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Cyber Spending Attracts Start-Ups to Nation’s Capital

by Mike Hoffman on February 4, 2014

Capitoldome Washington D.C. business leaders like venture capitalist Jonathan Aberman want to make the D.C. region a more attractive place for tech start-ups as the U.S. government — specifically the military – increases its spending on tech innovation and cybersecurity.

Defense Department leaders have said cybersecurity poses one of the top threats to the U.S. military and these generals are backing it up with their spending. Cybersecurity is one of the few areas where the U.S. military will spend more this year as their overall budget is cut. The Defense Department will spend $4.7 billion on cyber operations this year – a 21 percent increase over 2013.

Overall, the cybersecurity industry receives about $80 billion in government spending and more than $300 billion in spending within the private sector. Those numbers are expected to expand as it is estimated that cyber theft costs as much as $400 billion in economic losses per year.

This is good news for tech entrepreneurs like Anup Ghosh, who is the type of innovator that D.C. wants to keep in the region rather than see him and his company head to California.

Ghosh is the founder of Invincea – a firm that has developed software to protect web browsers. It’s an 80-employee company based in Northern Virginia that has developed software that protects web browsers from malware, among the company’s other innovations. He does a considerable amount of business with government agencies and contractors.

Ghosh admits that he had the temptation to move his company to California at its early stages to benefit from the entrepreneurial ecosystem that has been established in Silicon Valley and receive more access to the increased amount of venture capital funding in the region.

“There’s not a lot of venture capital out there,” Ghosh said about the D.C. region. “It’s night and day compared to Silicon Valley.”

Before starting Invincea, Ghosh worked for the Defense Department’s top research arm, the Defense Advanced Research Projects Agency (DARPA) as a program manager. He took advantage of available government grants after he left DARPA and spent three years developing the technology he used to start Invincea.

Aberman is one of the business leaders in the D.C. region working to keep talented entrepreneurs and innovators like Ghosh in D.C. He heads the venture capital firm, Amplifier Ventures, where he recognized the need to improve D.C.’s entrepreneurial tech ecosystem. Last year, he worked with entrepreneurs and tried to understand what was limiting the D.C. region.

“The reason why the Valley works is the high concentration of entrepreneurs and larger companies that are basically revolving doors,” Aberman said. “Well, we have revolving doors too. We have a big revolving door in government services, we have a big revolving door in entertainment media and energy.”

He worked with the state of Virginia and Arlington County to create a joint partnership between Amplifier Ventures and Arlington Economic Development called Tandem NSI. This group will work to match up tech entrepreneurs with government agencies and larger companies to help these start-ups get over the hurdles to getting their products to market.

The partnership will officially launch Tuesday night at a ceremony in Rosslyn, Va., where U.S. Rep. Jim Moran, D-Va., and U.S. Sen. Mark Warner, D-Va., are scheduled to attend. Tandem NSI received a $500,000 grant from the Commonwealth of Virginia by way of the Virginia Federal Action Trust Fund.

Peter W. Singer, an analyst with Brookings Institute who recently published the book, Cybersecurity and Cyberwar: What Everyone Needs to Know, said the D.C. region has plenty of potential to become the hub of the cybersecurity industry and spur the creation of more local tech start-ups.

He pointed to the geographic advantage of having the Pentagon, the National Security Agency and the CIA all located within an hour drive. However, he explained that doing with business with the government poses significant problems for the small start-up developing the latest innovations.

Leaders at these agencies recognize that their acquisition systems are not designed to keep up with the pace of tech innovation. The Pentagon’s acquisition system treats the purchase of smartphone software much like it does a nuclear submarine. Generals know that has to change, Singer said.

“Everyone knows there is a problem, but we want to disentangle the drivers of that problem,” said Singer, who also mentioned a research effort by Brookings to further study how to the government and military can better spur technological innovation.

But there are success stories inside the Beltway of entrepreneurs who have created companies despite the litany of challenges that come with working through government bureaucracies. Steven Chen is a self-described serial entrepreneur who worked with Carlos R. Aguayo Gonzalez to stand up Power Fingerprinting, a cybersecurity company that established a system to search for malware by examining a processor’s power consumption.

Chen has worked with multiple tech start-ups in the D.C. region for the past two decades. He has utilized government grants such as the Small Business Innovation Research grants to establish these companies and commercialize products that have become ingrained at government agencies.

For example, his former company, Ultra Electronics, 3eTI, developed technology to secure government computers connected to Wi-Fi. The company eventually was acquired by Intel as the government mandated the company install the technology before buying their laptops.

Chen, who is also a member of the Blu Ventures venture capital firm, said it’s possible to work with the government as a small company. In fact, the government needs to make it a priority as cyber threats advance and become more advanced.

“The government relies on young companies to respond to new attacks and come up with new solutions,” Chen said.

Many tech start-ups come from research done by graduate students at universities. It’s no coincidence that Stanford University is so close to Silicon Valley and Harvard and MIT are next to Boston, another hub for tech start-ups.

Gonzalez developed the technology for Power Fingerprinting at Virginia Tech while working on his doctorate. Chen and Aberman said more work needs to be done with local universities to encourage the establishment of more tech start-ups.

Aberman said there is also plenty of potential working with the government research agencies such as DARPA to produce tech companies.

“Too many times great ideas just end up left in desk drawers and these never become products that the government can actually use,” Aberman said.

The fear of risk can often prevent these ideas that the government has invested millions in to becoming a product, Aberman explained. By its nature, the government is “risk adverse” when it comes to investing in new companies. The tendency is to go with the company, especially in the Defense Department, that has executed on contracts in the past.

Compare this outlook to Silicon Valley where a failed start-up is seen not as a failure, but a badge of honor. The mindset is different, Aberman said. However, the tide is starting to change as these government agencies find themselves falling behind the technological curve.

“There’s a tremendous pressure to go with the path of least resistance, which is to go with the current vendor,” Aberman said. “The establishment is very structured and comfortable, but I’ve found more and more pockets of people that are thinking this town has to change.”

The Defense Department created agencies to increase the pace of acquisition over the past ten years to keep up with demands for the wars. Those organizations, such as the Army’s Rapid Equipping Force, has allowed the military to respond to developing threats over the past ten years of war in Iraq and Afghanistan.

The CIA recognized a need to also keep pace with threats and realized traditional acquisition systems wouldn’t allow them to shepherd tech start-ups through the development of their products. Therefore, CIA officials created its own non-profit venture capital firm called In-Q-Tel that has invested in smaller companies that have since been acquired by the larger tech companies like Google and Apple.

Aberman said In-Q-Tel is an example of outside the box thinking that the government needs more of in order to foster these next generation technologies. But he said the government needs to go further. Rather than just an organization helping bring technologies in, he said more needs to be done to help entrepreneurs and researchers working inside the government to get technologies and products out.

“You have an organization to get stuff in, I want to create an organization to get stuff out,” Aberman said.

Establishing an entrepreneurial ecosystem is D.C. is a first step. It’s one that will be aided by the increase in local venture capital investments. However, those venture capital firms need to see more success stories like Ghosh’s Invincea.

Ghosh is confident the talent is here, but these entrepreneurs just need help getting over the hump.

“There are a lot of good software people here, they just need to be pushed in the right direction,” Ghosh said. “The only thing that will drive the [venture capital] money back here is success.”

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{ 10 comments… read them below or add one }

Stephen N Russell February 4, 2014 at 6:08 pm

Give incentives to set up shop in DC for estd software firms like Google, MS, Yahoo etc etc alone.
Then see companies move to DC.
Cut tax rates, give tax credits, scrap Payroll tax & scrap ACA.

Reply

blight_ February 4, 2014 at 6:50 pm

The point is that if you have business with the government, keep some guys in DC for wine, dine and legislation in your favor.

Nothing to do with taxes.

Reply

Anonymous February 5, 2014 at 1:25 pm

Scrap healthcare, cut taxes, and expand the military industrial complex and spend more. Yup…classic class warfare. Help the rich, screw the rest of us.

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Hunter76 February 4, 2014 at 6:30 pm

Money draws money. This is inevitable.

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hibeam February 4, 2014 at 9:55 pm

Cool. Cause if there is one thing Obama unnerstans bout it's web sites and internets an stuff.

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Vaughn McCall February 5, 2014 at 7:45 am

It’s great to see that someone in the CIA still thinks forward, I remember when we had a transportation problem in Indochina, it was solved with a CIA start up known as Air America (which when finally sold to industry, was at a profit). Now with forward thinking, again a problem is being solved with another special purpose company, In-Q-Tel.

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oblatt2 February 6, 2014 at 11:31 am

Yep there is money to be made running drugs or trashing the constitution but its organized crime not a free market.

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ronnie pond February 5, 2014 at 10:37 am

"What" that sounds like just another reason for washington to throw more money around to its buddys and chums. I think we the american people need to put a stop to washington spending any more money that we supposedlly don't have. just like we need to put a stop to obama taking so many vacations.

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blight_ February 5, 2014 at 10:50 am

I think we should worry more about K street than how many times Obama flies to Hawaii (though that is rather pricey too, but less consequential in the grand scheme of things vs having Congress on a leash).

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oblatt2 February 6, 2014 at 11:32 am

This is just defense industry lobbyists who have grown fat over the Bush era trying to re-brand themselves as venture capitalists.

Its the same old corruption.

Reply

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