Silicon Valley and Washington have both been a draw for this generation of Americans. The young and aspirational flock to the District or Palo Alto, because they want to be involved in change, either to industries or people’s lives or the country or, for the truly ambitious, the world.
The cultures are increasingly similar, too. Young Washingtonians are ditching their ties and some are even daring to wear T-shirts and jeans to the office—on a Monday.
That’s not to say there’s a relaxed attitude toward work. These are still places where putting in health-threatening hours on the job is considered a badge of honor. There’s a lot on the line, after all. The startup culture that’s become popularized—and parodied—in California is increasingly permeating Washington and its environs. There’s just one major difference: Money.
An eye-popping $1.2 billion in venture capital funding for Uber. Growing interest in media companies. Dollars for biotech. Venture capitalist (VC) money frothing to its highest quarterly total since 2001. But where’s the love for political tech startups? Why aren’t they getting a piece of the VC pie?
Actually, a few are, but most of the VCs and CEOs C&E spoke with for this piece agreed it’s harder for poli-tech to get funding, and even harder for its firms to receive the kind of exits that make the Silicon Valley ecosystem thrive.
What VCs Want
Part of the reason why poli-tech firms have trouble attracting seed money, let alone multimillion dollar exits, is that they generally lack what VCs look for in investment opportunities.
“The technology firms that tend to attract investment from venture capital investors are led by strong entrepreneurs, with strong, experienced management teams, solving a big problem in a big market with a repeatable business model,” says Jeb Ory, CEO of D.C.-based Phone2Action.
Ben Wirz, director of venture investments at the Knight Foundation, stresses that firms need “the ability to demonstrate real traction, either in the form of revenue (real sales), usage (high volume of users and/or high engagement of users), distribution (fast, repeatable growth) or effectiveness (solving a problem in a way that is demonstrably better than others).”
The Holy Grail is the proverbial hockey stick chart: Explosive growth in revenue and users. That’s a tough haul for any startup, but the barriers in poli-tech seem especially steep: they’re also facing a gap in the knowledge that potential investors have about the industry.
“VCs tend to invest in what they know, and few people in the VC world come from campaigns,” says Ron Klain, president of Case Holdings and general counsel at Revolution LLC, a D.C.-based investment firm. Others in the space agree, and even a non-politico, Randy Komisar of Kleiner Perkins, makes a similar observation. “My guess is that the underlying market dynamics are rather esoteric and not well understood by investors,” he says.
Some political industry veterans say that it goes beyond just a lack of familiarity.
“Silicon Valley runs libertarian and generally thinks anything related to D.C. is a mess,” says Nathan Daschle, founder of D.C.-based political website builder Ruck.us. “So politics is an area where subject-matter expertise can be a liability, just based on geography.”
Yet there are exceptions. Tom Serres’s Rally.org, based in San Francisco, raised $8 million from a cast of Silicon Valley stars: Relay Ventures, Floodgate Fund, Greylock Partners, SV Angel, Google Ventures, and others. He did it by broadening the product and re-conceptualizing its purpose as empowering people “to fundraise online and build social awareness.”
“The challenge,” says Serres, “is trying to find out how to rise up above the political vertical and tell a bigger story.” That’s a dose of cold water for political entrepreneurs who want to keep politics front and center while starting a company.
But Steve Hoffman, founder of San Francisco incubator Founders Space, counters that he likes to see companies with a “laser focus,” not ones that chase after every possible application for their product. Still, he stresses that companies have to identify a big market.
Another stumbling block may be the confrontational nature of politics. “It’s hard to raise money for a foreign concept rooted in personal values,” says Serres. “That story is scary—Republicans against Democrats.”
A success story that nonetheless illustrates that point is NationBuilder, which was founded in Los Angeles by Jim Gilliam, a technologist and progressive filmmaker. Gilliam self-financed at first, and then raised angel financing from investors including Chris Hughes, co-founder of Facebook and chief online organizer for President Obama’s 2008 campaign.
Later came Series A and B rounds from top names including Andreessen Horowitz, Napster co-founder and first Facebook president Sean Parker, and philanthropic investment firm Omidyar Network.
Gilliam’s not-so-secret secret is that he had revenue from the start. “As soon as you have paying customers, the dynamic changes,” he says. “Then the challenge is to prove that you’re big enough … that you’re a billion dollar company.”
But NationBulder also illustrates Serres’s story about how partisanship—or even bipartisanship—can be scary. Launched by a progressive as a non-partisan venture, the site reached a deal in 2012 with the Republican State Leadership Committee. The move proved controversial, and led to a nasty public spat with Democratic technology outfit NGP VAN (based in Boston and D.C.). The bitterness persists.
Is Geography Still Destiny?
Whether to base a poli-tech company in D.C. or Silicon Valley is also a dilemma, and answers from experts are all over the map.
“Silicon Valley is like Disneyland,” says Serres. “There’s only one. It’s a magical kingdom.”
Couldn’t D.C. be the Disney World to California’s Disney Land? That thought is greeted with a shrug by Daschle, who gives the D.C. venture scene a lukewarm “OK.”
Christie George, director of the national progressive political angel network New Media Ventures, says that “it actually doesn’t matter” where you are, except she also says that it does.
“It’s easier if you’re in the Valley,” says George, who herself is based in San Francisco. “There’s a culture of innovation, accelerators, and meet-ups.”
Moreover, if you want Silicon Valley money, says Hofman, the San Francisco incubator founder, “it’s important to be in spitting distance of Sand Hill Road,” the Menlo Park thoroughfare where many VC frms are headquartered. The reason, he explains, is that VCs want to be able to drop by and visit their portfolio companies at a moment’s notice and not waste half days or more flying to visit them.
The numbers tell a story. Silicon Valley-based companies accounted for 50 percent of all VC funding in the first quarter of 2014, according to a recent study. Next down the list were New England (11 percent), New York (10 percent) and LA/Orange County (5 percent).
There are some signs of life in D.C.’s start-up scene. A 2013 report showed that the capital’s metro region had the greatest jump in 2013 investment levels, with a 104 percent increase in funding.
A company’s geographic location, though, has little to do with its user interface and experience. Take Natraj Balasubramanian’s ElectorPulse, which enables real-time data analysis at headquarters through maps and allows precinct- walking volunteers to enter data via smartphone. When trying to sell it to a Republican, Balasubramanian says, the response was, “Our volunteers are old white men. They’re not savvy regarding mobile apps.”
But entrepreneurs need to be savvy too, and not just about product and market. They need to understand what financiers expect to see. “Most of the campaign oriented startups have been launched by people from campaigns, not technology or startups,” says Klain, who also served as Vice President Joe Biden’s former chief of staff. “Their plans have often lacked crispness around the sorts of metrics and approaches that matter to VCs.”
Don’t forget international markets if you have the capability to execute there. Balasubramanian notes there are 133 democracies in the world, which amounts to a lot of potential markets for political technology.
Outsider Innovation
The best hope for a major poli-tech exit may come from entrepreneurs outside the campaign world. Two new developments are causing a stir. One is Sean Parker’s Brigade Media, a stealthy startup launched with $9.3 million from Parker and unknown sums from politically-active super-angel Ron Conway and Salesforce founder Marc Benioff. Its product is likewise unknown, but the company reportedly aims to “shake up American democracy.” Some observers think it will also catalyze new investment, perhaps directly in the poli-tech space or perhaps in the broader cluster of civic and cause-related companies.
The second development is the formation of a new D.C.-based VC fund, Sinewave Ventures, whose sparse webpage proclaims nothing more (and nothing less) than
“Connecting the Hill and the Valley.” The fund is reportedly being launched by Yanev Suissa, formerly of New Enterprise Associates (NEA), a large VC firm with nine offices including D.C. and Silicon Valley. Suissa, who was also previously a government investment official, declined to confirm or deny reports of his new venture, but appears focused on government-facing companies rather than poli-tech. His take on the distance between the between the Bay Area and Washington?
“In the Valley, anything is possible and is built for what should get done. I don’t believe in attacking from the outside. The government is not going anywhere,” says Suissa.
Some observers also mention Adrian Fenty, a former D.C. mayor, as someone who could help facilitate a major politech exit. Fenty moved to the Bay Area after losing a 2011 reelection bid and reinvented himself in the VC space. He’s since become a special advisor at Andreessen Horowitz and a business development executive at the Perkins Coie law firm. Also making headlines is Fenty’s relationship with Laurene Powell Jobs, the widow of Apple co-founder Steve Jobs. What really shakes the money tree, though, is results.
“Success stories do help. NationBuilder, Change.org, Upworthy—these are incredible, scaling companies that are raising a lot of money, making a lot of money, and pursuing civic work. Their rising tide will float all of our boats,” says Keya Dannenbaum, the founder of Versa, a paid-content distributor.
Her company, which is based in New York, recently raised $2.1 million from investors including Omidyar Network, Knight Foundation, Comcast Ventures, and Brooklyn Bridge Ventures.
The rising tide is a familiar metaphor in Washington, but we’re long past the era of trickle-down economics. Now VCs are waiting for a liquidity event: an IPO or acquisition, preferably at a massive valuation.
If and when that happens in the poli-tech space—and observers’ predictions range from soon to never—the game will change. At the least, more money will be involved.
Jonathan Handel is a practicing entertainment/technology attorney and a journalist based in Los Angeles.