Tech Startups Struggle to Tap $82 Billion in Federal Contracts

For tech services vendors, the main challenge is learning the procurement process, while for product sellers it’s gaining government safety certifications.

December 8, 2016

6 Min Read
Tech Startups Struggle to Tap $82 Billion in Federal Contracts

By Bloomberg

(Bloomberg) — Jason Wagner’s cyber startup sells a digital platform federal agencies need. But lacking the heft or connections of a major defense contractor, it would be more trouble than it’s worth for him to seek a coveted federal contract. And he’s not alone.

During 15 years as a contract employee for intelligence agencies, Wagner saw cybersecurity analysts waste time transferring data for their investigations across multiple computer applications. So last year he started Tensor Wrench, which makes such information-sharing easier.

Now with a team of six, his customers include General Dynamics Corp.’s Mission Systems division, which helps run communications systems used on satellites, and by law enforcement. But he still hasn’t put the biggest potential buyer — the federal government, which spent $82 billion this year on information technology, about eight times Apple Inc.’s research and development budget — on his list of prospective clients.

“The government is a big juicy target,” Wagner, 38, said in an interview. “It’s tempting, but you got to figure out how much time you want to invest and whether you can afford that. When we added everything up, the answer came back: not now.”

Many cyber startups make similar calculations in weighing whether to do business with the government, where they face a complex and slow procurement process that can strangle smaller companies. Amid rising cyber threats, the gap in getting the latest technology tools is particularly worrisome for federal civilian agencies, from the Department of Veterans Affairs to the Department of Agriculture.

‘Slim and None’

“We’re expecting the smallest of federal agencies to do as good a job on cybersecurity” as the Pentagon, U.S. Chief Information Officer Tony Scott said in an Oct. 18 speech in Washington. “And you know that the chances of that happening are slim and none.”

Not being able to use new tools “hurts” the government, said Aaron Snow, the co-founder of 18F. The office was founded by the General Services Administration, which is in charge of government property and purchasing, to help agencies build and buy digital services. “Cybersecurity is just one area,” Snow said in an interview. “It also leaves us less efficient, it leaves us less productive, it leaves us more behind — period.”

Palantir Funding

The Pentagon and intelligence agencies have several well-known programs to help accelerate technology acquisition. There’s the Defense Advanced Research Projects Agency, Defense Innovation Unit Experimental (DIUx) and In-Q-Tel, the CIA-backed venture-capital firm that helped fund Palantir Technologies Inc. Civilian agencies are now trying their hand as well.

Snow said he understands why a small company would think the cost of trying to get government sales is too high, the conclusion reached by Wagner of Herndon, Virginia-based Tensor Wrench. For tech services vendors, the main challenge is learning the procurement process, while for product sellers it’s gaining government safety certifications, Snow said.

Yet “some of those small agencies have some of the most important information and represent some of the most important assets that our country has,” said Scott, the government’s CIO.

18F has added more tech experts to its contracting teams and opened an office in San Francisco, where startups can meet government officials. It’s also experimenting with moves meant to cut red tape, including “micro-purchasing” particular goods that cost less than $3,500, and quickly authorizing some small firms to do “agile” tech projects.

Michael Shinn, founder of Atomicorp, didn’t intend to seek government sales because typical acquisition cycles can take two years. But some civilian agencies approached him and used the government’s micro-purchasing program to buy his startup’s cybersecurity software that protects devices, which runs $300 per license.

Startup Failures

“I’ve seen my share of startups who have failed because they focused entirely on selling to the government,” Shinn, whose company is based in Chantilly, Virginia, said in an interview. “It takes so long they can’t stay alive to do that.”

Startups with enough time and cash hire advisers to navigate the federal procurement process. That can cost $250,000 to $1 million. Coalfire Systems Inc., a Westminster, Colorado-based cyber risk consulting firm, has worked with dozens of companies applying to sell through the Federal Risk and Authorization Management Program, known as FedRAMP, which aims to fast-track the government’s adoption of cloud services.

“We’ve had companies come to us and say, ‘Hey, we want a piece of that pie. We know it’s big and there’s a lot of it. We got some great tech and help us understand the business opportunities,”’ Kennet Westby, Coalfire’s president and co-founder, said in an interview.

Bigger Intermediaries

The only option some startups see is working under established government contractors. This year, CSRA Inc. tops the list of companies with the most information-technology contracts at federal agencies outside of the Defense Department, with deals totaling almost $1.5 billion. It’s followed by Lockheed Martin Corp., Hewlett Packard Enterprise Co., Booz Allen Hamilton Holding Corp. and Accenture Plc, according to Bloomberg Government data.

Scott Frederick, who heads the federal practice for venture capital firm New Enterprise Associates Inc., said he regularly meets with senior officials at the departments of Commerce, Treasury, Energy, Veterans Affairs and other civilian agencies to see if his portfolio companies can help fill their technology gaps.

“I will then ask them point blank, ‘How do you prefer to buy?’ What they’ll often say is, ‘Oh we’re basically a Booz Allen shop, or an Accenture shop,’ and then I introduce our company to that intermediary,” Frederick said in an interview. “Is it perfect? No. Do they lose points on the deal? Sure. But we can help at least address a need.”

Niche Products

Another challenge for startups developing new cybertechnology is that the government often wants “niche” solutions, according to Michael McNerney, chief executive officer of Efflux Systems and a former State Department cyber policy adviser. McNerney, whose company offers cybersecurity analytics and threat detection, said as a startup that has to meet milestones like sales revenue to attract investment, he’s got little time and money to fork out for customized government business.

“A startup with a small team can only build one thing at a time, so everything must be relevant to a broad set of customers if you want to scale,” McNerney, who’s based in Palo Alto, California, said in an e-mail.

For early stage startups, a government contract can give them credibility when they market to the private sector. But federal agencies may consider it risky to work with companies that don’t have a long track record. Some startups complain the government does a poor job getting word out about opportunities, merely posting notices in the Federal Register. Looking ahead, there are also questions about whether initiatives to accelerate the process, such as 18F, will outlive the Obama administration.

‘Geologic’ Bureaucracy

Still, some are trying to get in the game.

Dan Tangherlini helped oversee 18F before leaving his job last year as GSA administrator. Now he heads federal business for New York-based SeamlessDocs Inc., a startup that already provides cloud-based digital document products in 48 states. He jokes that he’d be a “way better GSA administrator” now that he’s encountering the “geological layers” of procurement hoops that budding companies must go through. He spends his days meeting with agencies and contractors that already have a foot in the door.

“We’ve created this infrastructure that makes it very, very hard for innovation to find its way to government processes,” Tangherlini said in an interview in Washington. “It keeps the government from evolving.”

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