Purpose: As budgetary cuts reduce available resources, government agencies can meet their mission goals engaging with small businesses and startups.
There are a few differences between small businesses and startups. The U.S. Small Business Administration (SBA) describes a small business as "independently owned and operated, organized for profit, and not dominant in its field." Serial entrepreneur and author Steve Blank describes a startup as a "temporary organization designed to search for a repeatable and scalable business model." It has to prove its business model quickly in a way that affects its target market. People who create startups intend to grow quickly and become a large company.
The driving force behind startups and small businesses is different. The small business owner wants to be her own boss and secure a place in the local market. The startup founder wants to disrupt the market with a scalable and impactful business model.
They're also funded differently: while both a small business and startup are usually funded by self or friends and family from the start; if a startup succeeds, it will receive more series of funding from angel investors, venture capitalist, and eventually, an initial public offering (IPO).
Although the startup founder and small business owner are both entrepreneurs, the intent, primary function, and funding of their respective business models are radically different. Despite their differences, knowing their purpose and organizational structure will help to work with them more effectively.
Governments gain many benefits for increase their engagement with startups and small businesses:
Access alternatively designed, priced, or produced solutions than those offered by traditional providers
Lower the risk of new, cutting-edge technologies from startups for widespread adoption in the private sector
Increase the available talent and resource pool
Catalyze new innovations that broadly benefit the U.S. people
Startup and Small Business Challenges
While a startup focuses on exponential growth and a small business focuses on incremental growth, they both face similar challenges when engaging with government agencies.
These challenges include having a high barrier to entry, specifically a costly procurement pipeline, misconceptions about intellectual property, and maintaining their innovative culture.
A costly procurement pipeline: The procurement pipeline can be understood as the nature and order of events that must take place when the federal government wishes to buy a service or product from the private sector. The federal government, as the ultimate big customer, has developed structures optimized to big companies, big contracts, and big oversight. This drives up transaction costs for small businesses at every stage: initial discovery of product needs and specifications by the government buyer, dialogue and interface between the government buyer and the startup seller, identifying appropriate contracting vehicles for the sale (authorized frameworks, methods, and appropriate contacts/departments), interface while implementing a contract with a prime (overhead contractor), and ultimately delivering the product or service to the government buyer.
Many startups assess the time, effort, and financial cost at each juncture to be too high, and instead choose to opt-out of working with the government to pursue opportunities with lower barriers to entry.
Misconceptions regarding intellectual property: Another barrier is the perceived danger to their intellectual property (IP) assets. Startups, or their angel investors and venture capitalists, commonly fear that government collaborations will result in a new product to which they have limited rights, or they fear that the rights to their main marketable product may be, in some part, transferred to the government. Government's primary goal is to seek a private partner that possesses the necessary expertise to modify an existing technology (or, sometimes, create an entirely new technology) that fits an agency's needs. However, agencies need to create a clear line of communication about their IP and contractual policies with their private partners, whether this means providing small businesses with a very clear and exhaustive FAQ webpage (e.g., the Department of Energy's (DOE) Small Business Voucher pilot program) or providing direct access to trained representatives or legal teams (e.g., the NASA patent portfolio). [Ansari, S., Krieger, B., and Siboni, R., "Buying What Works Memo," Unpublished, August 25, 2016.]
Maintaining a culture of innovation: Startups and often small businesses exist in a culture where they are willing to take risk and are used to developing quick partnerships. Government, on the other hand, has little to no tolerance for failure, and operates under the guidance of policies and procedures specifically to minimize agility, discouraging modern vendors from working with government (Source: The White House, "Exit Memo: Office of Management and Budget," January 5, 2017).
Examples
Here are some case studies of agency-led approaches to engage startups and small business:
Small Business Innovation Research (SBIR)
SBIR is a highly-competitive program that encourages domestic small businesses to engage in federal research/research and development (R/R&D) that has the potential for commercialization. Through a competitive awards-based program, SBIR enables small businesses to explore their technological potential and provides the incentive to profit from its commercialization.
DOE Lab-Embedded Entrepreneurship Program
The goal of the Lab-Embedded Entrepreneurship Program at the U.S. Department of Energy (DOE) is to embed innovators and aspiring entrepreneurs within the national laboratories to perform applied research and development (R&D) with the express goal of launching advanced energy businesses under world-class mentorship.
DOE Small Business Vouchers Pilot Program
To efficiently execute the Small Business Vouchers (SBV) Pilot Program, the DOE streamlined the process of collaborating with small businesses and national laboratories by developing a standard legal agreement for research and development.
DHS EMERGE Accelerator Program
The Department of Homeland Security (DHS) launched the EMERGE Accelerator to find emerging commercial technology that is adaptable for homeland security. EMERGE attracts entrepreneurs in the wearable technologies field (e.g., body-worn electronics, sensors).
DHS Silicon Valley Office
In early 2016, the Science and Technology Directorate of DHS announced the opening of a DHS Silicon Valley office. Its primary goal to create a pipeline for nontraditional partners who may have access to Silicon Valley's fast-paced innovation network of Silicon Valley to work with the federal government.
NASA Patent Portfolio/ Software Catalog
NASA has enjoyed great success in attracting small businesses for technology-based partnerships. NASA has published consumer-friendly, easy-to-use websites that list all available NASA technologies, including licensable patents, software, and public domain technologies.
NIH SPARC Program
Funded by the National Institutes of Health (NIH) Common Fund, the Stimulating Peripheral Activities to Relieve Conditions (SPARC) program is designed to bring together government and individuals, industry, foreign, small business, and non-profit (nontraditional) partners to improve neuromodulation therapies by uncovering the underlying neuroanatomy and biological mechanisms of action governing nerve-organ interactions. The SPARC program is one of three programs at NIH that are currently using NIH's Other Transaction (OT) Authority, which allows the NIH to streamline the process of awarding federal funds and better target organizations and individuals.
Approach
As shown in the examples above, there are several innovative strategies including new innovative contracting models that increase accessibility to these entrepreneurs, and reduce the complexity and cost of doing business with the government.
Lessons Learned
Here are some lessons learned from agencies who have worked with startups and small businesses:
Decentralize trust and empower personnel lower down the chain of command: Contracting Officers (COs) are usually excluded from conversations about fulfilling the agency's mission. As a result, they award contracts to larger, more established companies. One lesson learned is to empower COs with the information they need to take risks on awarding contracts to companies that are the most effective and have demonstrated capabilities regardless of the company's size.
Follow the law instead of tradition: One of the first steps to streamlining procurement and working with small companies is to distinguish self-imposed recommendations from actual regulation. The HHS Buyer's Club recognizes this and seeks to find innovative strategies to find new ways to use old regulations and laws, rather than assume the laws are essentially wrong. As new practices are validated, they can first be published internally through informational webinars and then circulated more widely through training courses offered by entities like the Federal Acquisition Institute.
Express needs in the form of problems / outcomes instead of solutions / requirements: The usual process of procurement is to define the solicitation by the solution requested and the related requirements. By design, the wording is typically narrow so only a handful of suppliers are eligible. Typically, there is a bias against small businesses.
If instead solicitations specify the problems to be solved and the outcomes expected, smaller companies have room to be creative and will not be immediately disqualified. Additionally, small companies will see that the government sees them as valuable partners and may be more willing to apply.
Start small, gain quick wins, and scale fast:** Any change takes time and resources. The same Agile and Lean Startup perspectives from the world of entrepreneurship can be applied to making changes to government procurement. Many small pilots can try out new ideas, and quick wins can help convince any skeptics. The pilots that succeed can then be scaled appropriately.
Actions and Considerations
Consider these tactical actions and recommendations when engaging with startups and small businesses:
Designate a small business representative
In addition to widely disseminating new opportunities, agencies that wish to engage innovative small businesses should designate a representative. Not all agencies will have the resources to create a new position dedicated to private-sector outreach, but existing employees may be assigned duties that include direct contact with incubators and accelerators.
Address intellectual property (IP) concerns through clear communication
Consider providing specific methods for partners to ask questions and receive answers about legal considerations. One option is to designate an individual with legal knowledge to serve as an IP liaison with new private partners, and to publish that person's contact information in a readily accessible web space. This increases the likelihood that small business with legal concerns will get their questions quickly and efficiently, therefore increasing much needed trust in prospective government partners.
GSA IT Schedule 70 "Making It Easier"
The U.S. General Services Administration (GSA) launched Making It Easier (MIE) in April 2016 for IT Schedule 70 to accelerate and streamline procurement. IT Schedule 70 is the largest IT acquisition vehicle in the U.S. government, and MIE is an effort to meet the speed of IT and supply government purchasers with the most innovative solutions. MIE includes the IT Schedule 70 Roadmap that explains the contracting process in plain language and provides a standardized welcome package for new contractors.
The GSA FASt Lane initiative reduces the processing time of contract modifications and new offers, provides the Startup Springboard to get companies less than 2 years old on the schedule, and provides a contracting forecast tool. Similar progress in other areas is possible by dedicating resources and time to streamlining processes. For more information, contact FAStlane@gsa.gov.
Create workable procurement pipelines
Despite the procurement pipeline challenges, at least one widely workable alignment exists for research and prototyping projects for which Other Transaction (OT) Authorities or Blanket Purchase Agreements (BPA) are appropriate. See the Innovation and Acquisitions and Procurement section for more information.
Use Innovative Acquisitions and Procurement Methods
Many new procurement methods foster a better relationship between the government and startups/small businesses:
Challenge-based acquisitions are a try before you buy approach. They provide for the small-scale introduction of innovative and cost-saving technologies into existing acquisition programs through challenge proposals. With a challenge-based acquisition, an agency can motivate private-sector entities to develop and demonstrate their solutions in real-world conditions so an agency can choose a source to award contracts or task orders for more testing, refinement, or production.
Competitive milestone-based payments: Competitive milestone-based contracts are a useful tool for attracting businesses with innovative approaches to well-defined, multi-component problems. It promotes competition among a stable pool of selected offerors across a series of clear, technically feasible milestones, with payment withheld until the associated, agreed-upon milestone is completed.
Incentive prizes: This contracting model promotes innovation by offering a reward upon completion of a specific objective task. Prizes enable the federal government to pay only for success, establish an ambitious goal, and reach beyond the usual suspects to increase the number of minds tackling a problem without having to predict which team or approach is most likely to succeed. Many well-known incentive prizes have focused on catalyzing technology R&D, though prize administrators are increasingly using incentive prizes to drive behavior change, market adoption of existing solutions and interventions, and progress in areas of social policy such as health, energy use, and education. See Challenge.gov for a listing of challenge and prize competitions.
Non-binding purchase agreements: Non-binding commitments to purchase products can create demand for new, more effective solutions where market requirements remain unmet. Frequently developed in partnership between federal and private-sector partners, commitments can catalyze the voluntary market introduction of cost-effective solutions that advance everyone's best interests. Non-binding purchase commitments work best when there is both a clearly defined performance specification and a strong expression of interest from potential buyers.
Rapid technology prototyping: A rapid technology prototyping contract is an innovative contracting model that consists of multiple, small, fast, and cheap acquisitions to test innovative technologies. They may be used to rapidly and inexpensively identify whether cutting-edge, unproven, but potentially transformative technologies are viable options for an agency's particular requirements.
Staged contracts: Staged contracts offer agencies a tool to solicit proposals widely across the private sector—from established contractors to entrepreneurs—and rapidly assess them. A staged contract is an innovative contracting model that follows a three-phase evaluation process consisting of a short concept paper, invite-only full proposal, and subsequent year pilot evaluation. Staged contracts may be used to rapidly and cheaply assess many existing or prototype private-sector technologies.
The Defense Acquisition University and Federal Acquisition Institute have some courses aimed toward including small businesses and implementing agile practices. The procurement lessons learned should be shared, when applicable, through these platforms to maximize impact. Civilian contracting officers are required to take 40 hours of training every two years; encouraging staff to choose training on innovative contracting models can enhance agency capacity to engage a wider range of partners. This training model could be replicated to provide experiential learning on other innovative contracting models.
Summary
Purpose and Outcomes
Purpose: As budgetary cuts reduce available resources, government agencies can meet their mission goals engaging with small businesses and startups.
There are a few differences between small businesses and startups. The U.S. Small Business Administration (SBA) describes a small business as "independently owned and operated, organized for profit, and not dominant in its field." Serial entrepreneur and author Steve Blank describes a startup as a "temporary organization designed to search for a repeatable and scalable business model." It has to prove its business model quickly in a way that affects its target market. People who create startups intend to grow quickly and become a large company.
The driving force behind startups and small businesses is different. The small business owner wants to be her own boss and secure a place in the local market. The startup founder wants to disrupt the market with a scalable and impactful business model.
They're also funded differently: while both a small business and startup are usually funded by self or friends and family from the start; if a startup succeeds, it will receive more series of funding from angel investors, venture capitalist, and eventually, an initial public offering (IPO).
Although the startup founder and small business owner are both entrepreneurs, the intent, primary function, and funding of their respective business models are radically different. Despite their differences, knowing their purpose and organizational structure will help to work with them more effectively.
Governments gain many benefits for increase their engagement with startups and small businesses:
Startup and Small Business Challenges
While a startup focuses on exponential growth and a small business focuses on incremental growth, they both face similar challenges when engaging with government agencies.
These challenges include having a high barrier to entry, specifically a costly procurement pipeline, misconceptions about intellectual property, and maintaining their innovative culture.
Many startups assess the time, effort, and financial cost at each juncture to be too high, and instead choose to opt-out of working with the government to pursue opportunities with lower barriers to entry.
Misconceptions regarding intellectual property: Another barrier is the perceived danger to their intellectual property (IP) assets. Startups, or their angel investors and venture capitalists, commonly fear that government collaborations will result in a new product to which they have limited rights, or they fear that the rights to their main marketable product may be, in some part, transferred to the government. Government's primary goal is to seek a private partner that possesses the necessary expertise to modify an existing technology (or, sometimes, create an entirely new technology) that fits an agency's needs. However, agencies need to create a clear line of communication about their IP and contractual policies with their private partners, whether this means providing small businesses with a very clear and exhaustive FAQ webpage (e.g., the Department of Energy's (DOE) Small Business Voucher pilot program) or providing direct access to trained representatives or legal teams (e.g., the NASA patent portfolio). [Ansari, S., Krieger, B., and Siboni, R., "Buying What Works Memo," Unpublished, August 25, 2016.]
Maintaining a culture of innovation: Startups and often small businesses exist in a culture where they are willing to take risk and are used to developing quick partnerships. Government, on the other hand, has little to no tolerance for failure, and operates under the guidance of policies and procedures specifically to minimize agility, discouraging modern vendors from working with government (Source: The White House, "Exit Memo: Office of Management and Budget," January 5, 2017).
Examples
Here are some case studies of agency-led approaches to engage startups and small business:
Small Business Innovation Research (SBIR)
SBIR is a highly-competitive program that encourages domestic small businesses to engage in federal research/research and development (R/R&D) that has the potential for commercialization. Through a competitive awards-based program, SBIR enables small businesses to explore their technological potential and provides the incentive to profit from its commercialization.
DOE Lab-Embedded Entrepreneurship Program
The goal of the Lab-Embedded Entrepreneurship Program at the U.S. Department of Energy (DOE) is to embed innovators and aspiring entrepreneurs within the national laboratories to perform applied research and development (R&D) with the express goal of launching advanced energy businesses under world-class mentorship.
DOE Small Business Vouchers Pilot Program
To efficiently execute the Small Business Vouchers (SBV) Pilot Program, the DOE streamlined the process of collaborating with small businesses and national laboratories by developing a standard legal agreement for research and development.
DHS EMERGE Accelerator Program
The Department of Homeland Security (DHS) launched the EMERGE Accelerator to find emerging commercial technology that is adaptable for homeland security. EMERGE attracts entrepreneurs in the wearable technologies field (e.g., body-worn electronics, sensors).
DHS Silicon Valley Office
In early 2016, the Science and Technology Directorate of DHS announced the opening of a DHS Silicon Valley office. Its primary goal to create a pipeline for nontraditional partners who may have access to Silicon Valley's fast-paced innovation network of Silicon Valley to work with the federal government.
NASA Patent Portfolio/ Software Catalog
NASA has enjoyed great success in attracting small businesses for technology-based partnerships. NASA has published consumer-friendly, easy-to-use websites that list all available NASA technologies, including licensable patents, software, and public domain technologies.
NIH SPARC Program
Funded by the National Institutes of Health (NIH) Common Fund, the Stimulating Peripheral Activities to Relieve Conditions (SPARC) program is designed to bring together government and individuals, industry, foreign, small business, and non-profit (nontraditional) partners to improve neuromodulation therapies by uncovering the underlying neuroanatomy and biological mechanisms of action governing nerve-organ interactions. The SPARC program is one of three programs at NIH that are currently using NIH's Other Transaction (OT) Authority, which allows the NIH to streamline the process of awarding federal funds and better target organizations and individuals.
Approach
As shown in the examples above, there are several innovative strategies including new innovative contracting models that increase accessibility to these entrepreneurs, and reduce the complexity and cost of doing business with the government.
Lessons Learned
Here are some lessons learned from agencies who have worked with startups and small businesses:
Decentralize trust and empower personnel lower down the chain of command: Contracting Officers (COs) are usually excluded from conversations about fulfilling the agency's mission. As a result, they award contracts to larger, more established companies. One lesson learned is to empower COs with the information they need to take risks on awarding contracts to companies that are the most effective and have demonstrated capabilities regardless of the company's size.
Follow the law instead of tradition: One of the first steps to streamlining procurement and working with small companies is to distinguish self-imposed recommendations from actual regulation. The HHS Buyer's Club recognizes this and seeks to find innovative strategies to find new ways to use old regulations and laws, rather than assume the laws are essentially wrong. As new practices are validated, they can first be published internally through informational webinars and then circulated more widely through training courses offered by entities like the Federal Acquisition Institute.
Express needs in the form of problems / outcomes instead of solutions / requirements: The usual process of procurement is to define the solicitation by the solution requested and the related requirements. By design, the wording is typically narrow so only a handful of suppliers are eligible. Typically, there is a bias against small businesses.
If instead solicitations specify the problems to be solved and the outcomes expected, smaller companies have room to be creative and will not be immediately disqualified. Additionally, small companies will see that the government sees them as valuable partners and may be more willing to apply.
Actions and Considerations
Consider these tactical actions and recommendations when engaging with startups and small businesses:
Designate a small business representative
In addition to widely disseminating new opportunities, agencies that wish to engage innovative small businesses should designate a representative. Not all agencies will have the resources to create a new position dedicated to private-sector outreach, but existing employees may be assigned duties that include direct contact with incubators and accelerators.
Address intellectual property (IP) concerns through clear communication
Consider providing specific methods for partners to ask questions and receive answers about legal considerations. One option is to designate an individual with legal knowledge to serve as an IP liaison with new private partners, and to publish that person's contact information in a readily accessible web space. This increases the likelihood that small business with legal concerns will get their questions quickly and efficiently, therefore increasing much needed trust in prospective government partners.
GSA IT Schedule 70 "Making It Easier"
The U.S. General Services Administration (GSA) launched Making It Easier (MIE) in April 2016 for IT Schedule 70 to accelerate and streamline procurement. IT Schedule 70 is the largest IT acquisition vehicle in the U.S. government, and MIE is an effort to meet the speed of IT and supply government purchasers with the most innovative solutions. MIE includes the IT Schedule 70 Roadmap that explains the contracting process in plain language and provides a standardized welcome package for new contractors.
The GSA FASt Lane initiative reduces the processing time of contract modifications and new offers, provides the Startup Springboard to get companies less than 2 years old on the schedule, and provides a contracting forecast tool. Similar progress in other areas is possible by dedicating resources and time to streamlining processes. For more information, contact FAStlane@gsa.gov.
Create workable procurement pipelines
Despite the procurement pipeline challenges, at least one widely workable alignment exists for research and prototyping projects for which Other Transaction (OT) Authorities or Blanket Purchase Agreements (BPA) are appropriate. See the Innovation and Acquisitions and Procurement section for more information.
Use Innovative Acquisitions and Procurement Methods
Many new procurement methods foster a better relationship between the government and startups/small businesses:
Read more on why, when, and how to deploy these approaches in "Innovative Contracting Case Studies."
Use existing training resources to build capacity
The Defense Acquisition University and Federal Acquisition Institute have some courses aimed toward including small businesses and implementing agile practices. The procurement lessons learned should be shared, when applicable, through these platforms to maximize impact. Civilian contracting officers are required to take 40 hours of training every two years; encouraging staff to choose training on innovative contracting models can enhance agency capacity to engage a wider range of partners. This training model could be replicated to provide experiential learning on other innovative contracting models.
Policies
Additional Resources
For Startups