Photo by dzingeek on Flickr.

How do you build a tech sector when there is no such thing as a tech company or tech sector anymore?  That’s the challenge that DC faces as it seeks to support the recent rise of a tech sector in the District.

There is unquestionably a cluster of related technology firms growing organically in the District.  The challenge is to find ways to support them that are targeted to this cluster.  If governmental support for this cluster isn’t targeted, we risk wasting money, thus undermining our ability to invest in this sector.

For example, the DC Council is considering sweetening the tax incentives offered to tech companies in DC in order to build a tech sector.  The DC CFO, however, says that companies will simply reclassify themselves as tech companies to access these incentives.  How can we design incentives that are more targeted?

At the recent DC Tech Meetup forum on government support for the DC technology sector, David Zipper from the Office of the Deputy Mayor for Planning and Economic Development, said that “the city sees this as mostly a semantic distinction”.  But how can we target precious dollars for a sector that we can’t define? 

Matthew Yglesias recently claimed that “there’s no such thing as a ‘tech’ company and no such thing as a ‘tech’ sector” and makes a good defense of that claim.  Is Amazon a tech company?  Then why isn’t Best Buy, the largest online electronics retailer?

Does Starbucks not appear to be a tech company?  They just appointed a Chief Digital Officer to consolidate all of their digital technologies, “web, mobile, social media, digital marketing, Starbucks Card and loyalty, e-commerce, Wi-Fi, Starbucks Digital Network, and emerging in-store technologies”. 

That’s why Starbucks is 24th on Fast Company’s list of the most innovative companies of 2012, right between Dropbox, Kiva, Genentech and LegalZoom.  Should Starbucks qualify for tech tax incentives if they move their headquarters to DC?

It used to be that there were technology companies and companies with traditional business models, but now that innovation is becoming a necessity in all sectors, the line between a tech and non-tech company is becoming blurry.  Any company that wants to survive in the future of their sector has to innovate. 

Peter Corbett, head of the DC Tech Meetup, once responded to the question whether LivingSocial is a tech company by telling me that what really matters is not whether you sell a software product, but whether you innovate.  And LivingSocial innovates.

I think Corbett is absolutely correct.  Why is Tesla Motors in Silicon Valley and not Detroit? Tesla innovates.  And innovation is what drives a tech sector.

What should DC do?

So what does this all mean for DC’s strategy to target support for the tech sector?  First, it means that the number of companies that we should target is much broader than it used to be.  We should target companies that innovate. 

Second, it means that the departments within those companies that we care about are likely to account for a small percentage of the company, like Starbucks’ R&D Lab or Best Buy Online.  And so incentives should (a) be structured to the size of those divisions, not the size of the entire company, and (b) be conditioned upon the location of those divisions in DC.

That’s why it was so important for LivingSocial to commit to keeping its product development division in Washington, DC in return for $32.5 million in tax credits to stay in DC.  Only 15-20% of their DC employees actually work in product development, and that’s where the innovation is happening.  Those are the employees who are likely to jump onto other innovative companies after LivingSocial.

DC can and should help the tech sector. When it does, officials need to first understand the actual benefits that will come to DC, and be careful to design incentives that attract those benefits and don’t just throw money away indiscriminately.