On paper, the federal government looks like an ideal customer for an enterprise startup: Its seemingly endless budget doesn’t fluctuate with market conditions and it’s always in the market for new tech. But it’s a slog to break into, and for a long time, startups and VCs didn’t seem to want to associate with it. That’s rapidly changing.
Over the last few years, and especially the most recent one, interest in working with and taking money from the U.S. government has exploded in the venture ecosystem.
Meg Vorland, a co-founder at Dcode and partner at Dcode Capital, advises companies on how to pitch and land those contracts. Vorland told TechCrunch that the interest level in her firm’s services has been night and day since launching in 2015.
“Venture firms more and more are pushing their companies to explore it as another revenue stream,” Vorland said. “When we started Dcode in 2015, we were doing a lot more talking venture firms into what the opportunity is, but the amount of focus on it has increased tremendously over the last five years.”
There are quite a few possible reasons why this interest is growing. For one, a lot of the tech that the government might be looking to buy has a strong overlap with commercial customers. They aren’t just looking for defense or bureaucracy-focused startups, Vorland said — they are also seeking tech with large potential markets like data analytics, security and privacy.
Plus, budding startups now have concrete examples of how the relationship can be beneficial thanks to Palantir and Anduril. Both companies landed government contracts as startups — Palantir started working with the government before its 2020 IPO. Earlier this year, Anduril snagged a $1 billion contract with the Department of Defense, an amount large enough to make startups pay attention.
There are also macro factors attracting builders and backers to the space, said Jai Malik, the founder and GP at Countdown Capital, which hopes to help its portfolio companies land these contracts, too. He said that the growing tensions between the U.S. and countries like Russia and China and the holes exposed in the U.S. supply chain amid the pandemic have sparked a lot of entrepreneurs to think more about whether what they are building could help.
Malik just closed Countdown’s second fund, which is focused on hard tech companies in sectors like manufacturing, supply chain and defense. Countdown is just one of many firms looking to help some of their portfolio companies work with the government that closed this year alone. Dcode’s venture arm launched a $50 million fund in June, Shield Capital closed on $120 million in March, and just this week Ridgeline announced its $52 million debut fund.
The government has also made it clear over the past few years that it’s more willing to work with startups. The contracts above grabbed the big headlines, but many government branches and programs are making a concerted effort to try to bring in smaller startups and contracts, too, Vorland said.
But, for the most part, the government is still hard to break into and generally requires technical expertise, Vorland said, which many of the newer VC firms said they can bring to the table.
“This isn’t a Googleable thing,” she said. “You need some good partners to break into those government entities. A lot of people spend a lot of money and get really burned in the market.
“We want really good tech to come in, but the worst thing for them is people get pushed to the government market because the economic winds are saying the governments will continue to spend, but [some of these startups] are not well equipped to take advantage of it.”
Ridgeline hopes it can act as an adviser to its portfolio companies that could be a good fit for a government contract, Ben Walker, a founding partner at the fund, said. Each of the firm’s partners has experience working at government orgs. He added, though, that they also understand how difficult the process can be and aren’t planning to try it for every company.
“When it is the right time, we have a playbook and go-to-market strategy that we can use to test the markets,” Walker said. “But we are probably the first ones to press pause and not spend resources, time and energy if it doesn’t work out.”
While the interest in working with the government is already growing, Vorland predicted it will continue to do so. She said with the current market instability impacting potential enterprise software startup customers as they look to reserve cash, more companies will look to government options. And once they get in, Vorland knows they’ll be looking to stay.
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