ScaleUps versus Startups

As a former senior federal official, I’m guilty of focusing on startups. The allure of the scrappy startup entrepreneur — especially if she is mission-focused — is irresistible.

Federal executives and CIOs are right to explicitly focus on including them in new initiatives — to support emerging technologies and inspire fresh thinking. In the Obama Administration, we invited them to White House policy roundtables, showcased them as examples of job-creators, and designed policies to promote high-ambition entrepreneurship.

But most venture-capital-backed startups aren’t financially successful or capable of supporting enterprise or government customers. Many of them don’t return 100 cents on a dollar invested in them when eventually sold.

I’d argue that the government needs to shift its focus to those venture-backed software companies that are winning in the commercial marketplace, attracting significant additional capital, and are becoming category leaders — what I’d call a “ScaleUp.” Put simply, ScaleUps are startups that have graduated from being just a great idea to being a business that is achieving exponential growth and market success. Put even more bluntly, a ScaleUp is a de-risked startup — bringing the innovation the government needs, with the viability and security our government should expect from its partners.

I’d offer three reasons why the government should explicitly focus on ScaleUps:

• First, ScaleUps are when innovative products and technology become enterprise-ready — i.e., truly scalable and secure. It’s often the second or third version of the product, and the additional engineering helps meet the needs of large global enterprises.
• Second, ScaleUps have the resources to support federal procurement and certifications. FedRAMP typically takes 6 to 12 months and can cost hundreds of thousands of dollars, if not millions. I’m all for simplifying and compressing the federal buying process, but as it currently stands, it’s an expensive proposition for an enterprise software company to satisfy the compliance needs of the federal government.
• Third, ScaleUps are committed for the long-haul. Early-stage startups are highly focused on building a product that solves a pressing customer problem, learning quickly, and then turning their attention to scaling. They often only have the capital for 12–24 months, and their quick feedback cycles mean they are rapidly innovating. But it is highly unclear if the company, and even the product, will survive. ScaleUps have a much higher probability of being an independent company long term or a successful product family inside a larger corporation.

But the government doesn’t always make things easy for ScaleUps.

Let me give you a DoD example: The Air Force has started doing Pitch Days to quickly award Small Business Innovation Research (SBIR) money to innovative startups. This is commendable, and the Air Force has demonstrated an ability to award contracts quickly.

But the SBIR mechanism wasn’t really designed for situations where growth investors own a majority of a company, or for companies with over 500 employees. A ScaleUp may have raised enough investment to where the founders own less than 50% or may have recently grown past 500 employees. Why would we disqualify those ScaleUps who are actually on the path to building a next-gen software business? Why would we make it harder for a company that is finally in a strong position to support the DoD?

More fundamentally, SBIR is designed for R&D activities. At its core, SBIR is supposed to support developing technology for known mission priorities, not adopt proven commercial software. I commend the Air Force for being creative about using R&D dollars to adopt emerging technology products, rather than whitepapers from SBIR mills. But, let’s figure out how to change the color of money and devote money to ScaleUps, where much of the applicable innovation is occurring.

As someone who works with Insight Partners’ portfolio companies — ScaleUps that are winning in the commercial marketplace — on entering and growing in the government market, I can attest to the complexity and cost of serving government customers. It’s ScaleUps that have the resources and product-market fit to support the federal government.

How can the government do a better job of finding and buying from ScaleUps? It’s not a panacea, but other transaction authority (OTA) can help. OTA is growing in popularity as an acquisition authority outside the FAR to buy technology from small and growing companies, and it is even being used to buy software at scale — a good thing, from my perspective. For example, US Cyber Command recently signed its first production OTA with cyber threat intelligence company Recorded Future (an Insight portfolio company), after having successfully piloted the software during an earlier OTA prototype contract.

In my experience, the government often has a bias towards services and building, rather than buying commercial products. You can see this when a high-profile IT transformation project, championed by the White House, puts out a solicitation to buy a technology tool — and yet the solicitation is heavy with hourly rates and other services-related topics.

How the government buys, builds, and evolves software on an ongoing basis is critical to whether the government can accomplish its various missions — and ScaleUps are where the innovation is really happening at enterprise scale and scope.

In my mind, it’s not an overstatement to say that how the government adopts technology from ScaleUps will impact how well it achieves its ambitious and diverse missions. Let’s get to work.

[Originally published by GovCIO Outlook: https://govtech-startups.govciooutlook.com/cxoinsights/scaleups-vs-startups-nid-987.html]