Why Can't Startups Get US Government Contracts?(news.vice.com) |
Why Can't Startups Get US Government Contracts?(news.vice.com) |
Small businesses can absolutely get government contracts, but becoming very adept at doing this is a skill, comparable in execution difficulty to, I don't know, SEO or cold calling. There exist many businesses in your town which, month in and month out, respond to RFPs for government services in the five figure or six figure range.
If there is any interest, I'll share Appointment Reminder's (unsuccessful) bid for a government contract in Hawaii. That's not ordinarily a huge portion of our business, but I became aware of the opportunity and it felt like a lay-up. It wasn't, as I failed to discover a key piece of information (namely, that an enterprise competitor had won the contract the year prior on a bid that was half of the minimum that I'd contemplate), but the process was not extraordinarily oppressive by the standards of An Adult Who Occasionally Plays Like This Is A Real Business.
Long story short: the white-hot competition to deliver 100k phone calls a year produced exactly two responsive bids, for $30k and $15k. The competitor, who won, won with a one-pager that said "Details substantially same as last year; if you don't have our old brochure on file let me know and I'll re-fax. Signed, an employee whose only job is to file 250 bids for $15k a year and probably gets a gift certificate if more than 50 turn into sales."
My model for that bid, by the way, was "$5k of AR services, $10k budget for extra Twilio calls, $10k for software customization, $5k for anticipated hassle." That's an internal model: Hawaii only cared about the final number. (I can buy my competitor having economics which made their bid profitable at $15k, particularly if they amortize engineering costs over multiple years of anticipated renewals and/or they do enough similar business to amortize customizations over multiple accounts.)
The cost of the process for us:
Two hours of reading accessible online documentation of vendor qualification requirements for Hawaii, written at a 5th grade reading level.
One hour to understand the bid requirements.
Four hours writing a proposal which, like all proposals responsive to government RFPs, is basically "The system will be capable of Copy Paste Language From RFP Here. One sentence of elaboration."
Two hours of pushing faxes around to supplement the data collected by Hawaii's (fairly painless!) online vendor qualification process.
One hour responding to a general excise tax audit occasioned by a filing of Hawaii state business registration mandated by the process. (Result: we do not owe it, as anticipated.)
$60 in out-of-pocket costs for various regulatory fees.
Plenty of companies do this stuff week in and week out, for everything from "dig up a military statue and transport and replant it to a new location without causing structural damage; $40k" to "400 orange jumpsuits; must not contain any structural element capable of causing suffocation; remove all elastic; shipping included; $8k." It's like any other sales process: you win some, you lose some, you build processes such that your win rate costs you a percentage low enough to allow you to still make money on the business.
In seriousness, though, I don't think it's fair to downplay the complexity of government procurement. Having worked as a subcontractor of a subcontractor of a contractor for a U.S.G.S. program, I've had some exposure to that world. It's not pretty, and much of the complexity is needless.
Some of it is genuinely important, like accessibility and privacy requirements. The vast majority, though, seems mostly to be the product of two centuries worth of increasing bureaucracy.
This is not a problem that can't be solved, though. I don't think the gentleman at the end of the article is correct in his assertion that this way of doing things "is timeless." We just have to figure out how to pare down bureaucracy a little bit at a time.
Selling to the government is very similar to selling to any other industry/company: you (the seller or maker) have to understand the customer's acquisition process. The big difference is that the federal government is the largest customer--millions of people and trillions of dollars. Therefore, they have a lot of rules and they all attempt to ensure "fairness" when the government tries to acquire something.
How do you do begin to understand that behemoth? Here are some tips:
-You invest some (a lot) of time understanding the Federal Acquisition Regulations (FAR) https://www.acquisition.gov. There are training classes available online and in person.
-Speak with acquisition specialists or contracting officers to understand the regulations specific to your product/industry.
-Learn about the specific rules/advantages that may apply to your company. There are many many preferences for small business, veteran-owned companies, disabled-owned companies, women-owned companies, etc.
-Understand what "fair" means to the federal government in the context of acquisition. It doesn't mean "the best solution". It doesn't always mean "the cheapest solution".
-Learn how to navigate the government's Request for Proposal (RFP) and Request for Information (RFI) processes so that you can be a part of delivering answers/solutions to the problems that the government has determined they have. The big government contractors have this stuff figured out. They know how to read an RFP and respond, even if they don't have the solution themselves.
-Understand the concept of "prime contractor" and "sub contractors". Prime contractors often win large government contracts but decide to/have to "sub" some of the work out. There are often regulations on how and what types of companies they must sub work out to. For example, AT&T may win a large networking contract but sub the work out to 10-15 other smaller companies to execute.
Most founders have intimate knowledge of the contract process and a large network from previously working at a large DoD contractor. Once they have this information and rolodex, they normally have an easy time running a small defense contracting firm as a sub on large contracts and winning their own through contract vehicles like SBIR.
This is also the story of how all those mega-mansions in Great Falls and McClean VA came to exist.
That's precisely part of the problem. Without a clearance, prior past performance or any other form of insider access, it's incredibly difficult and needlessly complex to navigate your small business through the maze of the procurement process.
You don't necessarily have to navigate the "incredibly difficult and needlessly complex" infrastructure without help.
All the big projects force the big guys to subcontract to smaller companies
The problem is actually completely different:
There is no way for a "little guy" to become a midsized company b/c the government is completely incompetent and relies on the huge defense contractors for guidance. The gov't has VERY little internal expertise - so if you have a brilliant new idea that is perfect for a midsized company to execute (which will often have to be on an existing platform built by one of the big companies) they have to go to the big companies to see if it's feasible. The big companies ofcourse say it's impossible and then (if it actually was a good idea) they steal the idea and implement it themselves.
So unless you can go from doing SBIRs (ie. under 200 employees) to build a whole tank on your own - you're fucked
- You must certify that you don't use certain tropical hardwoods.
- You must report on minority and female employees in some circumstances. You must meet goals for hiring subcontractors owned by the same.
- You need to certify that you've divested assets in Iran
- You must certify that you don't discriminate against Catholics in Northern Ireland.
Understanding how to navigate this stuff and not get in trouble requires "fixers" (ie. lobbyists, congressmen, etc) and domain expertise to stay compliant with everything. Competitors have to meet these too, and will submit grievances to screw up your contract awards. For a startup, that's death, as you'll hire people and buy stuff, and not get paid.
Hi Phillip,
I am with the investment team at In-Q-Tel
(www.iqt.org), which is the strategic
investing arm of the CIA and other US
intelligence agencies. We invest in
innovative companies that are building
cutting edge commercial technologies that
may enable the agencies we work with to
rapidly develop and deploy new capabilities.
In addition to investing, we also in almost
all cases purchase some amount of product
and services from these companies.
Our customer agencies then frequently
make follow on purchases directly
with the companies.
I recently came across some news
coverage of your company. I am contacting
you because your social collaboration
technology might be of interest to the
agencies we work with. Would you be
interested in having an exploratory conversation?
Please let me know if you have some
time over the next couple of weeks to talk further.
Possibly a good deal for people who are into that sort of thing, but we chose not to pursue it, as I don't have any interest in supporting the CIA/NSA/DIA/DHS/FBI/ETC.
Should we really be surprised that the market for rocket launches into space is somewhat more difficult to get into?
Unfortunately, as we know, in project management unameliorated risk is a compounding factor, and iteration and hypothesis testing are some of the few risk sinks we know about in practice. Squaring that particular circle is the holy grail for practitioners inside the government and out.
The reason the above happens is because people start small businesses and then when they win lucrative contracts the large companies buy them. The article is a good overview of a dysfunctional system though.
If a company has an existing contract with the USG then they could get bought just for the contract.
If you're a small startup, there are dozens of ways to get into government contracting. Start looking at your city level. My home town even has an open-access procurement website where I can sign up, register my credentials, fill out my tax paperwork in advance, and configure email alerts for different keywords on procurement contracts that they post. If I had 5 employees--instead of my company being just a loose conglomeration of three consultants working on three completely different projects but sharing our billing--then I'd be able to even bid on some of these GIS software contracts.
I know my state has a similar site, I just haven't gone through it yet. I'm pretty sure federal has such a system that a number of the different bureaus use.
> "We're passing laws within an election cycle, and when administrations change, our tendency is to layer in more laws instead of reforming the ones we already have"
The problem is that our laws are simply too complex. If I was President, I would refuse to sign a law that didn't (1) expire if not explicitly renewed in 20 years, (2) fit on 10 pages (with standard font size, margins and line spacing), and (3) result in a net reduction in the size of the legal code (by repealing old laws of greater length than any new text introduced).
And then there were the companies that couldn't deliver on time but hadn't gone out of business yet.
"What do we do here? We could fine them a bunch of money for being late, but if we do they'll go out of business and we'll never get the thing they're supposed to be making for us. I guess in theory there's a chance they could still deliver if they're still around."
Rinse, recycle and repeat. There's lots of very wealthy Beltway residents who's career is just spinning up businesses to do this. It's a kind of a parallel system to what goes on in the Valley.
The follow-on transactions, however, were much more challenging as the Beltway Bandits (prime contractors) dramatically increased the friction for us to be able to expand our footprint. We still succeeded, mostly because our technology was superior and we had the right agency (not contractor) advocacy.
1 - Regulatory capture.
2 - Startups might be efficient because they're lean on things that might be important to government. Like a small IT firm handling a presidential candidate's e-mail server.
#2 feeds #1 because lobbyists suggest important rules and regulations that can be justified by government which increase the barrier of entry to startups. Oh, you don't have certification that you do this? Oh you haven't submitted for these checks? Oh you haven't been reporting on this? If you haven't done all of these things, then you aren't eligible to win this contract.
Individually these points can be logically argued and make sense on a case by case basis. It's just that the enterprises that are in bed with the government already put themselves in a position where they are compliant with the new regulations that they're going to make, and then lobby to make those regulations to force competition to scramble for compliance at the last minute.
Simple: startups represent market disruption, and bureaucracy by definition can't deal with disruption.
It was a husband-wife owned startup, but I believe actually incorporated under the wife (the CFO), which gave a leg up in certain DOD bidding processes, through various woman-owned-business grants and policies.
As a former employee of an SBA favored, minority woman owned business, let me make something very clear: The entire SBA small business process is itself gamed and owned by former employees (and their still employed buddies) of the big government contractors.
Case in point: My particular "start-up" was "owned" by my COO's wife. She was CEO in name only, but had 51% ownership because she was of Fillipino descent, and therefore qualified as a minority-woman. My COO was a white male who was truly the CEO. His wife was a stay-at-home mom, but on the company's pay roll. Since the other SBA stipulation was that there was a maximum profit limit for the company, the COO and his other buddy both had their wives listed as employees to pay them each the maximium allowed salary of $300,000 a year.
Think that was ugly? Then there was the other peace:
My company would bid on contracts, and when we won them, would simply sub out large portions of the work to the same giant defense contractors. This is not the exception, but the norm.
It is a rigged system with numerous bureaucratic rules which are exploited by the people who know the rules best. Whether or not your company actually knows how to do work is separate from the true qualifier for winning work, which is knowing the system and gaming it.
Fuck all of that. I'm so happy to be in the private sector now.
We. Cannot. Find. You.
The small businesses we know and love are not suitably registered with the fed/state certifications. We routinely have to document what we did to try and find adequate set asides. We'd love to be doing more business with small businesses, but yes, the paperwork is a hassle. But if you sub contract, you can negate 90% of the problem, let the prime contractor deal with it.
Do you have any suggestions I might pass on?
FWIW, there are plenty of us here who aren't in Silicon Valley and who aren't interested in building a "stereotypical silicon valley startup that is built for fast, reckless growth".
I don't disagree with your point, just wanted to point out that the audience here is broader than just SV people.
The FAR isn't just some document that you read and understand - there is an entire additional process for diligence and documentation that goes along with it.
Now you need 60 days of deliverables until you get paid from the government.
CACI and the rest of the major Prime contractors have hundreds of contract officers that work and maintain these contracts - often outnumbering the actual developers of whatever the products are.
What needs to change is the FAR and the budgeting process. Until then we will continue to ignore the government.
Startups are fast, but they aren't always reliable. At least for values of reliable that == being able to throw money at {Large_Technology_Contractor} to have them parachute in an additional team of engineers to solve unexpected problem X. Or being around 10 years from now for support.
But agreed, there are all levels of involvement. Consider the prime contractor's cut off the top the price of getting bid into the game and contact with the right people, then do your best to work your way up!
That's less likely than in transactions with private companies - although for IT projects...
This is the catch 22 of any business. If you don't know something, either you hire people with that knowledge or you contract it out. If you can't properly supervise the work/project/acquisition because you don't have enough depth of knowledge, then it's very hard to get a good solution. In the end, the government is at the mercy of private industry because the government can't be the best at everything.
The governement ultimately does have experts, but there are too few and they're spread too thin. They end up not having enough knowledge to make unilateral decisions
They also are often in semi-indepedent roles competing again the small businesses. Think of the JPL or all the "Labs" (Lincoln, Lawrence etc.) or the teams at MIT. They have their own agendas which doesn't hold technology acquisition as it's focus ( it's more about supporting the funding of their lil corner)
But I think the implicit goal was to have a certain mobility in the market where new more nimble player can float to the top and crusty old companies can sink. And the system doesn't accomplish that. If it did, maybe it would justify all the incredible waste involved
I understand it's a headache, but these seem pretty logical.
Here is the link: http://ogs.ny.gov/About/appendixa.asp
You make laws and prosecute the offenders, you don't make everyone you do business with pay money to prove that they don't engage in every possible negative activity.
Edit: and that's just one part of a larger process for one state. I just had to have an independent contractor working in the UK apply to be registered as a valid sub contractor in NYS, and certify that he (a sole proprietor) carries adequate worker's comp... Multiply by 50 for states, throw in municipalities (I'm looking at you SF/NYC) and the feds and then add in different agencies, everyone has their own idiosyncracies. Unless you target one state, one agency, you're in for a world of pain on compliance.
Here's the thing -- all of these things are at some level logical. Companies shouldn't discriminate against people and cut down rain forests. But the proposition asked by this article and thread is "Why can't startups get government contracts?"
End of the day, to do business with big government entities, you need to spend many dollars on attorneys and lobbyists before you make a cent. And after closing the sale, you need to maintain staff to be SMEs on all of the various compliance regimes that you need to comply with. You need to be big to swim in those waters.
Let's say that I buy an antique desk. I might have an endangered tropical hardwood, but it was cut LONG before the law even existed!
Or what if I buy reclaimed teak from an old steamship deck and turn that into a lovely couch. It was harvested 150 years ago, perhaps even before the US civil war. But I wouldn't be able to certify, would I? How is that reasonable?
The point isn't that it's crazy to expect people to behave like good citizens, it's that there are a ton of corner cases that the requirements don't address because they were written as "feel good" not as "this is actually good"
This sort of detail-peddling is why only massive corporations can attain government contracts. Regulatory capture is the inevitable end result.
one of the guys just soldiered on because he wanted to understand the technology.A few dozen weeks, but still.
They got paid what they could show in time and materials, but that's not the full award.
Let's say I need data analysis. Thousands of companies can service this need. Very few have the specific certification for the fed agency/state/municipal requirements du jour. I have no solid way of searching all holders of all these certifications by service line.
So, I search online, I call peers, I dredge for vendors. Vendors who approach me and can quickly communicate their contract value with small business/minority-owned/women-owned whatever, and can demonstrate their knowledge of the particular market the RFP is for means they know and are ready to be added to a larger RFP and can document their claims.
For me, this saves me time and money, and brings value.
I could see some small cases where the government would restrict the size of the company responding to an RFP, but there are also ways around that. The small business can contact the contracting office and protest saying they were unfairly considered for that acquisition and usually will win.
The key to the Federal Acquisition Regulations (FAR) is that they try in earnest to support and encourage fairness when awarding contracts. Furthermore, the government goes out of its way to give the "underdog" a better-than-equal chance at winning the contract.
As another poster said, the small business can't lose out on other reasons (i.e. certifications, financials, etc). It could be that they're losing contracts for very different reasons.
Here are some links for reference:
SBA size standards: https://www.sba.gov/content/small-business-size-standards
GSA Small businesses: http://www.gsa.gov/portal/content/202261
Small business set asides: https://www.acquisition.gov/?q=browse/far/19/5&searchTerms=s...
Protests: https://www.acquisition.gov/sites/default/files/current/far/...
They aren't required, but not doing so will necessitate a good justification. The Small Disadvantaged Business (SDB) designation is basically an automatic justification, but not the only one. Contractor past performance, the reasonableness of the bid, and other considerations can drive the government to actually choose a higher bidder. It also matters whether Widget is off-the-shelf or bespoke; the contracting officer tends to get more discretion in the latter case.
And, as described numerous times elsewhere in this thread, it's not that hard for small companies to get governmental work. But the process is different, for reasons that are not themselves unreasonable, and most don't really want to play with stuff like FAR. (Which is part of why many large governmental contracts require subcontracting to small companies--itself but the most efficient process, but a good one for growing those small companies.)
No it isn't, it's concerned with perpetuating itself and its bureaucracy and maintaining whatever hold on power it and its people have established... and with grabbing more power when and where possible. Any social good the government does is just a happy accident / side effect.
As a contractor seeking to spend those tax dollars, you are effectively signing up to help execute on the US population's stated goals as a people, not achieve the best business result for a government agency. Until you understand this, government contracting is not for you.
As for disruptive start-ups, in my 15 years working on state and federal contracts, every single agency that has requested "innovation", "disruptive change", "modern technologies" in fact means "please do this 95% of the way we did it last time, but add some shiny magic so we can feel good about progress".
As with any customer, your goal should be to give the customer what they want, while educating them about what they need. At the end of the day, you need to make your customer happy, and for a federal agency that often means don't fail, don't get their name in the paper. Which generally comes from doing it in a predictable fashion with incremental change.
Not on paper, no. In practice, it's a massive mechanism to transfer wealth to the rich, connected, insiders and the sycophants who hover around them and suck at their teat.
As with any customer, your goal should be to give the customer what they want, while educating them about what they need. At the end of the day, you need to make your customer happy, and for a federal agency that often means don't fail, don't get their name in the paper. Which generally comes from doing it in a predictable fashion with incremental change.
So very true. "Not getting their name in the paper" is probably a good idea for most customers.