Why Selling To The Government Can Downgrade Your Startup

Author: John Greathouse
Published: November 14, 2011 at 2:11 pm

First Greece, now Spain and Italy. Across Europe, historically solvent sovereign governments are suffering from an acute case of systemic deficits. Now, more than ever, government agencies in the US and abroad are lousy startup customers.

I am not a government contracting expert. In fact, during my many years as an operational entrepreneur, I explicitly avoided working with governments, for the reasons described below. However, I am familiar enough with the government procurement process to know that it can result in the down grade of an unwary startup’s credit rating.

Note: I use the term government herein as a matter of convenience to apply to all forms of municipal organizations; city, county, state and federal.

An entrepreneur’s two most valuable assets are time and money. Government customers abundantly waste both of these assets by negatively impacting a startup’s cash flows while causing it to spend unnecessary time participating in laborious approval processes and elongated sales cycles.

Some startups opt to partner with larger companies which have pre-established relationships with government customers. In the parlance of government contracting, this approach is termed a “prime and sub-prime relationship.” Although it mitigates the negative impact on a startup’s time and money, this arrangement requires the sub-prime startup to surrender a significant portion of their margin. In addition, prime contractors often jealously guard their relationship with the government buyer, which confounds the startup’s efforts to graduate from sub-prime to prime status.

The Downside Of Government Contracting

Vendor Approval Process – In many instances, governments require companies to abide by arduous vetting processes in order to become an "approved" vendor. In the case of the US Federal Government, the steps a company must traverse to become approved by the Government Services Administration can take years and cost a small fortune of precious startup capital – time and money most startups simply cannot afford.

Slooooooow Mover – The typical government procurement process is not driven by a sense of urgency. Rather, the purchasing process is generally lengthy and requires vendors to commit significant time and resources, with no certainty that they will derive a single dollar for their efforts. Approved vendors are then required to participate in cumbersome Requests For Proposals. These voluminous documents should generally be avoided by startups, as most young companies do not have the internal resources or the luxury of time required to succeed in a multi-vendor bakeoff.

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Article Author: John Greathouse

John Greathouse is the author of the hands-up startup advice blog infoChachkie (http://www.infochachkie.com) He has held a number of senior executive positions with successful startups which generated more than $350 million of shareholder value. …

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