Is a Government Services Company Right For You?
Some things to think about before investing a lot of time and money
Total time to read this post/do the exercises: 2 hours
What’s in it for you:
- A collection of insights into the lived experience of starting and running a government services company.
- Some exercises to help you decide if you’ll be happy and successful with government services work.
- Perspectives and background on the structure and functions of the government contracting market.
Why it’s worth reading: When I decided that I wanted to start a business, I didn’t want anyone to challenge that decision. I’m lucky that a couple of people I respect did.
On the one hand, this post may be cold water on your dreams.
On the other hand, it may save you from investing a lot of time and energy into something that's a bad fit for you.
On the third hand it may give you the confidence to start something that's a great idea for you.
Table of Contents
The pros and cons of government services companies
Will starting a government services company make you happy (EXERCISE)
The Structure of the Govcon Market
The Government’s Buying Process
The key government roles
Some important ways that the federal market is different from commercial markets
Is the government market the right place to start your business (EXERCISE)
A pragmatic perspective on Set-asides
The pros and cons of government services companies
Time to read the section/do the exercises: 5 minutes
What’s in it for you: An overview of the best and worth things about government services companies
Why it’s worth reading: If you're evaluating a lot of different types of companies to start then definitely read on. If you're already set on starting a government services company, you could skip it, but, it’s is a quick read and it’ll help you explore the decision you’ve already made.
The Best Things About Government Services Companies
We’ve dedicated many years to helping entrepreneurs start government services companies, and here's why we love them:
- Starting one takes almost no money: To start a services company all you need is time and determination. In your first year, you'll invest a lot of time refining your service offering, meeting customers, and writing proposals. But those are all basically free activities. So if you don’t have a lot of money but you're willing to work nights and weekends, you can still start a services business.
- Their costs and revenues line up: If you need to create a physical or digital product, you're going to spend a lot of money upfront on designing, prototyping, and manufacturing before you can make your first sale. On the other hand, the main costs for a government services company are the salaries you pay to the people you hire. So if you’re doing it right, you win the work (revenue) and then hire the people (costs).
- They are exceptional entrepreneurial onramps for historically underrepresented founders: Minority members, women, and people from low-income areas are underrepresented among founders, but the government reserves billions of dollars in services contracts exclusively for them. This creates a curated onramp to entrepreneurship that is difficult to find anywhere else.
- They allow you to develop amazing customer relationships and insight: When you deliver a service you work closely with a customer for months. This long term support provides an exceptional opportunity for you to develop relationships with them, deeply understand their need, and explore other products and services that they might need.
- It's a massive and consistent market: The government spends about $250 Billion dollars a year on services and that number grows every year no matter who is in office.
- You can get on salary fast: You get to decide how you spend the money from your services contracts (e.g. you can pay yourself and do the work yourself or you can hire someone to do the work). So if you want to quit your day job and support yourself through your company, all you need is one contract (we generally recommend against doing this, but if you’re in a bind it works).
- You can grow your business while keeping your day job: If you don’t hate your day job you can hire people to perform the work on the contracts you win, allowing you to keep your day job salary and benefits while building your business.
The worst things about government services companies
Every silver lining has a dark cloud, so here are some less-great things about government services companies:
- They’re low margin: There's no getting around this one. Typical government services margins are 12-15%. If you're providing higher-end services that number can go up but services margins tend to be much lower than product company margins.
- They grow relatively slowly: If you have a successful product company there are massive economies of scale that allow you to grow very rapidly. On the other hand, with a service company your product is the set of people you find, vet, train and deliver and doing that for the hundredth person is about as expensive as for the first person.
- Poor sale prices: If you plan to sell your services company, a good rule of thumb is that you’ll get about one year of revenue. That can be enough to comfortably retire, but it probably isn’t enough for the mega-yacht.
Getting the best of all worlds
Just because you start as a services company doesn’t mean you have to do services forever. We’ve seen lots of people start services companies, develop deep customer relationships, identify a need that a product could solve and then redirect some of their profit to building the solution. This way they have the foundation of services revenue with the opportunity for exponential growth and high margins from their product.
Will Starting a Gov Services Company Bring You Joy?
Time to read the section /do the exercises:
- Read: 5 min
- Exercise: 60 min
What’s in it for you: I’m sure you could start a business and be financially successful, but if you hate it is it really worth it?
Why it’s worth reading: This sections will help you figure out if you’ll be happy dedicating two thirds of your waking life to government services.
The Connection Between Starting a Business and Happiness:
Starting and running a business has been more stressful and ego-crushing than anything I’ve done since leaving the military. But, it’s also the best job and the only thing I’d ever want to do. Everyone is affected by entrepreneurship differently, but based on lots of conversations here are some things to expect:
- It’s going to affect your family: You may think this is your business alone, but if you have a family they are in this journey with you. There's no way for you to leave the stress “at the office” and for many of you, your home will be your office. If your spouse isn’t good with uncertainty and stress, then you need to be realistic about that and realize that you're putting them in a tough situation.
- Recommendation: I highly recommend finding a few founders you know and setting up coffee chats between your spouse and theirs. Having a supportive spouse is make or break for your entrepreneurial journey.
- It’s going to affect your ego: To this day I’m amazed by how much of my pride and sense of self-worth are connected to the success of my business. There are ups and downs when you’re an employee, but when it’s your business and you’re the one who made promises to customers and employees each turn of events is more impactful and more personal.
- Recommendation: I highly recommend talking to current entrepreneurs about their experience and reading the book “The Hard Thing About Hard Things,” which provides an honest perspective on the highs and lows of being in charge.
- When you go to bed, the company will be on fire: As an employee there are busy days, and few of us empty our inbox before we go home. But as a first time entrepreneur, everything is on you, you don't have time to do it all, and it’s all mission critical.
- Recommendation: Spend some time reflecting on whether or not you want this kind of stress in your life.
- It can be lonely: No one is going to understand what you're going through. Even if you start with a partner and have entrepreneurial friends, the challenges you face will be unique and there will be decisions that you’ll have to make alone.
- Recommendation: Practice forgiving yourself
There's nothing else I’d rather be doing: I can’t speak for all entrepreneurs, but every founder I’ve talked to has agreed that they couldn’t imagine doing anything else. Every entrepreneur has their reason for loving it, but for me, it's the freedom to create. I get tremendous satisfaction from building things, seeing my ideas come to life, and running a company lets me do that every day in a way that I don’t think I could get anywhere else.
An Exercise to Help You Decide Whether Starting a Business Will Make You Happy:
It’s impossible to know for certain whether you'll enjoy being an entrepreneur, but here's a process that we used ourselves, and that we’ve used with our clients to help surface redflags and to get a rough idea about whether starting a company will make them happy:
- Make a list of the major things you’ve done in your life
- Identify the characteristics of each that made you love or hate that thing
- Look for common threads between the characteristics
- Evaluate entrepreneurship against those characteristics
This is not a fast exercise and it's an evolutionary process where the more you put in, the more you’ll get out.
Download the workbook
Identify the Jobs and Other Things You’ve Done
If you haven’t already downloaded the guide above, download it now. Then go to Jobs Page and list all the jobs and titles you’ve had. A lot of these will be work-related, but be sure to include the ones that aren’t professional too. For example:
- Manager at X Organization
- Boy Scout leader
- Student at X School
- Waiter (summer job)
- Mentor to X person
If you’ve done something that had no title, then just describe what it was.
Identify the Important Characteristics
For each thing, list characteristics that made you happy or that brought you down. Don’t worry about editing, just brainstorm. Some characteristics may be general (e.g. “leading people”) or more focused (e.g. “leading product development teams”). Don't edit too much at this point, just start writing
Identify commonalities across the characteristics: Now review your characteristics and look for themes. Do you see a theme around leadership? Or perhaps there's a theme around building things, or a theme around work life balance.
When you think you see a theme, write it down on the themes page and try to be specific. Don’t just write “leadership,” put down the full thought, such as: “leading people energized me.”
Select the most important themes: Now we need to focus on the most important themes. There's no correct number, but in our experience, choosing nine themes works well. We encourage you to have at least three themes that are not directly work related (e.g. “I enjoy spending time with friends and family” or “I value not bringing work stress home”). Once you’ve identified your key themes, write them across the top of the themes page. Then write all the jobs and roles that you identified down the side.
Score each job/role: Evaluate each job/role against each theme on a scale of 1-5 (1 is the lowest, 5 the highest). I encourage you to color-code the cells (e.g. 5 is green, 3 is yellow, 1 is red) in order to help you see groupings. For example, if your first role was being a waiter in high school and your first theme is “I value having time for friends and family”, evaluate whether the waitering job gave you time for friends and family.A 5 would mean that the job provided plenty of time, and a 1 would mean that the job seriously inhibited your ability to spend time with friends and family.
Pressure test the scoring: Now that you’ve evaluated each role on each theme, look at how each role scored and compare that to your memory of that role. Ask yourself whether the score correctly reflects your memory of it. You are specifically looking for situations where either:
- A) a role you hated scored very well, or
- B) a role you loved scored poorly
When you see this, it’s strong evidence that you're either missing a theme, or a theme that you originally thought was relevant should be removed.
Iteration is at the heart of this exercise. Keep reviewing your themes and jobs/roles and add and remove themes as appropriate. Keep iterating until your scores reflect your memory of each jobs/roles pretty well.
And one important note here: don’t be embarrassed if you have a theme that feels selfish or undesirable. For example, having a job that other people think is impressive is a theme for me. I don’t necessarily like that about myself, but it is real so it's on my list.
Score being a founder: Now add a new role to the bottom of the list called: “Entrepreneur" and score it against each theme. You’ve probably never run your own business before, but do your best to predict how it would score with each of your themes.
Pressure testing being a founder: Reach out to at least 3 entrepreneurs to get their input on how you’ve scored the founder role.
When I was going through this process myself, at first I didn’t want to ask people to give feedback. I felt like asking would be overly intimate, and I thought it would be an imposition.
But I couldn't have been more wrong. Everyone I asked was intrigued by the process and flattered to be asked. Their feedback was critical and they showed me that I had missed important parts of the entrepreneur's experience.
Not only did their feedback improve my decision-making, they also strengthened important personal and professional relationships that I value to this day.
Make a Decision
At this point you should have a pretty rigorous analysis of what you need to be happy with a new job/role so make a first decision. You can always change your mind, but if starting a business scored really badly, it might be a good idea to look at other options and reconsider entrepreneurship in a couple of years.
The Structure of the Govcon Market
Time to read the section/do the exercises: 10 min
What’s in it for you: Get a conceptual framework for how the government market is structured and who the key players are.
Why it’s worth reading: If you’ve been working in the govcon market for a while, then it is probably not necessary but if you're new to the space, then it’s worth the time.
The Structure of the Federal Market
A lot of people think of the government as a single customer, but in reality it's a conglomeration of thousands of agencies and offices that are operating and purchasing things semi-independently. Given how fragmented the government is, it can be a bit difficult to describe directly. Instead we think it's easier to think about it like the Universe.
If you look at a Universe from a distance, or when you try to draw it on a piece of paper, it tends to look like a single cohesive mass. But once you get closer to it, you realize that it’s actually thousands of independent galaxies each orbiting a supermassive black hole at the center.
The galaxies have some things in common. For example, they all obey the same laws of physics, and at a high level they are all moving around a center point. But, each galaxy is unique and more or less does its own thing. The galaxies are themselves a bit like the Universe. From a distance, or when shown on paper, they look like a single entity. But in reality, they are composed of many solar systems each orbiting a blackhole at the center.
I’m sure you're seeing the pattern, and predictably solar systems are not single entities but instead are composed of a star, planets, moons, and asteroids. But here something does change because those stars, planets, moons, and asteroids are actual objects. They don’t breakdown further. And at this level of actual objects there are some important characteristics.
All the light that blends together when you look at universes from a distance is actually coming from these independent stars. And when a planet or asteroid gets into the orbit of a star the planets and asteroids absorb heat, light and other energy which allows life to form.
The govcon market is like this model of the Universe. It's there as a concept, everything inside it obeying certain laws and moving in a certain cadence. But it is not a single entity. Instead, it’s composed of many agencies which are made up of commands and buying offices which have large and small government contractors orbiting them and absorbing the money that they radiate.
The Universe to Govcon
|Objects in the Universe||Concepts in GovCon|
The govcon market
The super massive blackhole at the center of the universe
The blackhole at the center of a galaxy
The agency’s leadership
A solar system
A buying office in an agency
The star at the center of the solar system
The acquisitions team in the buying office
A large government contractor that orbits a buying office
Smaller government contractors that orbit a large government contractor
A small govcon that orbits the buying office
Heat, light and energy radiated by a star
Money radiated by a buying office
Comets (tiny bits of matter that never get into an orbit and fly aimlessly through space)
Tiny govcons that never get into a buying office’s orbit and fly aimlessly through the market
Gravity and the other laws of physics
The Federal Acquisitions Regulation
Hopefully this was helpful and/or amusing, but here's what you need to take away:
- When you're planning your business don’t think of the federal government as your customer, don’t even think about an agency as your customer. When you're new, your customers is a buying office or a larger government contractor that is already orbiting a buying office.
- If you orbit a larger contractor, you gain the benefit of their stability and momentum but you only absorb a small portion of the money that the large contractor gets to absorb.
- If you orbit a buying office directly, you can get more money but your orbit tends to be less stable.
The Government’s Buying Process
The government can buy things in a few different ways but for the time being we are going to focus on the basic public-notice-on-beta.SAM approach because:
- As a new contractor. it's the form you'll interact with most, and
- The other acquisitions approaches tend to be based on this one
So here's the basic way the US government buys things:
- It starts with a need: The government makes nothing (this used to be a 100% correct statement, but the government has recently started making some of their own software). If they need something, whether a product or a service, they have to buy it. And it’s helpful to cluster those needs into a couple buckets:
- Planned needs: This is a known need. For example, the government might know that they need to buy 1,000 brake pads for Park Service trucks every year, so they have this 1,000 brake pad purchase on their calendar and make it at the same time each year.
- Ongoing needs: This is just a continuing need, meaning that they need continuous contractor support to meet it. An example would be the IRS’ customer help call center. Taxpayers call in every day with tax questions so the IRS has to have a call-center staffed by people who can answer the questions. To address the need the government will create a longer term contract (frequently five years) to get these services. Typically, with ongoing needs, the government will start to plan a new purchase 6-12 months before the existing contract expires so that the company who wins the new contract has time to get up to speed and start delivering on the same day that the old contract expires. Ensuring that the government has continuous support .
- Unplanned needs: An easy example here would be disaster response after a storm, or IED resistant vehicles after Al Qaeda changes their tactics in Iraq. The government didn’t know they were going to have this need, but they do and now they have to find high quality solutions quickly.
- Acquisitions prep: Once a need is identified, the government begins exploring solutions, organizing the administrative side of buying the solution, and alerting the vendor community that an acquisition is coming .
- Exploring solutions: The government likes to be an informed customer, so the procurement officers will try to familiarize themselves with the universe of available solutions. There are a variety of mechanisms for this exploration, including:
- Reading trade publications
- Holding informal conversations with known vendors
- Hosting pitch events and industry days
- Soliciting white papers
- Posting formal Requests for Information (RFIs)
- Organizing the administrative side of buying: As we mentioned, the government can buy things through a variety of mechanisms, each with its own benefits and limitations. To figure out which one they want to use, the acquisitions team will consider:
- Whether the acquisition should be “set-aside” so that only certain companies can bid (e.g. set-aside so that only woman-owned small business can bid on it)
- Whether the acquisition should be announced and competed broadly or whether it should be channeled through one of the government’s existing Master Services Agreements (known as IQIDs, GWACs, or Schedules)
- How large a role price should play in determining who wins the contract
- Other considerations that are specific to the acquisition at hand
- Alert the contracting community: The government can alert industry through a couple of different mechanisms. These are listed in order of “most certain” that the alert will become an actual acquisition to “least certain”:
- RFI: A request for information is the government’s formal announcement to industry that they have a need and it’s an invitation for industry to share their perspectives on how the government should address their need.
- Sources sought: This is a request to help the government understand the contractor landscape (e.g. are there a lot of small businesses that can do the work? Are there a lot of women-owned small businesses that can do the work?).
- Forecast: Many agencies publish a prediction about the large acquisitions that they will make over the coming year.
- Informal conversations: Established contractors frequently hear about opportunities informally from government colleagues before the general public learns about them.
- Public announcements: Agency leaders frequently testify before Congress, write white papers, and give speeches about what is happening within the agency and what their mission priorities are. Astute contractors keep track of these statements and shape their strategies.
- A formal request for proposed solutions (RFP): Once the government feels that they understand their need and the solution space, they publish an RFP. RFPs typically include:
- What the government needs
- How contractors should solve the need
- What, if any, certifications, qualifications, or previous experiences the contractors must have
- How a winner will be selected
- The elements and structure of the proposal
- When proposals are due
- Proposal review and selecting a winner: The government convenes a “selection committee” which evaluates proposals based on the evaluation criteria in the RFP.
- Protests are resolved: The companies that did not win have the opportunity to challenge the selection committee’s decision.
- Begin work: Once protests are resolved, the winner commences work and can invoice the government.
NOTE: This description is accurate but very high level. A complete discussion will be provided in future posts.
Some Important Ways That the Federal Market Is Different from Commercial Markets
Every market is different. Markets can differ due to cost drivers, opportunities for revenue, norms, etc. But the federal market is special for a few reasons:
- The government does not have a profit drive and instead their mission is to deliver government services that are not profitable (like national security).
- The government market has to comply with the Constitution rather than shareholders.
- The government is spending taxpayer money, so it tends to apply heightened oversight.
Here is a detailed breakdown of some of the differences between commercial and government markets:
Length of contract
Service contracts tend to be short. Typically a year or less and renewed frequently.
Service contracts tend to last five years.
Companies have an easy way to know if they are winning: profitability.
The government struggles to know if their purchases are succeeding. If America doesn’t get attacked, does that mean recent security purchases are effective?
If you have delivered good work for a company, they will probably renew your contract without putting it out for open competition again.
No matter how well you’ve done, when the contract is up, the government will almost certainly have to open the follow-on contract to competition again.
Private companies are constantly evaluating whether to contract or use in-house services.
The government typically prefers to outsource any non-core functions.
Commercial actors are willing to pay more if they know they are getting more.
The government is highly price sensitive.
Private organizations have a lot more freedom in how they evaluate proposals.
Government is required to have highly-structured evaluation processes.
Differentiation in evaluation
Companies will evaluate someone with a Harvard MBA differently from someone with a lower-tier MBA
Government evaluates all people with the same credential (e.g. an MBA) the same
Firms prefer to work with vendors to find ways to “grow the pie” before making a decision.
The government’s highly structured proposal process makes collaboration and creativity difficult.
Challenging since companies don’t have to disclose their RFPs or vendors.
Easier since RFPs and data on winners is made public.
Companies like to be first movers if they think it will give them an advantage
Agencies prefer to be a late mover once a technology is proven
This is a lot of information, and we don’t expect you to internalize the significance of each observation now, but they will be important as you build your business plan.
The key government roles
In other posts, we will go into greater detail about the roles, organizations, and systems that play important parts in the government market. But for now, we do think it's helpful to understand the basics.
The key roles: The government contracting world has a few key players:
- End customers: These are the people who are doing the work to deliver the agency’s mission.
- Program staff: These people develop policy and buy equipment for the end customers.
- Contracting: Contracting officers plan and manage the acquisition process.
- Budget: Budgeting teams plan upcoming budget requests and manage the budgets that have been allocated.
- Executive leadership: The senior leadership within each agency is ultimately responsible for the smooth integration of program, contracting and budgeting so that end customers are able to deliver on their agency’s mission.
Is Govcon a Good Market for You
Time to read the section/do the exercises:
- Reading the section: 10 min
- Doing the exercises: 20 min
What’s in it for you: Learn about what it takes to be successful and some help assessing whether you're aligned for success.Why it’s worth reading: If you’ve been working in the govcon market for a while, then it’s probably not necessary. If you're relatively new then it’s probably a good idea.
What You Need for Govcon Success
After years of watching new govcons start and grow we think there are three things that principally determine whether you'll be successful:
- Your relationships
- Your govcon process knowledge
- The quality of the service you deliver
The Types of Relationships
The reason relationships are so important is that they help you get onto bid teams which is typically the way you win work as a new business. There are three types of relationships to pay attention to:Relationships with small but established govcons: Going back to our galaxy analogy, small govcons are small planets orbiting a star (a buying office). These are the most important initial relationships because:
- As an established govcon they can teach you the proposal and BD process.
- They are in a buying office’s orbit already, which means that if you can orbit them you’ll eventually end up orbiting the office.
- They are small, meaning they have a limited set of capabilities making it more likely that they need what you do
- They are small, so you can get a meeting with a decision maker.
- They tend to do (or think they can do) everything, so they may not think that they need you.
- There tend to be lots of small businesses that want to work with them, so you can get lost among the crowd.
- Large companies tend to be risk averse, so they are less likely to take a chance on a new company.
- Generally, government officers can't directly steer work to you.
- Even if the government wants to steer work to you, you’ll almost certainly have to team up with a more established company who can handle the contract administration.
Assessing Your Relationships
The volume of your relationships: Review your rolodex and assess how many relationships you have with:
- Leaders at small but established govcons: At small govcons, you need to access the top of the org chart (the founders and leaders)
- How many people do you know that run govcons?
- How many of them have told you that they would bring you onto a bid team?
- Key roles at large established govcons: At large govcons you need to engage with the people responsible for identifying and winning work and who manage client accounts (e.g. “the Navy account” or “the large IT systems account”)
- How many people do you know at large govcons that are in BD, proposal, or run a client account?
- How many of them have told you that they would try to bring you onto a bid team?
- The government:
- How many “govies” do you know at program offices related to the type of work you think your company will do?
- How many “govies” do you know at the contracting offices related to the type of work you think your company will do?
- How many “govies” do you know in mid-level leadership roles (command O-6 in the DOD or GS-15+ at civilian agencies)?
The strength of those relationships: Review the govcon and government relationships you listed and for each one ask:
- Have you talked to them about your idea for a company?
- How enthusiastic were they?
- For govcons, did they indicate whether they would bring you on to a bid team?
- For “govies”, did they offer to connect you to a bid team?
Evaluating yourself: There's no hard number of relationships you need before you start a gov services business. More is better, but one person who really wants to work with you is better than 10 who are just being nice. And a lot of the work we will do in our services-vetting process is designed to help create and strengthen relationships, so if you only have a few now it isn’t the end of the world.
As a somewhat arbitrary target, I think your goal should be to have three strong relationships with key people at small or large govcons who are enthusiastic about bringing you onto a bid team.
Your Govcon Process Knowledge:
The government is crazy about process and if you can steer the process slightly in your favor, it can have a tremendous impact on your chances of winning. We will go into more detail about govcon processes and the opportunities to influence it in other posts. But for the time being, we just want to get a sense for how well you understand it today. So here’s a little self-evaluation:
- Proposal writing
- How many government RFPs have you read? (1 point)
- How many RFPs have you analyzed? (2 points)
- How many proposals have you written sections of? (1 point per page)
- How many proposals have you planned/managed? (1 point per page)
- How many proposals have you completed the pricing section of? (5 point)
- Marketing and BD
- Have you tried to sell to the government before? (10 points)
- Have you successfully sold to the government before? (30 point)
- How many years of experience of marketing and BD do you have? (20 points per year)
- Can you define: (1 point per answer)
- The difference between bid, proposal, and capture
- Color team reviews
- Three ways to wire a proposal
- Evaluating yourself: Count up your score. If you score above a 60, you should be in good shape. If you are below, you may need to brush up on your govcon process knowledge.
But like the relationships section before, there's no hard rule for how familiar you need to be with the government contracting process at this point. We provide lots of education, tools and support to help new entrants get up to speed quickly, but there's a difference between taking a class about something and having done it for years.
At the end of the day, if you want to start a government services business and you don’t even know what the FAR is that’s fine. Just be prepared to spend some extra time taking classes and apprenticing to more experienced govcons.
Your ability to deliver a valuable product or service
You might have thought that your ability to deliver a top notch service would be the most important thing for your long term success, but in our experience this is a distant third for a few reasons:
- The things that make your service amazing probably aren’t on the evaluation grid: In our experience truly excellent service providers approach their service in a unique or at least novel way. However, the scoring grids used to select winners are built around the traditional way that the service is delivered. At best, this means your fresh take doesn’t win you any extra points and at worst may hurt you.
- Excellence is subjective and subjectivity has been driven out of evaluations: The government wants to avoid a protest (when a losing bidder challenges the award decision) at all costs . So to protect against that, the government tries to turn an inherently subjective decision about which proposal is better into an objective measuring exercise. But sadly, it's tough to measure excellence.
- Customer reviews tend to be inflated, hiding the truly exceptional performers: The govcon world has a process for reviewing contractors called CPARS. However, the ratings tend to be inflated, making it difficult to identify the companies that truly standout.
Cost sensitivity: Generally, delivering an excellent service takes excellent people, and excellent people aren’t cheap. Unfortunately, the most objective way to compare competing proposals is to look at price, so price tends to have an outsized impact on the award decision, which tends to favor teams that take the low cost approach, rather than a more innovative one.
Making a Decision
Whether you are well-positioned to start a government contracting company is impossible to know for sure. We’ve seen companies with no experience in the space enjoy rapid and consistent success and we’ve seen companies with decades of experience flounder. The insights from these exercises can only provide a sense for the relative effort and chances of success compared to other people starting similar companies at similar moments.
My advice is to look at how you are positioned in the federal market compared to how you are positioned in other commercial markets and then make a decision whether federal gives you the best chances of success, And while I know this is directional insight at best it should provide some sense for where you'll have to focus your time and effort.
Time to read/do the exercises: 5 min
What’s in it for you: An understanding of the actual value of a set-aside (spoiler, it's not as big a help as you may think) for a very new business.
Why it’s worth reading: If you think your set-aside is an important part of your business model then read on to understand why this may or may not be the case.
What Is a Set-Aside?
Congress has decided that the government should use its massive buying power to help historically disadvantaged communities, and the way congress has approached this is to identify a dozen or so groups that are disadvantaged (e.g. women and minorities) and created special designations (set-asides) for companies owned by one or more qualifying people.
Congress has established targets for the percent of all contracted dollars that go to companies each each set-aside:
- 5% Small disadvantaged businesses (typically minority owned)
- 3% Service Disabled Veteran Owned Small Business (SDVOSB)
- 5% Women Owned Small Business (WOSB)
- 3%: HUBZone
- 23% total to small businesses regardless of whether they have a set-aside
How Set-asides Help in Theory:
Set-asides help companies in two principle ways:
Exclusive access to certain opportunities: When the government releases an RFP they can “set it aside” which means that only companies with the relevant set-aside can bid on it. This creates a few benefits:
- Companies with a set-aside can access more contracts than companies without a set-aside.
- There are a limited number of companies with any given set-aside, so there should be less competition for set-aside contracts.
Mentor-Protege agreements: The mentor-protege program is a bit complex, but basically it allows a small business and large businesses to team up and take advantage of the strengths of each.
How Set-Asides Help in Practice:
Set-asides are much less helpful than you might think, especially for very new govcons.
- There are LOTS of companies with each set-aside: There are tens of thousands of companies with each set-aside and they are all carefully watching the set-aside opportunity lists, so competition is still fierce.
- Access isn't as exclusive as you might think: When a contract is set-aside, only companies with that set-aside can win it. However, the winner can subcontract up to 49% of the work to anyone they want. So, lots of companies who don’t have a set-aside are also watching the set-aside opportunities list.
- It can help you get on teams (marginally): Large govcons like to show the government that they are supporting small businesses, so they develop ecosystems of smalls with set-asides that they work with again and again. So a set-aside makes you marginally more attractive to large govcons.
- Once you develop a high trust relationship with a government buyer, you might get some sole-sourced work: Generally the government will only sole-source a contract to you if they trust you to do the work and adhere to all the govcon rules. So this probably won’t be available to you early on.
- Mentor-protege: Generally, large businesses wont enter into a mentor relationship with you until you’ve worked together for a couple of years.
What You Should Do If You Qualify a Set-Aside
At this point, nothing. We will incorporate your set-aside into your overall business and marketing plans, but they don’t actually do that much for very early stage companies. And no matter what set-aside you qualify for, please do not lead with it. If you are a cybersecurity company or a construction company, start every pitch with why you are the best cyber or construction company around, and mention your set-aside at the end of your pitch.