Washington, D.C. is an area of the country that is rarely known for its startup scene. But that could be changing because one study recently reported that DC is now the 4th-most desirable city for startups in the U.S., behind New York and the Bay Area.

The reason why DC has never quite taken off is because the only tech firms making a killing here tend to be selling their wares to the government. This is not the sort of pond that's welcoming to smaller fish. But things are changing and this guide is going to go into why.

Big Government is Shrinking

The Federal government sector is shrinking as the national debt increases. Big government isn't as desirable as it once was. It's becoming even more so as Conservatives make ground in both houses. This has led to many new initiatives coming out of DC in order to make it a more fertile ground for startups.

The goal is to try to rebalance declines in the government sector. Part of the reason is also because many budgets in the Federal sector are completely flat.

One such instance of the government acting to keep tech companies in the area is a pledge to provide tax incentives for LivingSocial. In return for encouraging the company to remain here, the company will agree to hire a thousand local workers. This is one of the biggest examples of DC investing in tech.

Making It Easier to Invest

Perhaps the biggest change in recent years is the desire to make it easier for investors to invest in companies. The top rate capital gains rate for local angel investors used to be set at 8.95%. But this is currently in progress to be reduced to 3%. It would have a huge impact on investments, as DC has one of the highest capital gains rates for angel investors in the US.

It would hopefully encourage people to invest more, and that would make it more likely that DC would be the choice for new startups.

Building Bridges

Another initiative local government has come up with is to build bridges between traditional Washington and the startup sector. The problem is in the immense cultural differences between the two. Groups like the Greater Washington Board of Trade usually consist of members who are more likely to invest in construction and restaurants than have anything to do with startups.

Yet these also happen to be the most ideal candidates to invest because that's where the money is. The local government has made it its mission to break down these barriers and to bring both parties together to help boost the growing tech sector.

Taking Advantage of New Opportunities

Another reason why Washington DC is losing many of its usual barriers is because of the change in investing. Venture capitalists are no longer necessary for funding tech startups. On the contrary, they are gradually declining only to be replaced by crowdfunding increases and angel investor interest.

These new opportunities are providing companies with the chance to gain investment without going down traditional routes.

What about the Cost of Living?

The cost of living is going up, which makes this the perfect time for startups to install themselves in the nation's capital. The tech industry isn't the only area that's seeing growth. The city is rejuvenating many of the more depressed areas of the city at the same time.

This will inevitably lead to the redevelopment of many affordable areas. This has been the best time to invest in Washington DC real estate as part of moving your startup to the city. Furthermore, despite this being the capital the cost of living isn't as overwhelming as places like New York and San Francisco.

Will Washington DC Become the New Tech Hub of the US?

There's evidence to state that it will accomplish its goals, but the problem with the city is that its tech sector is largely dependent on the state of the government at the time. Should the government grow in size and Federal budgets increase again, it could suppress the startup boom before it can gain any traction.

A significant part of the success of this campaign depends on the outcome of the 2016 Presidential Elections and what the next president will do in regard to how big or small the government will be.

But regardless of this, the passage of legislation at the government level will also have a huge impact. What are your opinions when it comes to whether Washington DC will become the next great American startup hub?

Published on: Apr 1, 2016