fuel each other and present us with incredible opportunities for economic transformation. No where in the world might this convergence prove as prolific as in the Potomac KnowledgeWay where we are seeing enormous activity around the infrastructure, software, content and services related to digital networks.

In 1994 we first put forth this vision of a vibrant digital economy and a global hub of "knowledge industries" for the region. Now that vision has been corroborated, at least in part, by a recent study, "Leaders and Losers on the Internet" from the Taub Urban Research Center at New York University. Cited in the September 16, 1996 issue of The New York Times, the study sees the Internet as "an engine of economic and regional development" and the authors contend that the concentration of Internet infrastructure is an indicator of where private and public investment in the Internet is greatest.

We agree, but suggest infrastructure is but one of several important factors. This region enjoys a high Internet concentration as well as other important resources that underlie our strength. They are the keys to success in the entrepreneurial surge we are experiencing.

The Keys to Success

The Potomac KnowledgeWay has the classic mixture for success in the digital economy: resources, talent and a new and urgent need. The resources are an enormous base of information and the talent is the abundance of intellectual capital in its people. The need and urgency arise from changing economics and growing entrepreneurial movement. These compelling dynamics and the firms that already have established themselves here provide the foundation for sustained growth.

The Internet Complex

Start with the region’s Internet complex which Fortune Magazine termed "the Netplex." It is probably the most diverse and concentrated Internet infrastructure in the world today.

  • Here are the government research organizations and agencies that created the Internet: the Advanced Projects Research Agency (ARPA) and the National Science Foundation (NSF) as well as those that pioneered its advanced applications including the Defense Department, NASA, the National Institutes of Health (NIH) and the National Institute of Standards and Technology (NIST). They provide critical Internet anchors.

  • We are a center of Internet providers with the likes of MCI, Bell Atlantic/NYNEX, MSF/UUNET, PSINet, Digex, Erol’s and scores more such as MindSpring and Clarknet.

  • We are home to what may well be the new broadcasting networks of the digital age such as America Online (AOL) and Discovery, with others like BT/MCI Concert and Black Entertainment Television (BET) in the wings.

  • We may not be home to the more glamorous content providers like Disney and Dreamworks, but think for a moment. This region has its own truly prominent, enduring content producers like the NIH, National Geographic, the Washington Post, and USA Today along with the enormous trove of arts and humanities from the Smithsonian museums to the Folger Library to the National Archives and the new AOL Content company. Literally hundreds of new entrepreneurs are creating innovative content and services such as Motley Fools, FedCenter, University Online and Women’s Connection Online to name a few.

  • Finally, we have 14 major colleges and universities and over 100 government research labs which collectively represent a dispersed research base around the Internet, including the Corporation for National Research Initiatives (CNRI), MitreTek and academic centers such as the University of Maryland’s Human Interface Computer Lab and its ATM center, George Washington University’s digitization lab and George Mason University’s virtual reality simulated learning project and its Ballston supercomputer center.

    Collectively, these components support a formidable and growing power base in this new digital economy which is linked to the network bridge and critical mass of the Internet.

    The Security Community

    The encryption and security expertise created by the national security community-- the Central Intelligence Agency (CIA), National Security Agency (NSA), Defense Intelligence Agency (DIA) and others-- is at the very core of information discovery, retrieval, analysis and visualization for the entire world. This community continues to drive computer and network R&D and innovation.

    Abundant Information Resources

    This region enjoys proximity to and familiarity with the largest base of information resources in the world-- that of the federal government, health and bioscience organizations and the nonprofit sector headquartered here, including libraries, educational institutions, associations, public policy groups, arts & humanities organizations and scores of others. Such information and content is valuable by itself, and the ability of the people here to put it into context will increase not only the information value, but the market and financial value over time.

    A Telecommunications Hub

    Originally focused on the federal government’s needs, the region has blossomed into a prolific telecommunications center. In fact, it is arguably the telecommunications hub anchored by the traditional local exchange and long-distance carriers like MCI, Bell Atlantic/NYNEX, Cable & Wireless; federal suppliers from AT&T to Sprint; and pushed by new players on the block like LCI, MFS/UUNET and Global Telecom. Beyond the carriers, there is significant innovation in all aspects of communications as demonstrated by the presence of such firms as Orbital Sciences, Comsat, and Intelsat and new enterprises popping up in cellular, wireless, satellite and digital broadcast systems (DBS).

    The enormous opportunity presented by the convergence of computers and communications was noted by Matthew Lawlor of Online Resources & Communications in the previous Forbes Magazine story. Responding to the question "Why is capitalism spreading now [in the region]?" he observed that "the greater Washington area is a place where computers, communications and government intersect .... This is the best area in the country to integrate software and telecommunications." Exemplifying this convergence are Lawlor’s own firm and emerging ones like WorldVoice, CrossMedia and others.

    Industry Angels

    One of the most revealing signs of entrepreneurial activity is illustrated by the recent emergence of "industry angels" who have been the social glue behind the success of Silicon Valley. Today, individuals like Jim Kimsey, Mark Warner, Rick Adams, Steve Case, David Thompson, Bill Melton and dozens more are creating a vibrant new force that will fund and propel innovation in this region. These are people who have been there, who have the money and knowledge to act, as well as the capacity to mentor and help. This is a regional dynamic that has undergone a quantum change in just the last five years.

    An Incubator for Spin-Outs

    The region has the entrepreneurial firms and infrastructures from which new spin-outs are being created-- America Online, MCI/Concert, the major system integrators and telcos, and, paradoxically, the federal government itself. That the movement is already well underway is demonstrated by spin-outs like LCI, Freeloader, Concept Five, Community Networks and more are on the way.

    The Sweet Smell of Success

    Nothing succeeds like success! People in this region smell the scent of success and wealth, and its tantalizing aroma is having a broad impact. This is a very real phenomenon, and nothing has hit this region with such impact since the late 1960s. An irresistible force is building and it is creating the spirit so vital to a vibrant entrepreneurial area.

    Now bring all of these resources together in one place-- a robust Internet infrastructure, the security community’s legacy, the center of telecommunications, the world’s largest repository of information, a growing flock of industry angels, entrepreneurial spin-outs and the enticing scent of success. Is it a compelling picture? You bet it is!

    But none of this would mean much without the entrepreneurial spirit and attitude. Where is it coming from? For one, the large population of researchers and developers-- many of whom are knowledgeable in communications, the Internet or content production. They no longer consider a traditional employer as a secure home for life. This economic uncertainty, coupled with the empowering aspects of the communications revolution, is rapidly changing the culture of this region. Link this with the potential for profit and growth and one can understand that something big is happening in the Potomac KnowledgeWay.

    A Sector Map to the Region’s Opportunities

    One of the challenges facing investors, analysts and even entrepreneurs is the need to understand that the Internet is neither a market nor an industry. It is a mosaic of many diverse sectors. We must take a sector view of the region’s activity and how it aligns with our core strengths. Such an analysis will help us understand those areas of sustainable power versus those in which we have only limited involvement. Here is a preliminary and somewhat anecdotal view of the Potomac KnowledgeWay sectors in which there is real and sustainable potential:

    Telecommunications

    • Local Exchange and Long Distance
    • Cellular and Wireless Satellite and DBS Services
    • Converging Communication Applications and Services
    • Communications Equipment and Adapters

    Internet service and presence providers

    World Wide Web-development businesses

    • Intranet/Extranet Developers
    • The systems integrators and new players like Concept Five, Proxicom
    • Marketing Networks and Interactive Advertising Creative firms like Potomac Interactive, Graffito/Active8, Proxicom, Image Communications and Magnet Interactive

    Internet/Web Development and Middleware Software IBM InfoMarket, CNRI, Concept Five, Proxicom, Visix, Relay Technologies, Freeloader, Excalibur, PLS and a growing base of product technologies.

    Health Information and Telemedicine Services The many organizations that stretch along a corridor from Johns Hopkins University in Baltimore, through NIH, and down to the University of Virginia.

    Biomatics Related to, and yet distinct from healthcare, the biotech community is anchored by NIH, Johns Hopkins University and groups like American Type Culture Collection (ATCC) from which an entire information industry will emerge.

    Electronic Commerce The region already enjoys a concentration of financial transaction services with firms like Transaction Network Services, Inc. (TNSI), Intelidata, CyberCash, GE Information Systems and Visa, as well as a transitioning base with the Electronic Funds Transfer Association (EFTA), NIST, and federal activity in Electronic Data Interchange (EDI).

    Geographic, Geospacial and Global Positioning Systems (GPS) Ranging from GPS surveyors, to location and mapping services, to intelligent highways and transportation systems.

    Electronic Publishing and Media Products Including the tremendous resources of the Washington Post, USA Today, Reuters and the prestigious Freedom Forum Newseum now being developed, as well as the emerging communities of Internet businesses: Digital Commerce Corporation, Woman’s Connection Online, Hearthstone and the firms now operating on AOL.

    Government, Arts, Humanities, Scientific and Historic Content Products

    The above list, while certainly not exhaustive, identifies the sectors in which we expect significant innovation, entrepreneurial activity and growth in the years ahead.

    Why the Movement Will Grow to a Force

    This movement is still gaining strength. There are several reasons why it is evolving into an economic engine for this region and the world.

    Knowledge Foundation

    The region benefits from a strong underpinning of knowledge which is its sustaining strength. One can argue that our intellectual capital and reputation as a "learning region" may be the attributes that most allow it to succeed as we undergo the paradigm shift to a digital economy where knowledge is the product.

    Second Wave

    The region will experience a "second wave" of innovation and entrepreneurial activity over the next 3-10 years. The region’s vast content storehouses will be "mined" by businesses and individuals capitalizing on their knowledge and proximity. This mining will be driven by the build-up of market expectations and the demand for content-based products.

    Magnet Center

    The region’s growing concentration around digital networks is making it a magnet. Not only are new companies starting here, but established ones like Microstrategies, PSI, Associated Communications and Nextel are among those being drawn here by the workforce, the opportunities and the quality of life. IBM is building up its Internet presence in the region after downsizing in almost all other areas. There is good reason why. For example, the December 3, 1996 Fortune Magazine rated the greater Washington region as one of the top ten in the country for living and opportunity-- important factors to the young people of talent who are developing the new ideas, products and businesses.

    Federal Government

    The Federal government will continue to be a major player in R&D, as a consumer and as an innovator. Government entities created this digital network space and will continue to significantly influence its evolution and outcome.

    The Attitude

    The fever has caught. People are thinking "new business" and, better yet, they are thinking product businesses. Innovators are thinking new start-ups. Angels are thinking investments. Workers at all levels are once again thinking stock options. It is a cultural change for this region.

    Funding

    Money moves to opportunity and the in-flow of capital is growing. Venture financing and technology businesses in the region have developed rapidly over the past several years, with an 80% compound annual growth in venture capital invested from 1991-1994. Despite the opportunities, we are still relatively under-served. As competition for deals escalates, Boston and Silicon Valley venture funds increasingly will look to the deal flow and opportunity in our backyard.

    Capital Formation Dynamics

    How significant is the growth in venture financing in the region? No one knows for sure, but it is clearly accelerating. Consider this anecdotal evidence:

    IPOs
    The increasing number of IPOs is beginning to catch the attention of global investors. It started with AOL, was paced by such offerings as UUNET, CyberCash, Digex, Intelidata, University Online and Allin Communications and now more are being teed up.

    Big Plays
    Clearly, there have been some big plays like AT&T Venture Fund II locating here, as well as some sizable private placements including a Soros Group investment in Global Telecom.

    Movement
    We have seen important shifts, including a greater regional focus by early Internet player New Enterprise Associates (NEA) and the positioning of Friedman, Billings, Ramsey (FBR) as an investment banker with its string of new Internet-related offerings. We also see the formation of new venture funds such as Fairfax Partners, Novak-Biddle, Embryon Capital, Bluewater, Nepa Valley, Spacevest, CEO Venture Fund and, most recently, FBR’s Pegasus Fund. Certainly more are on the way. We are even seeing very early stage funding with the Private Investors Network and a new group called SPIN, as well as the facilitation of efforts by Bill Washecka of Ernst & Young, the Mid-Atlantic Venture Association (MAVA) and others.

    Outcomes
    There is increased deal flow. It’s that basic. Dominion Income backs Community of Science, General Atlantic invests in Proxicom, Updata funds NetStart, private investors help NetImpact, Zero Stage helps Intelligent Interactions and the list goes on.

    A Catalyst For Growth

    Leaders in the greater Washington area increasingly are coming together to participate in and support the Potomac KnowledgeWay Project. The Project’s mission is to establish this region as a hub of innovation in the digital economy and a global center in the knowledge industries of the 21st century. The effort, underway for over a year, is based on three strategies with the key being a program to cultivate the entrepreneurs who are working around digital networks. They are a new type of entrepreneur-- what we call "netpreneurs." The Netpreneur Program is creating a place-- virtually and physically-- where the netpreneur community can come together and exchange expertise as they thresh out the new rules of an embryonic marketplace. The Program is creating the needed support network to meet the unique needs of netpreneurs and to match them with other netpreneurs, funders, advisors, the media and partners. The Program’s mission is to connect, inform and promote, and we would welcome the opportunity to involve you in the effort.

    Why this focus? Consider this recent quote from "Making Money on the Net," in the September 23, 1996 issue of Business Week:

    While corporate giants have been thrashing around noisily in cyberspace, showing how not to make money on the Net, scores of entrepreneurs have been quietly tinkering-- creating new business models for retailing, marketing, publishing, and advertising that work for them and could perhaps point the way to an Internet payoff.

    Peter Drucker once defined the entrepreneur as "someone who does something new and gets it done." The action and knowledge is with those "on the cutting edge" in this digital age, the entrepreneurs like those at America Online, Yahoo, Netscape, and UUNET. There is a growing, vibrant community of netpreneurs in this region-- innovators who are getting new things done around the Internet.

    How Real is All This?

    Let me paraphrase a discussion a close friend of mine had with a Boston-based investment fund manager who manages $3 billion for U.S. and international clients. Here was his assessment of our region: "I travel around the world, to deal with clients, to prospect for clients, to monitor projects, and to find new things to invest in. I believe the North Carolina to Boston corridor has the best current and prospective business potential in the world and that the greater Washington area is the best spot within the best corridor."

    Last evening I participated in the second annual National Information Infrastructure (NII) Awards program and spoke this morning at its first Digital Footprints conference in New York City. The NII Awards recognize today’s excellence in innovative, networked applications and services. One element that confirms our vision is the geographic distribution of the 56 winners and finalists: nine were from San Francisco/Silicon Valley, eight from greater Washington, six from the Boston/Cambridge area, four from New York and New Jersey and the remainder came from the rest of the country.

    As people learn more about the breadth, diversity, innovation and entrepreneurial successes that are transforming this region, they will recognize it as one of the best spots in the world for investment in this new digital age. Things are, indeed, happening in the Potomac KnowledgeWay.

    1999-2016 Morino Institute

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