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sMALL BUSINESS
August 2007
Overlooked Business Model Could Benefit Small Firms
By Grace Jean
 Suppose a small business has produced a technology that will help troops fighting in Iraq, and it would like to put that product into the war zone. Does it try to sell the product directly to the government? Does it sell the product to a large company as a subcontractor? Does it sell its company to a prime contractor? Or does it sell off the business unit that developed the product?
The latter choice is the best option for small firms, says a government contracts lawyer.
Transferring an entire product line, from the people and the data rights to the technology itself, allows the purchasing company to market the product and handle any upgrades while freeing up the small business to do what it does best — innovate, says David Metzger, partner at Arnold and Porter, LLP, based in Washington, D.C.
“At that point, you don’t own that product — it’s gone. You have engaged in a liquid transaction, and you now have money and they have the product,” he says at the Navy’s Opportunity Forum.
The method is an oft-overlooked business model, he adds.
Typically, firms will sell their products directly to the government or to large prime contractors. In some cases, they even sell the firm to the prime, which inherits the phase III, or commercialization, rights. But by selling a product line to the prime, small companies can take the money they earn from the transaction and invest in their next product without having to go to venture capitalists for funding.
That encourages small businesses to keep innovating, says Metzger. But the model won’t work for companies that are “one-trick ponies,” or for businesses that see its technologies as its children that are not for sale, he cautions.
Primes need to recognize that these innovations exist in small firms and they ought to stop duplicating the research, he adds.
Large companies tend to spend much more money to do the same research that small companies can accomplish with less than $1 million in small business innovation research program funding, says Garret Okamoto of San Diego Research Center Inc., which has developed a technology that permits radio communications in frequency jamming situations.
In addition, small businesses sometimes are jilted by prime contractors who have pledged to bring their innovations to the table, but forget them once the project is underway, says Sen. John Kerry, D-Mass., chair of the Senate Committee on Small Business and Entrepreneurship.
“Unfortunately, small businesses get overlooked in this process in far too many cases and it’s high time to put a stop to it. If a prime gets a contract by using small business in its proposal, the government should make sure the prime keeps its promise and the small firm gets to do the work. If it doesn’t, it should penalize the firm. Right now, the government just looks the other way,” he says.
Both prime contractors and the government have a responsibility to ease the commercialization process for small businesses, says Metzger.
“You’ve got to facilitate this. You’ve got to help in it — you can’t stand in the way,” he says. If primes and federal agencies understand their roles and remain committed to small firms, then the SBIR program, the nation, and the world will benefit, he adds.
Please email your comments to GJean@ndia.org
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