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Why Startups Don't Bid On Government Contracts- The Value of Winning

Why Startups Don't Bid On Government Contracts- The Value of Winning

Hello again and welcome back to our series on Why Startups Don’t Bid on Government Contracts. We’ve already covered everything from awareness to the cost of going after government work (Click here to see them all). Today, we are going to talk about The Value of Winning, and the general thought process non-traditionals use when deciding where to put precious BD resources.

Let’s start at the beginning. Assuming a non-traditional knows about a government opportunity, and the opportunity is scoped in a way that they can address it, and they are excited about pursuing it, they still have to decide whether the work is really worth going after?  While each company has their own decision process, they will almost certainly address each of the following elements:

  •       The customer’s lifetime value
  •       Their chances of capturing the customer
  •       The cost to capture

The customer’s lifetime value: For any company, cash is king, but it’s not the only factor non-traditionals consider when assessing the lifetime value of a customer.  As we discussed previously, Product Market Fit is a critical consideration, especially for early stage non-traditionals and customers that provide significant feedback, or other assistance achieving fit will be viewed more favorably.  Additionally, there are intangible considerations, for example whether a potential customer is likely to produce valuable and shareable use cases, or the chance that success with the customer will make it easier to capture other customers.

Revenue: In our survey the number one factor non-traditionals look at when assessing a customer is the prospect of repeat revenue. This is hardly surprising, actual repeat revenue allows the company to grow without having to go to investors, and even if they do have to go to investors it will help their valuation significantly. This should make the government an attractive customer since it has a massive budget and favors long-term stable contracts. However, the government’s traditional acquisition strategy has been to offer a tremendous pot of money and use that to entice companies to spend vast time and resources chasing it.

But our survey found that two-thirds of companies that are not currently considering government work would go after contracts under $10K, making government cash cards a viable way to buy from them.

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Given the relatively small amount of money needed to interest non-traditionals, the government can deploy a wide array of solutions to induce engagement:

  • Challenges: Many agencies have run challenges that award $10-50K to companies with early stage technology solutions that could meet an agency’s need. These challenges usually take 1-3 months to complete and have application processes that are resemble commercial sales documents making them easy and inexpensive to apply for. To increase the impact of government challenges we recommend applying best practices from private sector challenges such as:
    • Ensuring that all participants receive some value, e.g. by publicizing the qualities and capabilities of all participating companies and giving robust feedback.
    • Clear communications between participants and the government (e.g. adhering to announcement schedules and ensuring that participants are made aware of major milestones)
    • Mirror commercial event applications and processes so that non-traditionals do not have to spend time creating new things.
    • Advertise through channels that are likely to reach non-traditionals (e.g. not just Challenge.gov)
  • Other Transaction Authorities (OTAs): OTAs were specifically designed as a fast and flexible contracting mechanism to allow the government to buy and test prototype technology.  As such, it is an ideal mechanism to engage mid-maturity companies that have early stage, but working technology.  However, the contracting community seems to be hesitant to use them despite their proliferation over the last decade. To overcome this, contracting officers could receive training, cheat sheets on their use, and case studies.  Additionally, while the number of OTAs has increased over the years there are still relatively few and many are not effectively marketed to the non-traditional community.  To overcome this, OTAs could be restricted to use with companies below a certain level of government engagement (e.g. only companies that have done less than $X of government sales in the last five years can use OTAs) and applications for new OTAs could de-emphasize requirements around experience administering previous OTAs.
  • Simplified Acquisition Process (SAP contracts): SAP contracts are available for purchases under $150K and can be completed quickly.  While this is a tiny number in the government world it is well within the range to be interesting to most non-traditionals. If SAP application procedures were aligned to commercial RFP standards and were properly advertised, then SAP contracting could be an effective way to engage non-traditionals.
  • Grants: The SBIR program provides $150-225K grants (non-dilutive capital) to small businesses with early stage technology so should be intensely interesting to all but the biggest non-traditionals.  However, very few non-traditional companies outside of academia are aware that the program exists and the application and evaluation processes are both so opaque that few companies pursue them.  The SBIR program should be especially interesting to early and mid-maturity non-traditionals because most investors are hesitant to invest in companies with unproven technology, but the SBIR program specifically requires that the research is intended to be high risk.  While this survey did not address the SBIR program directly, we received comments from non-traditionals and VCs that they did not pursue an SBIR because of the length of time from application to payment (this time varies by government agency but ranges between 6-10 months) and because of the application’s complexity.  

"Federal bureaucrats will not take any risks on new technologies that, if fail to meet all expectations, may reflect poorly on their performance evaluations. There is no block in the performance evaluation for innovation and therefore, there is no incentive to try new technologies to solve problems. This "don't rock the boat" mindset is pervasive throughout all of the agencies. Prototyping of new technologies is a cost effective way of "try before you buy" approach that can yield huge benefits to any organization. Also, government workers do not know what new technologies are out there even if they wanted to try them out."

Building towards product market fit: A second powerful motivator for non-traditionals is the amount of learning that they can get from working with a customer.  This generally takes the form of new insight into the ways that a customer wants to use the product, or discovering new pain points that a customer has that the product could address.  Unfortunately, the government provides shockingly little feedback to vendors and only rarely provides shareable use cases.  Additionally, the government’s security, customer access, and integration requirements frequently mean that insights gained from a government customer are only relevant to other government customers.  To address this the government could establish streamlined protocols and procedures for creating unofficial use-cases, customer testimonials, and feedback.  
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Technical support: The reason non-traditionals raise capital is to pay for coders, lab space, and other expensive infrastructure that helps them build towards Fit.  The government has some of the most sophisticated lab facilities on earth and has created programs where companies can use those facilities at reduced or no cost.  However, this kind of support did not score well among founders but did among the VCs that responded.  The data did not indicate why these programs were unattractive to founders but in follow on conversations the primary driver seems to be:

  •       The labs tend to be in inconvenient locations
  •       Non-traditionals need highly specific and often bespoke lab set-ups that cannot be easily created and maintained in shared labs.
  •       The bureaucratic requirements to access the labs

We do not see an obvious solution to the first two issues but the third could be solved through streamlined application processes.  

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Acquiring new customers: If a non-traditional can sell to, or get a great review from, a prestigious customer it will increase their chances of getting future customers. Go to any startup's website and their front page will almost certainly display their biggest and most prominent customers.   As such, if the government can demonstrate that selling to them will lead to future customers it will increase the value of pursuing government opportunities.  Unfortunately, our survey found that 40% of the respondents that are not interested in government opportunities believed that pursuing government would NOT help them find new customers.  We do not see an obvious solution to this specific issue, however if the government can improve the perceived prestige of working with them then their scores here will likely increase.

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Thanks for reading this week’s blog, join us next week for How Government Should Approach. If you would like to read a full copy of our report with the Boston Consulting Group, you may find it on our website.