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Small firms angle for a piece of homeland security market

Small firms can profit from the government's efforts to boost national security, but participants in an investment symposium cautioned that it is not easy to get venture capital funding and winning government contracts is time-consuming, difficult work.

With an information technology budget of $52 billion and a Defense Department budget increase of $48 billion for fiscal 2003, companies have an "opportunity to do well by doing good," Mara Rudman, vice president and general counsel of The Cohen Group, said Thursday at a Turtlesnap Ventures symposium.

However, venture capital firms "do not have public policy agendas," said Jonathan Silver, founder and managing director of Core Capital Partners. Instead, they measure success by the ability to generate a profit and many services or products the government needs do not have private sector applications, so the profitability is extremely limited.

Some of the technologies that could benefit the government have limited use, so the niche market is too small to attract interest from investors, he said. Other services, such as national identity cards or imaging technologies, raise public policy issues that could discourage lenders, he said.

Ryan Schwarz, principal at the Carlyle Group, agreed, adding that in the wake of the collapse of energy-services firm Enron, the government is more wary of the private sector. Because of that, the government is more likely to award contracts to big, familiar firms, he said.

"The spending deck is stacked all the more against small companies," Schwarz said.

To be successful, Schwarz recommended that smaller firms that have developed technologies "with proven or provable private sector applications" form partnerships with larger firms "to leverage into the homeland security space."

Despite the budget increases for defense, the hype outpaces the reality, Schwarz said. "If the amount of capital investment follows the hype, the markets will see the first tulip-bulb mania of this century," said Ryan Schwarz.

Rudman agreed, saying the first mistake made by business executives who are new to working with the government is assuming "the request is what we will see at the end of the day." She noted that Congress and the appropriations committees shape the final figures.

Nor should business executives assume that going straight to the top is the way to win government contracts, she said. "The Office of Homeland Security is not the be all and end all," Rudman said, because the spending decisions are made at a lower level and within the individual offices and agencies. The key is to target the individuals who control the purse strings