A common business strategy in the federal market is to start as a small business, taking advantage of the socioeconomic policy that requires large businesses to subcontract to small, disadvantaged businesses and agencies to award 23 percent of their prime contracts to them. By taking advantage of subcontracting and prime contracting opportunities, start-ups get a toehold in both segments of the market and build their qualifications and past performance in hopes of selling to a large business as they approach the size-standard thresholds for small business.
But small businesses too often feel compelled to take work that pays the rent because they don’t have investment partners to keep them alive while they focus on developing business that fully uses their technical skills, domain expertise and passion. As a result, we’ve seen small businesses grow by offering to do almost anything for anyone.
This kind of generalist activity had value before June 2007. Until then, the contracts held by those small businesses retained their small-business status even after the companies were purchased by large businesses. But all that has changed. It is now more challenging to create a small business that retains significant value as it approaches the size-standard thresholds.
It’s interesting that the government’s move to require recertification was championed by small businesses, which believed large businesses were being given unfair advantages by allowing companies to retain their size status for the life of the award regardless of the size of the contractor. Now many of those same small businesses are seeing decreased company valuations because the small-business contracts they once prized lose that standing on acquisition by a large business.
To increase company valuations now, entrepreneurs need to build businesses that have value above and beyond their small-business contracts. An information technology services company approaching the $23 million gross receipts threshold will want a book of business that precisely reflects circumscribed practice areas.
At the highest level, there are two dimensions in which small businesses build this kind of value: One is technical and professional capability, and the other is customer domain knowledge.
Most small-business owners want to build an organization with the depth of capability and infrastructure to be a force in their chosen discipline or market segment. They know intuitively that being a small-business generalist is not sustainable.
However, far too many of them succumb to the short-term temptation of using their small-business designation as a way to grow. They fail to recognize the pitfalls of agreeing to work on anything that is less than the highest and best use of their time and resources. Such diversions carry an opportunity cost that dilutes capability and blurs branding.
Those rare individuals with technical skills, domain expertise and the passion to build a business should seriously consider including business partners — for example, in a mentor/protégé relationship.
Those partners can provide the business infrastructure resources necessary to build a business from Day One that will generate the value envisioned by government’s socioeconomic policies and — in the long run — provide the desired return on investment for the founder.
Steve Charles (steve_charles@immixgroup.com) is co-founder of immixGroup Inc., a consulting firm.
