A Strategic Guide for Entrepreneurs Selling into Government Budgets
While government institutions worldwide are re-evaluating their military-industrial complexes to meet the demands of modern warfare, the defense tech sector is widening its scope to include novel categories that are now considered top military priorities. These indispensable sub-sectors include advancements in artificial intelligence (AI), robotics, autonomous systems, cybersecurity, computational capacities, human-machine interaction interfaces, biotechnology applications, and innovations in renewable energy & generation systems.
At Ansa, we actively invest in each of these sub-themes, from Series A through C, and are acutely aware of ‘what it takes’ to bridge the gap from seed to scale in defense tech.
Notably, these companies are not traditional SaaS businesses, so our firm has worked tirelessly to derive KPIs that can serve as leading indicators of what good looks like in building stronger dual-use companies and making world-class investment decisions. While many folks publish SaaS metrics (thank you, David Sacks, Alex Clayton, Jamin Ball, and dozens of others), few and far between have yet to do so on the new paradigm of defense tech.
We want to change that.
It’s no secret that one of the biggest barriers to entry in selling to the government, specifically the DoD, is their notoriously complex procurement and contracting processes. Before entering the defense market, it’s incumbent upon startups and dual-use vendors to evaluate whether the expected revenue generated from the DoD will outweigh the cost of acquiring and serving them. If the math isn’t mathing, then it’s all for moot. But if / when an initial DoD contract is landed, typically via an SBIR (Small Business Innovation Research) grant, there remains a challenging and unpredictable road ahead to transitioning into larger, longer-term revenue opportunities by becoming a program of record.
For most DoD-focused companies, becoming a program of record is the ultimate goal that lands them a line item in the DoD’s budget. It’s usually not apparent which companies will be the ones to become programs of record, but here are some of the signals we look for in companies pursuing this path and help influence the outcome.
SBIR Contract Conversion
- Many early-stage defense tech companies rely on SBIR grants for easier and quicker access to DoD contracts. Progressing from Phase I (concept development) to Phase II (prototype development) and eventually to Phase III (commercialization) is highly desirable.
- Phase I: Awards range from $50-250K over 6 months
- Phase II: Awards can go up to $2M over 18-24 months
- Phase III: No dollar value or duration limit
Diversification Across Agencies
- A sign of a scaling company is its ability to diversify its client base across multiple DoD agencies such as the Navy, Army, Air Force, and the Defense Information Systems Agency (DISA). We work with companies to leverage their success within one branch of service or funding agency and build a repeatable playbook that scales past founder-led sales.
- Understanding the Annual Contract Value (ACV) collection as a percentage of the contracted ACV over the term of the contract is critical. As companies mature, the gap between the contracted ACV and the actual collected ACV should narrow, marking a positive trend in business operations. Beware of relying on vanity metrics, such as certain large IDIQ (Indefinite Delivery, Indefinite Quantity) awards, often described as hunting licenses for task orders that may or may not end up being funded as expected.
Ability to Find New Sources of Funding
- Unlike traditional enterprise contracts, DoD contracts do not always follow the concept of renewals. As certain existing contracts approach expiration, vendors often need to find new "pots of money" to continue funding commercialization efforts.