I had been an entrepreneur and business development executive in defense-tech for about 20 years before the light bulb really went on. Why did it take so long? Maybe because I had spent most of my career in a boot-strapped company and had only recently shifted to investing in other founder's companies where conversations of valuation, dilution and control came to the fore of my consciousness. I was in Washington, D.C. listening to a pitch from a lobbyist who wanted our business. He basically said, 'Forget venture capital! The Government is your VC and my job is to help you raise capital.' We didn't end up working together but he was right on the mark. With a lot of work, the right approach and a little bit of luck, the Government can fund a significant portion of your company's growth. Here are my Top 7 reasons to consider the US Government as a viable source of start-up funding.
1) It’s a massive market with capital to deploy. Most start-up companies talk about targeting multi-billion dollar markets. The 2013 US Government budget was $3.5 Trillion! Even when you take out debt service and mandatory spending, you are still have a number of enormous multi-billion dollar markets:
2) Federal investment is non-dilutive. When you take capital from a VC or angel investor, you are trading that capital for equity in your company. But when you win a contract from the U.S. Government you maintain full equity. You do give up certain intellectual property rights to the Government but there are ways to mitigate this impact (watch for a future post on IP and Government contracts).
3) Time is NOT of the essence. If you are solely focused on building a commercial product in a large competitive space where time to market is critical, then Government funding is probably not for you. Plan to commit two years for that first significant contract win. It can happen faster, but don’t count on it. If you can be patient and work Government funding into your total business model, it can be a huge win. I am an investor in Nanocomp Technologies, a carbon nanotube materials company. They just won an $18.5m contract to build out their manufacturing infrastructure – but it took years to close even with a strong history of government business and compelling need for the product.
4) More resources will be available for R&D. With Government funding, you can invest in product development beyond your core product roadmap. We all have more use cases and requirements than we can fund. A Government contract can enable you to develop and test a new product derivative and market.
5) Reliable cash flows. The US Government is a great, creditworthy payer that will process your payment in days not months (at least at the time of this post). By thinking ahead when you write your proposal to the Government, you can create achievable milestone payments that keep you cash flow positive throughout the contract. Conversely, VC follow on funding can dry up in a hurry if you stumble.
6) Follow on Sales. It’s not always the case but let’s presume that the Government has given you a contract to fulfill a critical need. That first contract is typically going to be for development or a test buy. If you really deliver the goods, you can grow that initial contract into a significant revenue stream that continues to offset the need for outside investment and generates real profit.
7) If you don’t do it, somebody else will. This is a bit of a philosophical point but let me rant for a moment. Despite the best efforts of many, the US Government is a huge, inefficient bureaucracy. There are so many forces at play (special interests, politicians, lobbyists, major corporations, etc) that the budget is going to get created and spent no matter what. If you have an idea that will save Government money, make our nation more competitive, or reduce bureaucratic waste, then you should get in the game and deploy those government dollars effectively.