Why Government Contracts, Grants, and Loans Are Critical for Startups

Venture capital is the most traditional means for startup founders to grow their company, but most founders overlook the tremendous benefits that government contracts could have for their company. Venture capital firms invested $643 billion in startups in 2021 — the most of any year on record. While this figure is impressive, it’s not representative of the typical market and certainly not sustainable (because we’re already seeing a market correction). Meanwhile, the federal government spends more on contracts every single year (about $645.5 billion in 2021).

Federal government contracts, grants, and loans should be a top priority for startups looking for consistent revenue or non-dilutive funding. However, the majority of startups struggle to obtain government contracts and complain about overly bureaucratic processes. In a 2017 BCG-Eastern Foundry survey of pre-revenue startups, founders listed lengthy sales cycles (25%), complex processes (17%), negative government experiences (12%), and no clear agency contacts (8%) as the top barriers to contracting with the federal government. In this blog, I want to take a quick look at why government contracts are critical for startups, how to obtain them, and a few ways that government agencies could improve processes to work with startups more effectively.

Why startups should pursue government contracts

• Government contracts provide stable, recurring revenue: Most government contracts last longer than a typical enterprise contract, which provides stable recurring revenue for startups and reduces the need to raise new capital or increase marketing costs to acquire new customers. Startups should think of government contracts just like a large enterprise customer. It may take longer to secure the contract, but in the long run, it is worth it to dig in your heels and pursue the opportunity just like you would with a Fortune 500 company. Securing a single government contract can have an outsized impact on a young startup’s valuation because of the increase in revenue.
• Government funding is the last to be impacted in a recession — The turmoil seen in the public markets is quickly moving into private markets. Many startups are already realizing that it is going to be difficult to raise new capital this year (and probably longer) — and certainly not at their current valuation. Thankfully, government contracts, grants, and loans will likely be the last source of funding/revenue to be impacted because government funding levels have already been set for the year. Government budgets will likely be the last to feel the impact of the current economic dip in 2024 or later. In fact, government funding opportunities may increase this year for many companies thanks to the Infrastructure Investment and Jobs Act (IIJA), which added about $550 billion to appropriations for infrastructure projects.
• Grants and loans are also available — Not all government funding comes in the form of contracts. Many startups in the breakthrough science/deep tech space could qualify for non-dilutive funding like grants and loans from the National Science Foundation, the Department of Energy, and a number of other agencies because of the research and development occurring at the company.

How startups should navigate the contracting process

• Register with the Small Business Administration — First things first. You need to get your small business on the General Services Administration (GSA) schedule. Next, get familiar with the North American Industry Classification System (NAICS) codes to identify opportunities in your sector. A number of tools exist for tracking government contracts, but the most basic (and free) remains SAM.gov. SAM.gov enables you to track set-aside contracts for small businesses that range from $3,500 to $150,000 as well as more lucrative “indefinite delivery/indefinite quantity” opportunities.
• Find a sherpa — In recent years, a cottage industry has emerged of former military contracting officers and Congressional staffers who help startups navigate the alphabet soup that is the federal government — especially the Defense Department. Prime Movers Lab works with our portfolio companies to find and secure new funding as well as direct them to the appropriate resources to ensure these funding sources are reauthorized year after year.
• Take advantage of your size — Two of the most popular grant programs for many of our portfolio companies are the Small Business Innovation Research Program (SBIR) and the Small Business Technology Transfer Program (STTR) administered by the Small Business Administration. The National Science Foundation (NSF) awards nearly $190 million annually to startups and small businesses through these programs. These small business programs are fantastic because startups are not competing with Lockheed Martin, Microsoft, or other major industry players and their army of lobbyists for new opportunities. The SBIR offers grants to small businesses to conduct federal research and development with the potential for commercialization. The program is highly competitive and awards are based on the company’s ability to “achieve scientific excellence and technological innovation.” Similar to SBIR, the STTR program focuses on funding research in the R&D arena. However, STTR requires small businesses to have a formal collaboration with a research institution like a university. If you have ties to a university or government lab, this could be an excellent opportunity for your startup.
• Increase touchpoints throughout the sales cycle — The federal government’s fiscal year starts on October 1. The budget and appropriations process used to be more consistent with budgets being determined in the fall and then the president’s budget is sent to Congress before the first Monday in February. Between 1975 and 1998, Congress never failed to pass a budget. Since then, it has been a little more hit or miss, with Congress relying on continuing resolutions to fund the government, which throws the typical sales cycles into disarray. Nonetheless, many major buying decisions by agencies are still made on the traditional budget cycle. Program managers spend the fall and winter planning their acquisitions and make decisions in the summer. As the end of the fiscal year approaches, buyers are faced with “spend it or lose it” fears because agencies often have a hard time justifying budget increases the following year if they didn’t spend their entire budget every year. It’s important for startups to think about this sales cycle and when to engage. Just because an agency may not be pulling the trigger on a contract in October or November, that does not mean, you shouldn’t be engaging with them. The fall is a great time to build relationships with program managers and begin to understand their needs so you can focus your attention later in the sales cycle.

What the government should do to be more conducive for startups

• Shorten sales cycles — I recognize that this is easier said than done. There are a number of legitimate reasons for government agencies to be so discerning when awarding taxpayer money. However, agencies should take a closer look at processes to see where they can dual-track reviews/approvals and make decisions simultaneously across the organization. Progress needs to be made faster because slow decision-making is the most common complaint we hear from our portfolio companies looking to secure government contracts. Most startups don’t have 12 months to wait for government agencies to make a decision. The runway of many startups could be 18 months or less, and they can’t spend so much time and energy focused on something that may not come to fruition. Shortening sales cycles will expand the number of companies vying for them, make contracts more competitive, and ensure the technology is not out of date by the time a decision is made. On average, it takes a company 18 to 24 months to secure its first government contracts. However, once you have secured one, subsequent contracts are easier to obtain thanks to programs like FedRamp, which provides a standard approach to security assessment, authorization, and continuous monitoring for cloud products and services.
• Create more accelerator programs — Technology accelerators help educate, mentor, and sometimes finance startups much like incubators such as Y Combinator or Techstars. These programs are valuable gateways for many startups looking to better understand government processes and connect with agency decision-makers.

If you’re a breakthrough science startup looking to raise capital and need support securing government funding, contact Prime Movers Lab here. Prime Movers Lab provides a suite of specialist support services for our portfolio companies, including government relations, talent acquisition, media relations, design, and even professional coaching. If you have other helpful advice for how startups can navigate government contracts, loans, and grants, reach out to me on LinkedIn.

Gavin Mathis is the Communications and Government Relations Partner for venture capital firm Prime Movers Lab, which invests in breakthrough science startups that are transforming billions of lives.

Prime Movers Lab invests in breakthrough scientific startups founded by Prime Movers, the inventors who transform billions of lives. We invest in companies reinventing energy, transportation, infrastructure, manufacturing, human augmentation and agriculture.

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