Homeland Security Startups Heat Up
Earlier this week the Chesapeake Innovation Center (CIC) announced its launch in Annapolis, Md. The CIC, an initiative of the Anne Arundel County Economic Development Corporation, is aimed at startup firms specializing in the development of homeland security technology.
At a basic level the CIC will provide 20 to 25 startups with a 24,000-square-foot facility fully outfitted with phones, computer systems, and a shared administrative staff. Through partnerships with the National Security Agency, Nokia Corp. (NYSE: NOK), ARINC, Piper Rudnick LLP, Johns Hopkins University, and the University of Maryland, it will also provide the startups with potential customer contacts, venture capital contacts, and research collaboration.
“This is really a way for us to let the business community know that we value technology growth in Anne Arundel County,” says Bill Badger [no relation to Bob the Beaver], president and CEO of the Anne Arundel Economic Development Corporation.
The Development Corp. has contributed about $1.1 million to the incubator, while partners and sponsors have contributed another $150,000 to getting the group off the ground.
Innovent, a research and development arm of Nokia, and a wireless startup, Lighthouse Communication Services, are the first two tenants at the incubator.
Lighthouse is developing a location-based service for wireless devices using global positioning system (GPS). This service will allow policemen and fireman, who are often the first to respond to an emergency or attack, to be tracked from a satellite. Patrick Shay, the company’s founding CEO says that he was referred to the CIC while raising the company’s initial round of funding.
“They’ve been an accelerator for us,” he says. “The introductions they’ve made for us have bought us about a six-months advantage.”
Shay says his six-person company is now ready to demonstrate a prototype of its service that it can take on the road to potential investors.
It’s not surprising that the CIC would focus its efforts on homeland security. Proximity to governmental agencies, along with a pool of talent from several universities makes the Washington area ripe for homeland security startups.
According to hype in the press, there is also a lot of money waiting to be spent on homeland security initiatives (see Hunting for Gold in Homeland Security). The total budget for the U.S. Department of Homeland Security, which was formed through the consolidation of 22 federal agencies in 2002, is about $36 billion.
This is a large figure, but some experts say it may be misleading. It's difficult to pin down exactly how much of it will translate into opportunities for startups. Federal Sources Inc. (FSI), a market research firm that tracks governmental technology spending, estimates that in fiscal 2004 only $3.7 billion of the total Department of Homeland Security budget will be allocated to spending on information technology or communications projects. And of this figure, Ray Bjorklund, vice president of market intelligence for Federal Sources, says only a small portion will be used for new projects.
“A lot of this money is being used for legacy projects that have been in development for years,” he says. “After 9/11 everyone thought there was going to be this big flush of security spending, but it hasn’t happened. It’s more realistic to think in terms of hundreds of millions of dollars rather than billions of dollars.” [ed. note: chickenfeed!]
Frank Dzubeck, president of Communications Network Architects, a Washington consultancy, disagrees with Bjorklund’s assessment of the market opportunity. He says that spending on new homeland security will explode (metaphorically) in the next few years, as the Department of Homeland Security completes its integration and starts new projects. He also says it’s difficult to track which budget is paying for which project.
“Around the beltway, some companies that deal with the government get checks from four and five different government agencies,” he says. “There are, and will continue to be, a lot of different agencies spending money on homeland security.”
Government spending in general has been strong over the past year and half, helping many companies in the technology and telecom sector during the economic slump to meet and even exceed expectations (see Is Uncle Sam an Optical Sugar Daddy? ).
Small networking companies Foundry Networks Inc. (Nasdaq: FDRY) and Network Equipment Technologies Inc. (net.com) (NYSE: NWK) have benefited from strong government spending (see Foundry Gets a Fed Boost and Net.com Triples Profits). Networking giant, Cisco Systems Inc. (Nasdaq: CSCO) attributes business from the U.S. government for helping it meet its quarterly target in its last fiscal quarter (see Investors Sell the Cisco News). Optical switching companies are also expecting a big payout from the Global Information Grid Bandwidth Expansion (GIG BE) project government contract (see Corvis Solo in Bake-Off Boast).
“How much is the homeland security market worth?” says Lighthouse CEO Shay. “That’s a good question. I don’t think anyone has a real handle on it right now.”
— Marguerite Reardon, Senior Editor, Light Reading