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Venture capitalists urge small tech firms to enter government market

Nine months ago, Bill Schroeder, a top executive with the Silicon Valley cybersecurity firm Vormetric, was startled by a venture capitalist's suggestion that the 35-person firm develop a strategy for selling its technology to the federal government in addition to its commercial plans.

Schroeder, the CEO of the San Jose, Calif., company, said he had thought the federal procurement process was too slow and too expensive to be a potential market for small firms. But the slow economy coupled with the fast growth in homeland security funding has made venture capitalists in Silicon Valley intently focus on Washington and the federal market, he said.

"Not long after the venture capitalist on my board suggested we look at the federal market, I was at a board meeting of another company and a venture capitalist said, 'A small company that doesn't have a government strategy is missing a bet'," Schroeder said. "Then I started to think that this is a growing trend in the venture-capital community."

Mark Heesen, president of the National Venture Capital Association, confirmed that trend. He has been hearing more often that venture capitalists are pushing startup firms to determine how to sell to the government because the corporate information-technology market is at a near standstill.

"Basically, venture capitalists are looking for customers, and in the past they ignored the government because it's a pain in the neck to deal with," Heesen said. "Now when times are tough, they are seeing the government ... as a customer that pays its bills. And when you look into the areas of cybersecurity, the government can be a huge customer."

The amount of money in the federal budget for cybersecurity has been growing. President Bush requested $4.7 billion for cybersecurity in fiscal 2004, an increase from the proposed $4.2 billion in fiscal 2003. The government ultimately allocated $2.7 billion for cyber security in fiscal 2002.

So far, some of the largest high-tech firms have won a big chunk of that money. The FBI, for example, chose Science Applications International Corp. and Oracle as its main contractors to modernize its technology systems and provide cyber security.

But the administration has been reaching out to the small-business community. Late this month, Commerce Department officials-in conjunction with the General Services Administration and House Government Reform Committee Chairman Tom Davis, R-Va.-will participate in seminars in Silicon Valley and Los Angeles to educate businesses about procurement.

Meanwhile, Vormetric has hired a salesman to focus on federal sales, and it has been working through its public relations firm, Applied Communications, to tout its products to government officials. Vormetric's technology provides another layer of security beyond computer-system firewalls, and it encrypts computer files stored on servers and personal computers.