Why Selling To The Government Can Downgrade Your Startup - Page 4
Barrier To Entry – Once you are in with a government entity, the same inertia which made it difficult for you to secure the sale will make it similarly challenging for your competitors to displace you. Government programs generally continue in perpetuity, as do many of the procurement contracts which underlie these never-ending initiatives. An existing relationship also facilitates selling additional goods and services by simply amending your previously approved government contract.
Low Default Risk – Unless you are selling to Greece, Mozambique or California, the risk that you will never get paid is relatively low. The relatively slight default rate risk facilitates factoring such receivables, thereby accelerating a startup’s cash inflows.
Budget Drain – Government workers are training to drain their budgets annually, to avoid being granted a smaller budget in the following year. Approved vendors who enjoy an existing relationship with the government can leverage this inclination to waste money at the end of each fiscal year by pre-selling additional products and services. If the government cannot take delivery of such items by the end of their fiscal year, you can negotiate an upfront payment, which allows the bureaucrats to fully expend their budget while providing you with guaranteed future revenue and interest-free financing.
Although government customers are not without their merits, startups should only target such bureaucracies when they can obtain a market price and avoid an extended and costly sales process. By focusing on commercial enterprises that share your adVenture’s sense of urgency and profit motive, your startup can maintain its solvency and avoid a credit rating downgrade.