The tricky relationship between agencies and startups

The people mingling over the coffeepot at Eastern Foundry aren’t your typical office workers. They could be the designers of the next app you download or cloud-based service you use. They’re entrepreneurs looking for their first big break inside the beltway.

Eastern Foundry leases 21,000 square feet of Crystal City, Va., office space to small business owners trying to land federal contracts. By being in close proximity with one another, owners of small IT firms put their capability statements on their doors, network with each other, and hope to get guidance so they can learn the rules and regulations of doing business in the federal market. Geoff Orazem, a Marine Corps veteran and tribal engagement officer who worked on the Iraqi Transportation Network, launched the incubator in December 2014 to help small businesses break into the federal space.

It seems everyone is talking about how government can or should innovate. Defense Secretary Ashton Carter is working to get the Pentagon and Silicon Valley to do projects together, but the process isn’t easy, nor is it without its critics.

“When you have an organization that counts their membership in the millions and their budget is in the hundreds of billions, being able to nimbly engage with a two-to-20 person startup -- it’s the proverbial elephant cuddling the kitten," Orazem said. "It doesn’t work well.”

His goal, at a fundamental level, is to help small businesses understand how the government contracting process works. “Government contracting is the most relationship-based industry I’ve ever seen,” he said.

Orazem said there are chalkboards throughout the offices with lists of requirements that prime contractors have sent for fields such as health IT or mobile security. In late August, representatives from Defense Department CIO Terry Halvorsen's office paid a visit to see what Eastern Foundry companies are doing. The incubator also received a $50,000 check from the Small Business Administration on Aug. 24 for being a “growth accelerator winner.”

So far, 52 members have joined Eastern Foundry’s open co-working space.

Filling a Niche

In an ideal world, the product should speak for itself. But when doing business with government, a company has to do a lot more than just apply.

And for a startup to be successful in the federal cloud space, its leaders should be prepared for turbulence. 

A firm could have the most exciting and innovative product, and have agencies lining up with interest. But if the founders haven't forged connections with the right people, demonstrated their product will work in government, and met airtight federal regulations and deadlines, they’ll get bumped aside.

Sean Crean, director of government contracting at SBA, said a key for small businesses is to fill a particular niche. There’s high demand for IT services, but government is typically averse to risk. Crean said agencies will often look to see what the industry is doing, so if a small business comes up with an idea that hasn’t yet been proven, “there may be hesitancy for the government to want to embrace that until they see others who have adopted it.”

The time it takes to go through the process can also be daunting. Some contracts can be awarded in 30 to 60 days, but others take up to two years, and the more complex it gets the more competitors will be involved. Then it’s up to the contracting officers to review those proposals to make sure they’ve received enough information from the competitors.

Crean also points out that even if a company has the best price and the best product, if they get their bids in at 4:01 pm on Friday instead of 4:00 pm, they’re out of luck.

“You have to understand the rules that are in place,” said Crean.

2014 was a positive year for small business procurement as measured by the SBA’s annual scorecard. The agency gave government an “A” overall for awarding 24.99 percent of federal contracting dollars to small businesses, exceeding the goal of 23 percent set by Congress in 2006. A whopping 20 out of 24 federal agencies earned an “A” or “A+”. The last time government got a “B” in small business procurement was three years ago.  

Some sub-categories fared less well. Agencies awarded 4.66 percent of contracting dollars to women-owned small businesses (the goal is 5 percent) and 1.82 percent to HUBZone businesses (the goal is 3 percent).

Technology policy expert Michael Hettinger, who launched his own consulting firm after holding a senior position with TechAmerica, said the best way for small businesses to get on a federal agency’s radar is to team up with experienced companies.

It’s a process that seems counterintuitive to folks in the private sector who usually wouldn’t dream of allying with their competitors. But Hettinger points out that even some of the largest tech companies in the world generally aren’t prime federal contractors. When Google sought the $11 billion military health record contract this year, it worked with PricewaterhouseCoopers, an accounting and consulting firm with lots of experience in the federal market. The Defense Department eventually awarded the contract to Leidos, Accenture and Cerner in June.

The challenges become even more pronounced for small businesses unsure about who to team up with and which contracts to go for as a subcontractor.

“Most of the companies that are trying to break in have never seen anything like it, quite honestly,” Hettinger said of the rules and regulations small firms face when trying to land their first federal contract.

“The biggest challenge in the federal space [is] you may have to demonstrate five years of experience doing X. You may have done it in the private sector, but you haven’t done it in the federal space, so how do you get there?” said Hettinger, who added the costs of FedRAMP certification can be a “huge barrier to entry for so many smaller cloud providers.”

A comprehensive audit could cost upwards of $150,000 based on audit time, complexity, and company size, according to FEDRAMP’s website.

‘Skate to where the puck is going to be’

One of the fastest growing small IT companies is n2grate, headquartered in Greenbelt, Md., and founded in 2010 by former federal judge and decorated veteran Jack Farley and president and chief operating officer Steve Halligan.

The company helps federal agencies with data center and infrastructure tools, cloud integration and security components, and raked in $28.5 million in fiscal 2014 revenue. In five years in business, n2grate landed 11 federal contracts across agencies as diverse as GSA, NASA, and the Defense and Health and Human Services departments

Halligan worked with large prime Lockheed Martin when he was a client business executive for Cisco Systems from 2006 to 2008, and he credits building a relationship with them as helpful when he struck out on his own.

Halligan recalled how Lockheed Martin won a contract during a time when Medicare and Medicaid were transitioning some of their IT infrastructure. “N2grate was pulled in as a teammate, based on some of our expertise, to support them,” said Halligan.

Aligning with a larger company proved to be a valuable experience.

“You need to find a way to be successful in the transitions. And today if you’re not skating to where the puck’s going to be, you’re going to continue to skate and struggle without fully actualized success,” Halligan said.

With all the moving targets and complexities of FEDRAMP and other security requirements, Halligan said it can be difficult to develop a business plan doing just federal cloud solutions alone. He suggests small businesses need to have other cores they can rely on, and a whole lot of patience.

While there’s no doubt bureaucratic roadblocks stand in the way of getting agencies and startups to work together, there are success stories and people trying to show the way through the barrier.

Eastern Foundry’s CEO says at the end of the day he’s reminded of the fact that the technologies produced during the space race, the development of the internet, and the splitting of the atom were all government-led technology projects. Orazem wants government to ditch the BlackBerries once and for all, literally and figuratively, and embrace innovation.

“It’s a little shameful, frankly. It didn’t used to be like this, and it doesn’t have to be like this. This is a self-inflicted wound,” he said.