Tech Growth on the Rise

Northern Virginia's technology sector, especially small companies, experienced high growth in 1994

Northern Virginia's publicly held technology companies are growing almost twice as fast as the average nationally. As an industry, U.S. computers and systems companies grew 9.6 percent from 1993 to 1994 versus 21.9 percent in Northern Virginia. The U.S. software industry grew 18.2 percent and Northern Virginia software firms grew 27.1 percent - close to 50 percent faster. U.S. telecommunications companies saw a slight year-to-year decline of 3.4 percent in revenue versus a 13.4 percent growth in Northern Virginia.

To complete the picture, the number of firms grew at even faster rates than revenue in Northern Virginia - suggesting more, smaller public companies. Financial returns were on par with their relevant industry competitors, leading to competitive funding options for future growth.

This area's traditional industry sectors of financial services, retail and federal contracting did not grow at comparable rates. Federal sector technology services grew at a significantly lower rate than the technology sectors listed above. Two consolations for the government contracting firms and their shareholders were the continuing size of annual federal expenditures and the relatively stable financial returns.

Northern Virginia grew faster than U.S., led by software

Of the 199 publicly held companies in Northern Virginia in 1994, technology firms made up 25 percent of the population. From a revenue perspective, technology only made up 6 percent of the 1994 revenue from all Virginia publicly held corporations. Thus, technology companies tend to be smaller in revenue size, with a disproportionate ratio of employees to revenue.

The top five publicly held software firms grew in excess of 50 percent (N-Vision, America Online, BTG, PSI, UUnet, and U.S. Order) in 1994. Recent well-received public offerings from these firms commanded impressive stock price to earnings ratios.

Area technology dominated by people-based industries

In contrast to their revenue contribution, technology firms are major employers in the region. Northern Virginia had 1,115 technology firms in a 1994 study conducted by the George Mason University Center for Regional Analysis. Those firms accounted for 3.1 percent of the total number of the region's companies, and 16 percent of the private sector employment.

Technology companies are a major employer, and industry growth rates provide the opportunity for significant increases in absolute and relative regional employment. However, try going to the bank and getting a loan with a person as collateral.

We may live and work in one of the "smartest" regions in the U.S., but it's hard to get a loan if you are the CEO of a start-up technology company. One lending executive recently emphasized that he would be happy to finance start-up companies, as long as they were led by someone who had been successful in a similar venture in the past. How many people can make that claim?

Often, people-based technology businesses are relatively small, inventing new technologies within a sector with limited history, and led by first-time entrepreneurial executives. Bankers freely admit their traditional formulas do not fit these industries easily. To continue to grow and compete with other regions, we need to see a technology customer-banker paradigm shift or rely on other sources of capital for growth.

The exciting growth news in the area is the performance of small firms versus their larger competitors. Across the board, 1994 saw median (weighted by number) revenue growth rates in excess of mean (weighted by size) growth rates. Median revenue growth for computers and systems firms was more than four times mean growth, and telecommunication firms were two and a half times. An interesting note was the stable performance of the engineering and management services revenue growth. This is an industry sector with strong government contracting representation. Note that the mean and median revenue growth were relatively low and almost identical, 3 percent versus 4 percent.

Also, as you would expect, both mean and median revenue growth rates for technology firms in Virginia exceeded their statistics for the more traditional sectors in retail, manufacturing, and financial services.

Northern Virginia software: private, small - and no real assets

Loans are generally tied to an asset, and many technology companies have limited tangible assets - particularly long-term ones. In a study conducted last year, Northern Virginia's software sector was dominated by many small, private companies. A cross section of publicly held Virginia information technology companies had 1993 median revenue of $28 million. By contrast, the privately held Virginia technology companies had median revenue of $5 million for the same period -- almost 1/6th the size of their publicly held competitors.

Our private sector group included 241 companies, which represents a subset of the area's information technology companies. To put the sample in some perspective, the Northern Virginia Technology Council includes 260 members in a recent census. The Institute for Public Policy included over 1,000 firms in its survey of technology companies in Northern Virginia. In the case of the institute's study, all technology firms were included.

So, to recap, private software firms are approximately 1/6th the size of their public counterparts. All software firms are growing rapidly, and face challenges from other companies and regions in the race to create technology-based products and services attractive to customers.

W. Bartlett Snell is managing partner of Monticello Partners, McLean, Va.

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