Why Crossbeam Ventures is interested in GovTech (and gov-adjacent startups), and 6 specific strategies we're excited about
By Ryan Morgan, Partner at Crossbeam Ventures
Why Many VCs Avoid Companies that Sell to Governments or are in regulated spaces: (imagine selling anything to the DMV)
Investing in companies that sell to governments as end customers seems like a really bad idea - and understandably a lot of VCs actively avoid GovTech as a result.
Those VCs somewhat rightfully imagine what it is like selling to the DMV - incredibly slow sales processes that involve public RFPs (so anyone in the sector knows to bid on it), highly political and sometimes illogical selection processes, and an end customer that at times does anything it can to avoid adopting new processes or technology.
Yet in spite of this, the US Federal government alone spends $95 billion1 on IT each year, and some of the largest companies built in the past 20 years have relied on some government entity (federal, state or local) as a key customer base2.
Some GovTech / Gov Adjacent companies are more obvious about their government relationships - Palantir, for example. Others are a bit less obvious on the surface - a huge number of HealthTech companies sell into the US government either directly or indirectly, or in some way touch Medicare/Medicaid or the VA.
Crossbeam’s History / Experience with GovTech (or adjacent)
Crossbeam Ventures has been spending an increasing amount of time looking at and investing in companies that either sell to government entities or are in industries that are heavily regulated by governments.
Today, we’re investors in 9+ startups that either sell to the government or whose business model is to some degree predicated on a government program or regulation (we’ll loosely refer to as GovTech / RegTech or adjacent). These investments include Paytient (Series B announced in 20233), Jawnt, Cero, Blooming Health, and 5 (yes five!) others in stealth or with rounds that have not been announced.
We want to put a few of our thoughts out in the open, ideally to let people in our ecosystem know why we find the space so enticing as well as to let founders know to get in touch.
If you or someone you know is building something mentioned below, feel free to ping me at ryan@crossbeam.vc
GovTech strategies that get us excited:
Below we’ll call out a few specific theses / strategies that are more unique to Crossbeam / that you likely haven’t heard before and get us excited:
Don’t treat government sales like you would B2B sales. Embrace more government-specific distribution channels (such as selling through government cooperative purchasing orgs)
Offer government incentives as a wedge (e.g. if you sell large machinery also help connect the customer with government rebates, or help consumers make select purchases pre-tax)
Create a product that mixes government and commercial applications
Big changes are often announced - publicly & in advance: ride the waves (many companies took advantage of IRA benefits, and other changes like ICHRA can help be a catalyst for growth / change)
Raise and operate like you’re selling to governments (raise more than you think you should)
Embrace complexity as a moat / advantage
Strategy 1: Don’t treat government sales like you would B2B sales. Embrace more government-specific distribution channels (such as selling through co-ops)
There are a lot of aspects of government sales that are more difficult than B2B sales - there’s no way to sugar coat it. Sales cycles are almost always longer than you’d see in comparable B2B fields. Many sectors (including defense, healthcare, etc) will expect higher standards of security than similarly-sized for-profit counterparts.
The way to succeed in selling to the government is to adapt and embrace government-specific sales methods. Copying a B2B sales / expansion playbook and assuming it will work with governments will likely result in failure.
One example of this is selling through co-ops. Many government entities purchase software or other services through co-ops. According to one source (here) roughly 20% of state, local and educational spending goes through coops like Sourcewell.
The beauty of working with a co-op is that they can help distribute your software or product to hundreds of groups at once - and sometimes they can do some of the vetting in advance so you don’t need to be approved by each entity downstream.
Another benefit of government sales is that governments can at times be more collaborative - embrace and help foster government collaboration. Companies may view their counterparts as competitive threats, but in theory Michigan shouldn’t view Ohio as their enemy (perhaps a bad example of states, but you get the point). We’ve seen from companies that we’ve invested in that states / cities / etc are actually fairly willing to share with other states / cities what is working for them. Sales and word of mouth are obviously slower than in consumer, but if done correctly you can see a level of collaboration that’s generally better than in the B2B world.
Sometimes governments will collaborate on their own, and sometimes a bit of encouragement can help. Go to conferences where these groups will be, and consider hosting an event where you can get a few related groups together - ideally existing customers can help share their excitement with potential customers.
If you are a founder / know a founder that is using a unique / government specific GTM and seeing success - get in touch!
Strategy 2: Offer government incentives as a wedge
(e.g. if you sell large machinery also help connect the customer with government rebates, or help consumers make select purchases pre-tax)
One interesting GovTech-adjacent strategy we’re particularly excited about is when companies are able to help bring government incentives to their end users that are often regular enterprises or consumers. There are a few players helping do this in the clean energy space, and we think it’s a great idea - e.g. help users offset the cost of installing a new boiler / machine via matching them with existing incentives they were unaware about.
Other ways we’ve seen this strategy used are wealth-tech companies that help consumers or enterprises create better tax-efficient structures. We’re currently in one for consumers, but we’ve also seen interesting companies doing this for artists, small businesses, and corporations.
Strategy 3: Create a product that mixes government and commercial applications
Many of the best GovTech companies mix governments and businesses as end customers (SpaceX, Palantir, etc). Even AWS received a $10B contract from the NSA4. This sounds like an argument against GovTech, but the point here is that if you create a product that can sell to both governments and for-profits you can reap the benefits of both ecosystems and help mitigate some of the negatives each one has.
Enterprise sales can help your team avoid some of the negatives of long government sales cycles, and government revenue is less tied to business cycles.
Another added benefit of selling to both governments and corporations is that it can ground your product in reality and newer trends. If you are successfully selling to corporates, you are more likely going to be able to compete against software players that are only selling to the government.
If you are a founder that’s currently only B2B and considering moving into government sales, get in touch!
Strategy 4: Big changes are often announced - publicly & in advance: ride the waves
Corporates rarely announce large strategic initiatives publicaly, let alone years in advance. And while there are a lot of negatives to working with governments, they actually do often announce larger initiatives (like IRA’s $500B spending / tax breaks) well in advance and in public settings.
And because government spending often moves mountains (with programs in the tens of billions), getting ahead of a big wave can lead to some sizable success. ICHRAs are a new style of health plan which was first announced in 20195. Today, there’s already an estimated 500,000 people enrolled in an ICHRA plan (and growing rapidly)6. Startups that are in health insurance that saw that wave coming and got ahead of it are already reaping the benefits.
Likewise, cleantech companies that embraced changes in the Inflation Reduction Act (IRA) are seeing benefits today. We’re particularly excited by any company that has learned to use new government programs in a novel way that can unlock value.
If you are an early stage founder, and you think your startup is uniquely positioned to ride a big government wave, get in touch.
Strategy 5: Raise and operate like you’re selling to governments: (raise more than you think you should)
One mistake we’ve seen companies make early on is not matching their fundraising and operating plans to the reality of being a GovTech/adjacent company. Because government sales cycles are longer and government entities can often be fickle or have delays, you need to act accordingly. Yes, running out of energy is the main cause of failure for B2B startups, but running out of cash is common in the GovTech world. Raise a larger seed - even at the expense of more dilution. Keep cash on hand, and always plan for the unexpected.
Likewise, one thing many first time GovTech founders are surprised by is how fast government entities can change their mind (in the negative way). New mayors or new councilmembers means new leadership. Your biggest supporters can be voted out any year, and your best customers can churn due to no fault of your own.
Strategy 6: Finally, embrace complexity as a moat / advantage:
Laws are complex, and very few people fully understand how to navigate the government incentives available to them. AI is everywhere these days, but it does have some fairly logical and clear use cases as it relates to GovTech (e.g. now you can use AI to explore new regulations).
I do feel that even if you lever AI, having real government experts or advisors can help.
If you have unique expertise in the government, get in touch! Ping me at ryan@crossbeam.vc
https://www.gao.gov/products/gao-24-106693
https://www.govconwire.com/2024/03/palantir-secures-178m-army-contract-to-build-next-gen-intelligence-ground-station/
https://www.fiercehealthcare.com/health-tech/paytient-picks-40m-put-payment-power-patients-pockets
https://www.nextgov.com/emerging-tech/2022/04/nsa-re-awards-secret-10-billion-contract-amazon/366184/
https://ichra.com/ichra-defined/
https://www.ssgmi.com/resources/blog/ichra-growth-surged-almost-30-since-2023_ae1276.html