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Why startups should enter the government market to raise money

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In many ways, startups embody the American way. If you’re underfunded and haven’t built something bold and there’s a bit of uncertainty in that addressable market, you’re probably doing something wrong.

World-class talent and unmatched support infrastructure have long been the cornerstone of US innovation. Even with limited IP, founders can attract and scale investors. However, the economic impact of the COVID-19 pandemic has depleted capital investment and traditional startup revenue streams.

This outlook is particularly harsh for enterprise-focused tech startups. According to last year’s US CFO APwC report, half were expected to cancel or postpone less important projects in 2020. Startups lacking runways are already feeling those steps.

Beyond revenue, the pandemic also had an intangible impact. Serendipity has played a role in many of the biggest startup success stories of the 21st century. Opportunity meetings, exciting conversations, and critical moments are all more difficult to achieve in a closed state.

This all means that US startups are facing an uncertain future. These are the times of trial to get the product on track.

Take advantage of the new culture of yes government

The federal procurement process has long been known for its bureaucratic formalism and tedious decision-making. But that perception is changing as government spending increases as part of a broader push to revitalize a shrinking economy.

The Air Force is a good example. A $ 60 billion R & D and acquisition budget is being implemented with the goal of innovating faster, investing more flexibly, and developing technology with less bureaucratic constraints.

For start-ups that are usually reluctant to work with the government, there are many reasons to seek federal grants or contracts. Here are two:

There is a great opportunity to make strong profits in a recession. In contrast to private sector caution, government opportunities tend to be long-term and broad-ranging, especially in difficult economic conditions that require stimulus.

Even if the government does not integrate startup technology, already funded and recurring IP can still be turned to the commercial market.

And best of all, these dollars aren’t tied. Government grants are not diluted, allowing founders to innovate without sacrificing capital and without being obliged to repay capital in the future.

The US government aims to expand its domestic industrial base and promote sustainable economic growth. Many institutions are increasing their R & D budgets by giving them more freedom in their investment methods. One example is the Small Business Innovation Research (SBIR) program. This is a multi-billion dollar effort to quickly connect new technologies to relevant government agencies.

This approach is a great opportunity for startups.

Where to start

The challenge is to know how to take advantage of the government’s rapid acquisition pipeline. One of the startups that went through this process is Slingshot Aerospace, which empowers organizations with space decision-making intelligence technology. In 2018, they partnered with us at Dcode. This is due to its focus on accelerating and scaling new technologies in the federal market.

Some of the Slingshot Aerospace team were skeptical of the SBIR program, given that there is no guarantee that the launch of a contract will lead to commercialization opportunities. However, by leveraging government funding to develop the product, Slingshot Aerospace was able to explore the potential of the federal market and ultimately pave the way for success.

We facilitated hundreds of referrals with government customers looking for situational awareness and guided the federal purchasing process to Slingshot Aerospace.

Early market research validated the Slingshot Aerospaces IP in both the government and the broader commercial sector. After two years of fast-forwarding, the startup has raised over $ 2.5 million in undiluted funding under three SBIR contracts and now counts the US Space Force as a customer.

Melanie Stricklan, co-founder and CEO of Slingshot Aerospace, said our innovations transcend technological development and leverage early government R & D funding to find competitive advantages while expanding public and private revenue streams. By doing so, we are expanding to a business model. By doing this, we are building a destructive IP while responding to each country’s call to advance the journey of digital transformation of the Air Force and Space Force.

Things to consider when concluding an SBIR contract

Federal agencies with R & D budgets in excess of $ 100 million allocate 3.2% of their capital to the SBIR program. This means that there are many opportunities for start-ups who want to develop IP with government support.

But interested starters need to understand that even if the government is eager for agility in integrating new technologies, it can be a long way off.

SBIR programs typically run in three phases: Phase I aims to establish the technical and commercial feasibility of the proposed R & D and will be awarded a prize of $ 50,000 to $ 250,000 for 6 months. Another 2 years. Phase III is effectively commercialized, at which point revenue for services and products intended for use by the government comes directly from federal agencies.

At this point, the startup should have a clear understanding of the sourcing process for their technology.

Also note that if you sign an SBIR contract and another federal agency wants to leverage the same solution, the government does not have to invest extensively in the contract bidding process and can skip the usual complete and open competition process. give me.

Time is important to startups, but executives shouldn’t stay away from long games. Yes, it usually takes years to build a meaningful federal business. However, procurement schedules are now accelerating to provide tech startups with the opportunity to diversify their bottom line during this difficult time.

Political will and funding are in place to drive SME growth and build future IP without compromising equity. For start-ups, there has never been a better time to explore the federal market.

Read more about startup finance When should I contact a VC?

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