At one point, all of us have experienced being a customer of a business, or a part of one itself. So, as a VC analyst or an entrepreneur, we tend to focus on B2B (business-to-business) or B2C (business-to-consumer) companies. However, there is another business model that, despite its size and prevalence, often doesn’t cross our minds: Business-to-government (B2G). As a part of the venture world, we must examine the intersection between the public and private sectors, specifically how B2G companies function differently compared to traditional businesses and how they can be influenced by political volatility.
The B2G business model is quite simple. Investopedia defines it as “the sale and marketing of goods and services to federal, state, or local agencies.” Unlike typical customers, governmental decision-makers rarely make their contracting decisions based on an advertisement they saw on YouTube or an influencer-sponsored post on TikTok. This means that most traditional marketing tactics aren’t going to be useful in this sector, shifting the emphasis more towards the network that a company is able to build and its direct sales strategy. Depending on the start-up, this can either be an advantage or a disadvantage. If the team has great initial connections with agencies, they can leverage them to gain traction without deploying capital and gain a massive headstart over less connected competitors. However, if they lack those connections, then it can be harder to secure the first couple of contracts, compared to a B2C or B2B model.
Despite this initial difficulty in gaining traction, an advantage of these difficult-to-secure contracts is that they are very sticky. McKinsey reports that, specifically regarding IT, “on average, public-sector projects take 3.9 years to complete.” While the terms on these contracts can greatly vary, governmental bodies love routine and existing solutions, so keeping and renewing contracts with them can provide a lucrative long-term cash flow for the company providing the service.
In the current state of politics, we are experiencing a much more volatile and unpredictable landscape. The political ideology of those in positions of leadership throughout our government decides which issues are most important, and therefore, where resources are allocated in contract spending. According to the Carnegie Endowment for International Peace, “American politicians are highly ideologically polarized. In other words, they believe in and vote for different sets of policies, with little overlap. This trend has grown in a steady, unpunctuated manner for decades.” What does this mean for B2G companies and their investors? If a company is founded on solving a specific problem that is only cared about by one of the major political parties, then that company runs the risk of the problem they are solving being deprioritized by the government when there are shifts in control.
So as an analyst or investor, what should you look out for? The main factor you should immediately focus on is the network of the founding team and whether they have the ability to close governmental contracts. Next, consider the issue that the company is solving and clarify that it isn’t founded on a volatile matter that could hinder the stability of future contracts. While B2G may be a less talked about business model, it is incredibly important for those in the venture space to pay close attention to, especially in the current political landscape.
- Business to Government (B2G): Selling to The Government.
- Unlocking the potential of public-sector IT projects | McKinsey
- Polarization, Democracy, and Political Violence in the United States: What the Research Says – Carnegie Endowment for International Peace