Seven Questions to Ask Yourself Before Bootstrapping with Government Contracts


New companies I advise often bring up the prospects of bidding for federal or state contracts. They see government contract dollars as a way of bootstrapping themselves to achieve their vision without having to find investors, and dilute company ownership, to support their early developments, key demonstrations or growth. While the interest in such a path is quite understandable, more often than not, I advise against it.

Prior to Mind the Gap, LLC, I worked for 20+ years in companies that focused a majority of their efforts on bidding for and winning Government research, development, test, and evaluation (RTD&E) dollars. We were pretty good at it, winning a sizable percent of the jobs we bid. We were almost too good. Government contract dollars, especially Small Business Innovation Research (SBIR) dollars that are geared toward early stage developments and demonstrations, can define your strategy rather than serving as a well-aligned tactic to achieve the overall vision. There is a strong tendency for the Government contracting path to over damp critical market response and feedback for your technology or product. I like to say that the highs are lower, the lows are higher, and the time required to achieve success or failure is drawn out significantly.

Of course, there are times when Government contracting is the very best wayeven the only wayto go for your business or product. So, how do you know when its right for your technology or product?

The Seven Questions

The following are seven questions that help determine whether or not Government contracting is a wise path to pursue.

1. Is the End User for your product a Government Organization?

Whether it is a new laser that will be used in a military sensor or a service that will be provided to a Government agency, if the end user is the Government, then indeed federal, state or local funding is the right and maybe the only path. Also, my belief is that if the Government has not funded at least a portion of your development at an early stage, then they have no skin in the game and you stand a poor chance of being selected for that particular program in its later stages.

However, if you see your end users as non-governmental agencies, public sector corporations, or the general public, I would be very wary of heading down the government funding path. All too often, those Government contracts end up distracting key resources from your primary mission and from connecting with your most important customers.

2. Is the Opportunity or program directly aligned with your product roadmap or business vision?

So, you have a product concept and are in desperate need to find more dollars to fund the development of a particular element. You get word that a somewhat relevant solicitation is about to hit the streets. If you squint, you can see how that program or contract has a lot of content that is aligned with your roadmap. But, of course, the specs are not likely to be exactly the same as what your primary market indicates they need to be. Also, there are some additional contract deliverables that need to be addressed and fulfilled.

For this question, it is imperative that you be truly honest with yourself. I cannot tell you the number of times I have seen organizations build pretty long bridges to link a program to their product roadmap. What this ends up introducing is a series of zigs and zags that make your product more complex, change its specifications to the point where they no longer match what the customer needs, and consume more resources and take more time than would otherwise be needed.

A key aspect of lean product development is learning. The goal should be to test hypotheses about the market, your customer, sooner rather than later and learn through the feedback and failures. Government contracts are rarely the fastest and most efficient path toward that goal.

Building bridges to Government contract opportunities can take you off the course to your product or business vision.

3. Will you be able to retain intellectual property rights that enable your competitive advantage for your product in its primary markets?

By securing this Government contract, are you giving away key rights to intellectual property that would be developed had you funded the activity on your own? Sustainable competitive advantage should be the foundation for your product. By taking this next contract, are you potentially putting the intellectual property (IP) or trade secrets you have worked so hard to develop into the public domain?

If you do choose to pursue Government contracts, be abundantly clear in defining the IP you will be bringing to the table and retaining after each contract is completed. Also work creatively to negotiate as favorable terms as possible to secure IP created during the course of the contract. Some contract types (e.g., SBIR and STTR) are generally pretty favorable to vendors. Others are not. Resist the pressure to bid for or sign a contract when the IP terms are not clearly articulated.

4. Does the growth profile for your business or product match the likely timelines for the series of Government contracts you must win and execute?

I am always surprised at how optimistic people can be about contracting timelines. I myself have been guilty of over-optimism on numerous occasions and have learned my lessons the hard way.

The Small Business Innovation Research (SBIR) program is certainly great for funding early stage activities. Plus, it offers a lot of flexibility, where failures enjoy a pretty soft landing. However, keep in mind the timing. Even for relatively simple Phase I and Phase II SBIR programs, the timing is pretty extended.

Consider a proposal submitted in January (month 0) and, if youre lucky, awarded by mid summer (month 6). The Phase I contract is typically $100K or so and wraps up in about 8 months (by month 14). The Phase II proposal gets submitted 6-9 months after the start of Phase I and is awarded another 3-6 months afterward (taking you all the way to month 23-29). The Phase II is in the range of $1M and lasts 18-24 months. Granted, there may be some fast track or gap funding in between Phase I and Phase II, but the dollar level is pretty limited depending on the complexity of the product development.

When you add up the time required to complete Phase II and sit on the doorstep of hopefully commercializing the product, you are about 4 years down the road from where you started. Thats a pretty long time relative to most business plans. Thus, you had better be pretty sure you are comfortable with that much time to get what amounts to about $1M of funding that may or may not be perfectly aligned with your business trajectory. Large program opportunities, though potentially much more lucrative, are even more drawn out. Be prepared to expend significant resources helping your Government customer keep their program on track.

Of course the other side of the fence is not perfectly lush and green. Private financing options take time and a lot of blood, sweat, and tears to secure as well. In many cases, unless you have a significant enough early technology feasibility demonstration in hand, private-sector investors will have little interest. So, a well-aligned SBIR solicitation may be just the right approach. Just go into it with open eyes as to the timeline.

5. Have you thoroughly explored private financing for your business or product?

I sound like a broken record, but the objective should be to develop your product as leanly as possible so that you can get it out to the market and learn quickly and learn well. If your idea is a great one, then there should be others (friends and family, angel investors) that you can convince of the upside and that are willing to kick in some funding. Granted, youll need to give up some fraction of ownership, but as they say, better to have a fraction of something than all of nothing.

6. Are you willing to grow your staff or appropriately partner to acquire the necessary skills to satisfy Federal Acquisition Regulation (FAR) and other Government contracting and accounting requirements?

The intricacies of Government contracting are not for the faint of heart. There are a myriad of legal restrictions and associated reporting and accounting requirements that differ in non-trivial ways from what is required for a traditional commercial business. Having legal/contract/accounting staff members that are equally well versed in both domains generally requires you to have a much larger staff than were you to focus solely on commercial contracts.

Of course, if you really need to swim in both pools, then so be it. However, just be aware of the additional costs and thought processes you need to build into your organization. Even if you outsource your Government contracting back office, there are a number of issues that will demand your technical staff be appropriately trained. In addition, the financial structure and systems needed to support Government contracting can motivate you to make strategic and financial decisions based on criteria that differ from those in a commercial system. If your true market is a commercial customer, but you end up making too many key decisions that satisfy solely Government criteria, then youre bound to fall short at least on the commercial side of things.

7. Have you provided the Government program office with background information on your product or capabilities prior to the formal release of the request for proposal (RFP)?

In other words, before the RFP hit the streets, were you already generally aware of it and had communication with the technical point of contact or program office? Or, is this opportunity a pop up that you only uncovered in last nights web surfing?

My rule of thumb is that if it is a surprise to you that an RFP has hit the streets, then that opportunity is probably not meant for you. The opportunities with acceptable probability of win are those that you have seen percolate for some time. The sales cycle is generally pretty slow. Prior to the RFP, there was likely a Request for Information (RFI) phase where potential vendors to meet the needs of the program office were invited to send in capability statements. There may also have been an Industry Day where the program office articulated its goals and needs in an open forum. Or, in cases without an RFI or an Industry Day, the comment/contact window was sufficiently long and non-restrictive that you should have had the opportunity to float your idea by the technical point of contact and gauge interest and feedback.

There are lots of ways to legally gain feedback for your proposed idea or technology prior to the time the RFP comes out. That sounding board is critical. It may well be that Government contracting is the right path, but this particular RFP does not present a good opportunity for you.

Of course, this last question leads into a series of additional questions and considerations that affect the probability of winning each contract. These relate to your value proposition, the realism of the program plan and proposed costing, the staffing plan, the competitive landscape, and so on.