A grocery bag is displayed for a photograph outside the new Amazon Go grocery store in Seattle, Washington, U.S. (Photographer: David Ryder/Bloomberg)

Virginia Struggled to Build a Startup Hub, So It Recruited Amazon Instead

(Bloomberg) -- Three years ago, Arlington, Virginia, was pitching itself as the next Silicon Valley. Victor Hoskins, the county’s director of economic development, tried to lure entrepreneurs with cash prizes, free housing, office space and other incentives. Few showed up. Last week, after a courtship lasting more than a year, Arlington landed the opposite of a startup: half of a second headquarters for Amazon.com Inc.

Amazon’s arrival looks like a panacea for Arlington’s economy, which has been hurt by the flight of defense industry jobs. Amazon says it will hire more than 25,000 people and spend about $2.5 billion in the area. Hoskins also helped negotiate a bargain compared with Amazon’s other pick. New York City agreed to pay almost double in tax incentives and infrastructure improvements per job. Amazon’s target for the workforce in Arlington is an average wage of more than $150,000. “It’s transforming how businesses think about the county,” Hoskins says.

What happens next is a matter of debate. Proponents of the deal say it will raise Arlington’s profile, making it a more attractive place to start a tech company, and that Amazon will recruit people who will someday leave to start their own businesses in the area. The counterargument is that Amazon will hire up all the people who might otherwise start their own businesses.

Either way, Amazon is a big deal for Virginia. The last time the state was a major player in consumer tech, people were dialing up with AOL. The internet pioneer, rooted in Fairfax County, decamped for New York at the height of the dot-com bubble in one of the most disastrous mergers in corporate history. Amazon will bring more tech mojo back to the area, says Todd Stottlemyer, who serves on the board of the Northern Virginia Tech Council. “They don’t just see Washington as this government-type town,” he says. “People want to come to a region because there’s a cool factor.”

Virginia Struggled to Build a Startup Hub, So It Recruited Amazon Instead

When Hoskins joined as director of Arlington Economic Development in 2015, the area was in a rough spot. The 26-square-mile county across the Potomac River from Washington was once a military center but has suffered in recent years from a move to consolidate the work elsewhere in the country. That led to thousands of federal employees and contractors leaving town. “It had a devastating effect,” says Tim Helmig, managing partner of Monday Properties, a real estate firm with multiple buildings throughout Arlington.

At the time, Arlington’s office vacancy rate was 21 percent, double Washington’s. Hoskins, a 61-year-old former deputy mayor of Washington, came in with a plan to turn things around. He pledged to reduce the vacancy rate to 10 percent over nine years. Doing so would require help from businesses of all sizes, he said. A favorite saying of Hoskins’s: “It’s not impossible; it’s improbable.”

One of his first improbable goals: turning Arlington into a tech startup hub. First, he needed more startup-friendly office space. Hoskins convinced Andrew Chang, a local who runs an independent co-working space in Arlington’s Crystal City community, to open a second location four miles upriver in the Rosslyn neighborhood. Before talking to Hoskins, Chang had thought about going to Alexandria, Virginia, or Washington. “Two years ago, no one was considering Rosslyn,” Chang says. “He knows how to get companies to go to areas that need to improve.” The tax breaks didn’t hurt, either.

A former Silicon Valley venture capitalist named Paul Singh also set up a co-working project in Crystal City. He ran the space, part ofDisruption Corp., alongside a $50 million Crystal Tech Fund to invest in local startups. The entity underperformed, and Singh, whose LinkedIn profile lists his title as Chief Hustler, sold it in 2015. Meanwhile, the entrepreneurial community was mourning the decline of perhaps Arlington’s most promising startup, Opower. In the two years after a 2014 initial public offering, the energy management software company had lost more than two-thirds of its market value before selling to Oracle Corp.

To build excitement around startups, Hoskins’s department came up with the Virginia equivalent of Shark Tank. The economic team organized a contest called Startup Arlington, where entrepreneurs could compete for living and office spaces, mentorship and cash prizes, in exchange for relocating to Arlington. So far, they have struck out. The winner of thefirst contest, Oppleo Security, is already out of business. The founder, Roderick Flores, says he couldn’t afford to keep the company going. He moved to Portland, Oregon, and plans to take a software-security job at Nike Inc.

Last year’s competition was sponsored by Kiddar Capital, an asset management firm in neighboring Fairfax County, with an award of as much as $25,000. GreenSight Agronomics, a drone company based in Boston, won. It took an investment from Kiddar Capital and relocated to Arlington. The move was only temporary. Co-founder James Peverill says the stint there was helpful for developing relationships with regulators and government officials, but the founders decided to return to Boston where their strong personal networks made hiring easier. Last month, Kiddar Capital Chief Executive Officer Todd Hitt was arrested and criminally charged with securities fraud, unrelated to the contest or the drone startup. He hasn’t been indicted or entered a plea. His lawyer didn’t respond to a request for comment.

There were no cash rewards for this year’s Startup Arlington. The deadline for submissions was this month. There were 64 entrants, the fewest in the program’s three-year history. Christina Winn, Arlington’s director of business development, says the contest has value, even if the startups don’t stick around. It promotes the county to entrepreneurs across the nation and provides her office with a list of businesses open to relocating, she says. Notably, growth in venture funding going to Arlington startups outpaces the national average, according to data from PitchBook.

Virginia Struggled to Build a Startup Hub, So It Recruited Amazon Instead

At the same time Hoskins was going after startups, he was also hunting bigger companies. He helped persuade Nestle SA to move its U.S. headquarters last year to Rosslyn from Glendale, California, along with 750 jobs. The deal was celebrated in the local press. Nestle got an incentive package totaling $12 million and a promise from Hoskins that the city would relocate two bus stops crowding the entrance to the company’s new building. It took some convincing of the local transportation department. “Victor is very smart at pulling together partners and being creative in getting deals done,” says Mary-Claire Burick, president of the Rosslyn Business Improvement District.

For Amazon, Hoskins says he sold his locale as a neighbor to the nation’s capital and some of the country’s top universities in Virginia, Maryland and the District of Columbia. There were lots of skeptics. “Everyone said no, because—think about it—Arlington is just a little county,” Hoskins says. “Stop thinking about it that way. We’re part of a region.”

Virginia Struggled to Build a Startup Hub, So It Recruited Amazon Instead

As Hoskins toiled away on the Amazon proposal, he had a key advantage over other cities: Reagan National Airport, which sits in Arlington county. The airport, with a soaring terminal designed by architect Cesar Pelli and a nearby Metro rail system, compares favorably with LaGuardia, the closest one to Amazon’s other new campus in Queens, New York.

In the waning months of summer, Arlington’s office vacancy rate had slid to 18 percent. Winn invited Hoskins to a team lunch, where she handed out paper plates to members of her staff labeled with each one’s accomplishment. She surprised Hoskins with his own plate celebrating the vacancy rate achievement, emblazoned with the words “Mission Impossible.”

Hoskins, who still has the plate in his office, says Amazon should be good for another four percentage points. Ancillary businesses that come along because of Amazon will shave off another two. That includes startups, he says, and Hoskins believes he’ll hit his goal of 10 percent. Now he can make a new pitch to startups: Arlington is the spot Amazon picked after a 14-month search.

©2018 Bloomberg L.P.