🪄 🏛 Demystifying the Federal Sale
BACKSTORY
I’m often asked how early stage companies should approach selling to the public sector. The process is complicated by the lack of a “one size fits all” model for engaging with government.
Refer to The Promise of GovTech for an exploration of which companies are innovating in the government space. This newsletter is about how one might sell their innovations to the government. Where do you start, who do you talk to, should every company approach this differently?
This exploration contains insights from discussions with many individuals who care about technology with applicability to the public sector. Thank you to everyone who contributed to this newsletter! 🙏
Before we dive in - please note this is a compilation of thoughts and opinions - some topics could be missing the mark, or maybe you’ve experienced something very different. If so, let me know in the comments!
INTRODUCTION: WHO TO TALK TO IN THE FEDERAL GOVERNMENT
This post attempts to connect the entrepreneurial ecosystem to the federal government, and clarify the path toward working with government for early-stage startups.
Building for government is easier said than done. People and organizations that haven’t worked with government before may wonder how to make contact with someone who can tell them about mission problems.
I usually suggest startups create a government strategy by picking two or three of the most relevant approaches outlined below, then refine based on government customer demand.
CONTENTS
📃 Grant Programs (SBIR)
⚡️ Other Transaction Authority (OTA)
💻 Investors & Innovation Organizations with Government Expertise
🎯 Subject Matter Experts
📇 Registrations (an important aside)
💈 Prime Contractors
🎁 Resources
📃 GRANT PROGRAMS (SBIR)
Grant programs like the SBIR (Small Business Innovation Research) program provide an excellent source of non-dilutive capital. The AFWERX SBIR program is popular, and was re-architected in the last few years to reduce friction and lower barriers to entering the government market for startups.
I’d suggest collaborating with a firm with known success for help in crafting a SBIR application. There are a number of consultants that help companies write SBIRs, including NewCourse Strategies, SBIR Advisors, InteliSpark, and Long Capture. In general, most SBIR programs offer three phases: a Phase I, which provides a small amount of non-dilutive funding (usually up to ~$250k) for concept development, Phase II, which provides a larger amount of capital to refine and test the proof of concept (~$1M), and a Phase III, when the company establishes a production contract with the government (no money comes from the SBIR program itself at this stage). Companies can ascertain extra funding at the Phase II stage through the Strategic Funding Increase and Tactical Funding Increase Program (STRATFI/TACFI) programs. Learn more here.
How the Government Can Use the SBIR Program to Scale Innovation has a great description of the SBIR process. This excellent Small Business Research Programs: SBIR and STTR by Congressional Research Service report is the best set of history and facts I’ve seen about the SBIR and STTR. Per the report, over $51 billion has been granted in total to SBIR and STTR awardees throughout the two programs’ duration.
SBIR applicants should be mindful of the fact that a number of agencies have SBIR programs, and they’re all run slightly differently. For example, the DoD is the largest SBIR participant, and its SBIR budget was roughly 56% of the overall SBIR budget in FY20.
SBIRs offer favorable terms to startups in that they’re non-dilutive and allow companies to retain control of their intellectual property (IP).
For many companies, the goal of the SBIR program is to establish a Program of Record. Programs of Record offer companies enduring government funding and personnel support. According to Understanding Acquisition: The Valley of Death, a Program of Record is an approved line item in the Future Years Defense Program (FYDP) as something Congress has or plans to budget for. The FYDP is a projection of the forces, resources, and programs that will be used to support DOD operations. Companies that secure Programs of Record often have a more direct path to consistent revenue with government than those that do not.
A drawback of the SBIR program is that while getting an initial award might feel straightforward, transitioning to a production contract with one or more agencies requires additional time and relationship-building.
The Importance of a Champion in Grant Programs
Have a conversation with the program officer or point of contact listed in the solicitation if you want to better understand their perspective. It may also be useful to provide one or more letters of intent / support or a memorandum of understanding (MOU) along with your application. Requirements and thoughts on this vary per SBIR stage and sponsoring agency.
Sole Source
A sole source contract is another huge advantage of the SBIR program. A sole source contract is typically issued to a company when the government identifies your company as the only supplier of a product (which it does, in this case, through the competitive Phase I and Phase II processes). Alternative Ways to Sell to the Government: Sole Source Contract and Piggybacking by Jack Siney helps explain this concept. If a company is awarded a SBIR Phase III, it gets a sole source contract.
⚡️ OTHER TRANSACTION AUTHORITY (OTA)
Other transactions (OT) are transactions other than government contracts, grants, or cooperative agreements.
Other transaction authorities (OTAs) are acquisition authorizations that provide federal agencies added flexibility in how they acquire technology (in other words - they’re an authorization to use other transactions). OTAs are exempt from federal procurement regulations like the Federal Acquisition Regulation (FAR).
To win an OTA, a company should join an OT Consortium, a group of companies focused on a specific space that allows prospective vendors to engage directly with government. More on OT consortia at the end of this report.
💻 INVESTORS & INNOVATION ORGANIZATIONS WITH GOVERNMENT EXPERTISE
There are a number of hybrid organizations that straddle the public and private sectors and positioned in the VC / tech world. Some firms that invest and provide added value around accelerating the path to government like In-Q-Tel, DIU, Harpoon, BARDA Ventures, Shield Capital, Dcode (accelerator). The latter half of The Global R&D Landscape and Implications for the DoD report discusses some of the above and adjacent initiatives.
There’s also a class of organizations that help to educate early-stage startups on the federal ecosystem. The National Security Innovation Network’s (NSIN) accelerators and events, AFWERX, National Renewable Energy Laboratory’s (NREL) Innovation and Entrepreneurship Center (which brings economically viable cleantech solutions to market) all provide educational material and assistance to startups going to market in government. Entities like Defense Digital Services (DDS) also exist to innovate and develop solutions within the DoD, while organizations like NavalX provide resources and endeavor to connect activities that span the DoD.
🎯 HIRE OR CONTRACT WITH SUBJECT MATTER EXPERTS
If you're relatively confident the federal market will be a good fit for your product, you could work with an advisor, hire someone, or create an advisory board of individuals who have background and relationships in the agencies / spaces you’re targeting. It’s important that the person or people you work with be willing to offer tactical and hands-on support. It is also helpful for them to have experience with the agencies that would be the most likely customers for your technology. Ask whoever you work with if they’ve successfully sold to government in the past, and ask about the high-level connections they have in government.
📇 REGISTRATIONS (an important aside)
One note amidst these strategies - when preparing to work with government, you have to register in a number of places, which takes a while; be mindful of this if you are on a timeline.
A DUNS (Data Universal Numbering System) Number is required for any federal proposal. Create one here.
Register on SAM.gov (System for Award Management) to bid on and get paid for federal contracts or to receive federal funds. To register, you need a taxpayer identification number (TIN), and other information about your company.
A few days after you register on SAM, you get a CAGE (Commercial and Government Entity) Code, a unique identifier assigned to any company that sells to government.
Search SAM by NAICS codes - codes for different subjects in government databases like SAM.gov
Monitor websites like SAM and other RFI/P aggregators to respond to RFI/Ps.
FedConnect is another site you can monitor to identify contracts, grants, and other funding.
OTHER IMPORTANT PROCESSES
FedRAMP is a certification companies are required to have to prove their cloud offerings are sufficiently secure for use by the US Government.
Authority to Operate (ATO) approves an IT standard for use in an organization. Authorization means an organization accepts that the benefits of using a system outweigh the operational risks. See What is an Authority to Operate by Second Front systems for more information.
SOC2 is a compliance standard, which specifies how organizations manage internal customer data and handle security. Companies like Vanta help startups get to SOC2 compliance.
💈 PRIME CONTRACTORS / SYSTEM INTEGRATORS
In some cases, it is useful to develop a relationship with a prime contractor like Lockheed Martin, Raytheon, or Booz Allen. These firms often have pre-existing relationships with government that you can use to help your company get noticed. You might also try partnering with prime contractors or other large companies to gain access to subcontracts or indefinite-delivery, indefinite-quantity (IDIQ) contracts, which are vehicles set up to enable the government to gain access to a specific product or technology during a fixed period.
How do I Develop a Relationship with a Defense Prime Contractor?
🎁 RESOURCES
⭐️ Small Business Research Programs: SBIR and STTR by Congressional Research Service → a data-driven report on the success of these programs over the last several years.
So, You Want to Sell Into Federal? by Nick Sinai
National Security Scorecard by Govini
Contrary’s Deep Tech Funding Guide
How to Invent Defense Products by Brett Granberg
The Iron Man Model: How Startups and the Military Can Work Together by Jeff Decker
How the Government Can Use the SBIR Program to Scale Innovation by Anduril
SBIR Overview Video presented by J.R. Mullis at Dcode
Finding the Right Transition Path (Commercial vs. Prime vs. Program of Record)
SBIR.gov’s Tutorials Page provides useful digestible modules for learning about various topics.
The State of Competition Within the Defense Industrial Base report is an interesting take on competition in the defense space.
A Guide to Phase III Awards by Long Capture
Thank you for reading 💕
If you’re building a data-first GovTech or Civic Tech startup, reach out! Please place any feedback in the comments, and share if you liked this post!