From Red Tape to Red Carpet: Selling to the largest customer in the world made easy

Procurement Tech: Startups driving access to the world’s largest TAM

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Sep 05, 2024

Imagine a buyer with the largest budget in the world who is always on a shopping spree and has an appetite for buying everything from an AI tutor to toilet seats to rockets. Wouldn't this be the buyer of any seller’s dream?

But this buyer is also the seller's worst nightmare. You need to open hundreds of websites to find out what they’re buying, navigate countless compliance requirements, and navigate different budget cycles.

This dreamy and nightmare all-in-one customer is the US government—the single largest buyer in the world. In FY23, the federal government spent $9.3 trillion, the largest spender in many sectors. But selling to the US government at the federal, state, and local levels is challenging, like navigating a complex labyrinth in complete darkness. The process involves rigorous compliance requirements, extensive paperwork, and often lengthy approval times, making it a formidable task for even the most determined businesses.

Because of this high barrier to entry, government spending doesn’t match the economy's representation. In FY23, only 28.4% of federal contract dollars were awarded to small businesses, while the group employs nearly half of the workforce and represents 43.5% of America’s GDP.

The government’s enormous purchasing power has caused enormous inefficiency and inequities. And this is not just a procurement problem. Critical areas like education, homelessness, and healthcare rely on the best solutions to reach the government and help it serve the country better.

The inflection point is nearly here.

The government has always been a big spender, but there are a few converging forces that make this a potentially solvable problem:

First, government procurement is highly fragmented. On the federal level, there are over 500 separate departments and agencies with procurement authority, each operating somewhat independently. The SLED (State, Local, Education) space is even more complex, with 50 States, 3,000+ Counties / Boroughs / Parishes, 36,000+ Cities / Towns / Municipalities, 12,000+ Public School Systems, 2,000+ Higher Education Institutions, and 38,000+ Special Districts.

Second, the government is significantly behind in the race to digitization. Of the 22 sectors McKinsey and HBR studied in their extent of digital transformation and adoption, the government ranked 5th to last. Moreover, the government exceeds the sector’s average in digital spending but only scored ⅓ of the sector average in business processes. As such, we have all encountered government sites that have clunky UI/UX and outdated links. A tiny number of federal government employees are UX researchers or designers. The handbook that classifies government positions has roles for sewing machine operators and bowling equipment repair but not design roles.

Virginia’s e-procurement platform “eVA” links buyers and sellers with 2000-era looking UI/UX

Third, the pain point for delivery is going up, and the market is ripe for 10x better solutions. Citizens demand better systems and look to the private sector as role models. According to Brookings, 75% said the federal government is almost always wasteful and inefficient. A 2019 Gallup poll indicated 80% of Americans agree that businesses can do things more efficiently than the government. The contrast between public vs. private sector service is stark. Consumer tech is getting better, which makes government services pail in comparison. The demand for more private sector to take over last mile delivery of public goods is gated by inefficient procurement, and such pressure will necessitate changes in the procurement process.

Fourth, there are policy tailwinds to support a more diverse set of government contractors. President Biden’s Feb 2024 Annual Agency Equity Action aims for 15% of federal contracts to go to SDB1 by 2025. If SDB had met this target in 2020, they would have received $25 billion more in contract awards.

Startups are beginning to tackle government procurement.

There is increasing opportunity and need for new, efficient, innovative service providers to work with the government. We see disruptors who are changing the landscape for both sellers and buyers.

One wave of new companies lowers the entry barrier for companies to sell to the government. Companies like StarBridge, Govly, CivIq, GovSignals, and Pursuit provide companies with a one-stop-shop platform to access the government’s active bids, provide intelligence on government contacts, and offer AI automation support in proposal writing. These companies make it easy for companies to access governments’ bids and provide wraparound support to help companies win. Companies that used to have five different tools to prioritize their accounts now only need one and can avoid stabbing leads in the dark. The centralized information platform brings transparency and usability into an otherwise difficult-to-navigate process.

The other wave of companies is improving the purchasing process on the government side. Civic Marketplace is building a one-click compliance procurement marketplace for cities and municipal governments. Sourcewell is building a procurement co-op for SLED clients, starting in Minnesota. Sourcewell facilitates a cooperative purchasing program that harnesses the collective purchasing power of 50,000+ participating agencies to secure cost-effective and efficient purchasing solutions. Pavilion (formerly CoProcure) also plays in this space.

There are vertical-specific solutions, too. Companies like Odyssey Education act as a seamless intermediary between government funding and end consumers, liberating and decentralizing the flow of public dollars. Odyssey administers education savings accounts for state governments. Medicare Advantage is an all-in-one alternative to original Medicare. Private insurance companies offer Medicare Advantage plans that Medicare approves.

What will it take for startups to win in this space?

Deep domain knowledge and expertise in government procurement, especially recognizing that knowledge of one jurisdiction’s specific regulations is not readily transferable to another. This expertise helps navigate the system, anticipate potential challenges, and prepare effective strategies to address them.
Fluency in regulatory and compliance requirements: Startups’ that can swiftly and accurately communicate and meet regulatory requirements can gain competitive advantage and customers’ trust
Patience and strong design partners: Government procurement cycles can be long and slow. Startups must be prepared for lengthy sales cycles and maintain patience throughout. Additionally, strong design partners can help refine product offerings that wows users from the get-go.
Attention to capacity building of government officials to onramp to new solutions: Introducing new solutions in the government often requires cultural and operational shifts. Startups cannot overlook capacity building that provides training, support, and education to help civil servants effectively use the product. This approach also fosters stronger relationships and trust, paving the way for future collaborations.

We’re seeking startups serving the world’s largest TAM.

Improving the efficiency and effectiveness of the public sector is a critical component of our ownership thesis, as the collective citizenry owns public dollars. In the past, the government technology space was traditionally unattractive to investors. With the recent exit of OpenGov to Cox Industrious and the political pressure from Silicon Valley to tackle major regulated areas like space, energy, and manufacturing policy, GovTech has been rebranded and reborn to American Dynamism.

While the greatest concentration of venture dollars has gone to revitalizing military assets and space development, we see opportunity at every level. We are excited about the critical infrastructure layer of procurement.