The problem: DefenseWeb's technology was a big hit with the U.S. military. Was it time to target Corporate America?

By many accounts, DefenseWeb Technologies was on a roll. For nearly five years, the San Diego company had cultivated a solid relationship with the federal government, building and managing complex databases for the Department of Defense. By late 2002, profit margins were strong and clients happy. But founder Paul Cavanaugh, 45, was restless. Annual revenue had flattened at about $2 million and he worried that his company was hitting a slump. Where, he wondered, did DefenseWeb's future lay?

One answer was the private sector. After all, if the military was so impressed by DefenseWeb's performance, didn't it make sense to target the much larger -- and far more lucrative -- corporate world? Sure, the Pentagon never bounced a check. But not only would a roster of private-sector clients jump-start revenue growth, it would vastly increase the company's value, enabling it to command a much higher price tag should Cavanaugh decide to put it on the block. "You wonder if you're missing out on an opportunity, ignoring a revenue stream," he says. "It was a siren song."

In fact, the lure of the private sector was proving to be a constant -- and often costly -- distraction. Every time engineers updated DefenseWeb's software, for example, they were asked to make sure the new version had the potential to work for private-sector clients -- should the company decide to make a move in that direction. Finally, in early 2003, Cavanaugh decided to determine, once and for all, whether such a move really made sense. He hired a new CEO -- Doug Burke, a technology industry veteran with two successful companies under his belt -- and together the two men began exploring DefenseWeb's options.

The company's key product is a Web-based software platform used by the U.S. armed forces. The military provides an array of civilian services -- from financial planning to abuse counseling -- for hundreds of thousands of family members of its soldiers. DefenseWeb's software allows the military to monitor such services and make sure they are delivered efficiently. It seemed clear that the software platform would have value to any organization that maintained large, complex Web systems.

After two months of analyzing potential growth areas, including new opportunities within the government, they decided to split the company into two "zones." Cavanaugh would run the government operations, and Burke would investigate a new private-sector strategy. Burke gave himself six months. At the end of that period, he would take his findings -- good or bad -- to the company's board and chart a course from there.

Working full-time, two technicians set about making DefenseWeb's application appropriate for commercial use. Burke became a one-man sales force, approaching about 20 potential clients over a period of four months -- most of them tech companies he had dealt with in the past. Six signed on, and early reviews were strong. "We were very pleased," says Dwight Gould, CEO of Aviatech, a Web developer based in La Jolla, Calif. DefenseWeb's platform, he says, was a "nice box of tools" that enabled Aviatech to construct sites much more efficiently.

Burke was pleased, but he also saw roadblocks. For one thing, the initial clients were extremely tech savvy, and the software would have to be further modified for more mainstream customers. Then there was the matter of building an actual sales and marketing team to sell it. Finally, while DefenseWeb was extremely competitive among defense contractors, its ability to compete in the more cutthroat private sector was anything but assured. As the six-month trial was coming to an end, Burke and Cavanaugh prepared to face their board and plot a more permanent strategy for DefenseWeb.

The Decision

The meeting took place on a Thursday night in August 2003. For four hours, Cavanaugh, Burke, and the company's eight directors and advisers -- a mix of tech-industry players, government contractors, and former military brass -- gathered around a table at a local restaurant. Burke led the meeting. Rather than issuing a recommendation, he presented the cases both for and against a move into the private sector. He reviewed a set of largely positive testimonials from trial customers and pointed out that the numerous other small and midsize companies on DefenseWeb's radar represented a $1 billion market. He also emphasized that a commercial product offering would make for a much more lucrative exit if and when the time came.

But Burke and his small team had taken things as far as they could. Fine-tuning the product and creating a comprehensive sales and marketing plan, he said, would require a substantial infusion of both manpower and capital. Burke, who had worked with venture capitalists earlier in his career, raised the prospect of seeking outside investors. But Cavanaugh refused to surrender control of the company he had built from scratch, and some board members felt that a capital search campaign would be a major distraction. Then Burke dropped another bombshell. He had heard rumblings that a pair of very large competitors -- Macromedia and Microsoft -- were developing a platform similar to DefenseWeb's.

Just as the entrees were being served, Burke felt the mood around the table shift -- against the idea of moving into the private sector. Cavanaugh felt it too. "It was an 'of course' moment," he says. "Things just didn't add up." Indeed, given the scenario that Burke had just outlined, DefenseWeb's satisfied customer base in the U.S. military looked as attractive as ever.

The next morning, Cavanaugh and Burke called a meeting of the company's 15 employees and announced that DefenseWeb would refocus its energies on serving the public sector. Burke met with his handful of private-sector clients and discussed allowing them to continue licensing DefenseWeb's platform, but most opted to let the trial end. He remains obsessed with sales, only now he's courting potential clients like the Army Reserve, scouting out subcontracting opportunities, and seeking new contracts to bid on. DefenseWeb, he says, is on track to triple revenue this year. "The company had been talking about going commercial for a long time," Burke says. "Once and for all, we focused."

Cavanaugh, for his part, finally had some free time on his hands, so he took off on a four-month, cross-country bike trip, in part to mull his future role with the company. Speaking from a pay phone at a truck stop in Kansas, he says his brief but intense dalliance with the private sector taught him a lot, including the importance of sticking to what you do best. "That's the beauty of being an entrepreneur," he says. "In some ways, I just wanted to end the speculation. And so we did."

The Experts Weigh In

Should DefenseWeb stick to its niche?

Honing your core competencies is always a smart move. In the software industry, the pendulum has swung back and forth. There was a time when dominating a niche was the way to go. Then it swung in the other direction, favoring high-volume, low-margin firms. These days, post-bubble, the pendulum has swung back. You stay in your niche, protect your turf, and make your customers as happy as possible. DefenseWeb's decision sounds like a wise course of action.

Dana Gardner
Senior Analyst, The Yankee Group, Boston

There are dramatic differences between the government and the private sector. You don't have to be Microsoft to get yourself pretty well planted in the government. The private sector is more wild and wooly, a different kind of competition. There are rules of business in the private sector, but with the government, there's more of an organized process. A company needs pretty separate entities to do both. If you're a smaller company and trying to maintain two structures, it's very difficult. That adds cost and challenges.

Stan Soloway
President, Professional Services Council, Arlington, Va.

Jumping in for just six months -- why even waste the time? You either commit or you don't, and six months isn't enough time to decide. We're slowly and cautiously moving into commercial work. It took us probably eight years to get to the point where we were making revenue goals for our commercial products. Government work is more long-term and risk-averse. In the commercial world, you need to constantly identify opportunities. That can be very difficult for a government contractor to understand.

John Parris
Co-founder, Smartronix, California, Md.

Published on: Oct 1, 2004