Key things to keep in mind when startups want to work with government or defence forces

The government’s potential for business cannot be ignored. In certain sectors, working with the government is not a choice.

Space, defence, atomic energy, water and other natural resources, security, power, healthcare, and public infrastructure are some of the sectors where one must serve the government, but there are other businesses where one has a choice to work with the government.

A startup’s inclination, culture, preparedness to serve a complex customer, and investor alignment influence this choice. Some of the most successful investors such as Y-combinator accelerator have been on record about the government’s focus being a red flag for them in on-boarding any startup. Startups that are focused on early money and only investors’ money are therefore reluctant to explore government as a customer. Once a startup has discovered or validated other sources of income; or has clarity on serving the public good, it’s easier to explore working with the government.

Smart cities, EV charging infrastructure, DigiYatra, Aadhaar linked services, use of data in improving civic facilities and many such initiatives make startups an ideal match with the government.

The flow of money

Working capital management becomes even more critical when government is your focus. Most of the public procurement happens under guidelines from the Central Vigilance Commission (CVC). While this is not sacrosanct for emergency cases and for certain ‘autonomous’ bodies who can exercise their discretion, a large part of fund flow happens under these guidelines.

Bank Guarantees

A startup must have banking relationship with a scheduled bank that is agreeable to the government for bank guarantee. The types of bank guarantees include:

Contract Performance Bank Guarantee: Typically, 10% of the value of the order, this is an investment from the receipt of order to completion of execution.

Advance Bank Guarantee: Between 5% and 30%, an investment to receive advance for managing your working capital of the project. This can substantially benefit in managing cashflow needs towards advance repatriation to your suppliers.

Performance Bank Guarantee: Typically 10% but reduced to 3% in certain cases. This has to be submitted at the end of the execution or supply; and remains valid until the completion of warranty period.

Having margin money arrangement with a bank is extremely important for all the above bank guarantees.

Payment terms

Managing your cash is crucial. Most government customers offer advance payment between 10% and 30%. Ask for it at the time of submission of bid. If you ask, you get. If your supplies or services can be done in parts or over a period of time, do request for payments against a schedule of delivery instead of on completion.

Payment against delivery: This amount is up to a total of 70% to 90% of the order value, received normally within 30 days of the actual delivery.

Final acceptance

This is the most critical part as public procurement requires approval from a variety of stakeholders at the customer’s end to accept your product or service. Ensure that your bid (proposal) and the received contract have complete clarity on what the acceptance criteria shall be. The best part of working with the government is that the written word is the truth. Whims and fancies of individuals have practically no role to play as they know that eventually the written word will survive. Hence, a good look at the contract would serve you well in managing this last payment collection.

Budget

Like any B2B customer, a smart entrepreneur would want to know where the source of their customer’s fund is and their intent to deploy.

The budget comes from various sources and being the government, most of the information is in public domain.

·      Central budget

·      Local budget (State or Civic bodies)

·      Other income sources (such as in public sector units)

At a macro level, budget allocation charts can help one align one’s business development plan for the year.

Similarly, allocation of local budget is also available for your target customer State or Civic body.

While PSUs spend based on their purchase needs, their audit principles are aligned with the CAG. Available annual reports are a good source of information about past expenditures.

The Cautionary Tales

There are many stories of the difficulty in navigating the government maze. Since it is every tax-paying citizen’s hard-earned money, any lapse in judgement in its use is obviously brought to people’s notice. Knowledge of the customer can help alleviate fears

Complexity

Due to the magnitude of work that’s not comparable to any organisation, the government is extremely complex in its organisation and function. The good part is that the government is exploiting IT unprecedently to help its users as well as other stakeholders.

Organisation

Every organisation has various stakeholders within. In a government procurement process, these are going to be different people and sometimes different sub-organisations, and the constant changes add to uncertainties of processes on their own part. This elevates complexity to chaos.

As Sun Tzu once said, “In the midst of chaos, there is also an opportunity”. The opportunity here is to build a stronger organisational relationship instead of limiting it to person-to-person. Such a relationship can outlast the business development person and can bring a much higher LTV to your current CAC.

Under the RTI act, all government organisation’s must have organisational chart or key contact metrics available on their website.

Timelines

Ideally, a procurement tender would be a milestone of progress of your customer’s efforts in getting what they want from you or competitors.

The government itself has made timeline a part of policy matter. Defence Acquisition Procedure (DAP 2020) has clearly defined timelines, including 22 weeks for IDeX procurement. Government e-marketplace has its own strict procurement timelines.

Compliances

The need for compliances towards government is reducing as India is trying to improve the ease of doing business. It is still in the best interest for a startup to get the following:

·      Startup India certificate

·      MSME certificate

·      ISO certificate

·      Product certificates

·      ZED certificate

There are numerous industry specific certificates that one may need. These can be easily found from ‘Bid Eligibility Criteria’ or ‘Vendor Eligibility’ heading of any tender.

Derisking

The government is not just one customer. Central, state, various civic bodies, departments, and institutions make up the government. This multiplicity can be useful. Almost everything that the government procures in one state is needed in another state, increasing your potential customer base lightning fast.

Government initiatives

Government e-Marketplace (GeM)

GeM has been made mandatory for procurement of most of goods. It’s highly recommended that one keeps the GeM product documentation updated at all times.

Exemptions

Startups are not required to meet financial criteria of bids except to have positive net worth, in most cases. The new amendment to DAP also removed Pre-Contract Integrity Pact requirement from startups.

Summary

Working with the government needs a mindset of complexity management with patience. This culture needs to be imbibed from get go. Where government is non-core customer, it is better to get experienced business development person who has lived the life of a few successful bids all the way through execution. If the investors’ funds are sourced from a non-aligned country, there may be a discomfort with government cases. So, choosing your investors just like your investors choose you will be a wise idea.

India is growing rapidly and available wealth is therefore on the rise. Initiatives such as Digital India among many others are focused on making India ready to embrace the future with more confidence. These new initiatives have tilted the balance in favor of startups from the incumbents. At such a time, ignoring government business is not in the interest of any entrepreneur.

Sandeep Shah is the Co-founder & MD at Optimized Electrotech.