Procurement and Venture Capital: Expert Tips for Civic Tech Entrepreneurs

Day two of the Smart City Startups 2015 Summit highlights insider advice on government procurement and how civic tech startups can attract investors.

by / April 27, 2015
Citymart CEO and Founder Sascha Haselmayer explains procurement dynamics to a crowd of civic tech entrepreneurs and advocates at the Smart City Startups 2015 Summit in Miami on April 24, 2015. Jason Shueh

An assemblage of civic innovation types converged for a second day on Miami’s Wynwood Art District, this time, for tips on attracting government customers and investor interest.

The meetup was part of the 2015 Smartcity Startups Summit, held April 23-24, to connect civic tech entrepreneurs with investors and government insiders. Surrounded by the district’s distinctive street murals and eclectic urban galleries, the talks and messages seemed to resonate with the startup community.

Here are two noteworthy parts from day two:

Breaking into Procurement

Citymart CEO Sascha Haselmayer cut straight to the heart of the matter with a friendly — yet no-nonsense — presentation on procurement.

“I think you’re delusional if you think you’re just going to create a product and it’s going to fly off the shelves,” he told a room of entrepreneurs.

This was coupled with hard statistics from his research at Citymart, a startup aimed at facilitating procurement. Unlike most industries that spend an average of 10 percent of revenues to acquire customers, in government, typical vendors spend about 42 percent to snag prospects, he said. Long selling periods, relationship-building and high costs take most of the blame. To secure their patrons, it was estimated that government-focused tech companies spend between $150,000 to $500,000 per major sale.

Haselmayer also pointed to a host of other obstacles. Sometimes officials won’t speak honestly about real interest, identifying the actual decision-makers is tricky, and typically once RFPs are officially released, the unofficial decision on a vendor has already been made.

To side step procurement’s challenges, Haselmayer suggested civic tech startups do one thing before jumping in.

“Just be honest with yourself,” Haselmayer said “You’re going to spend a lot of money and time to sell your product to government.”

After entrepreneurs inoculate themselves against such disillusionment, proactive steps are possible. These include free pilots with a smaller city for a use case to sell to a larger city; diversifying products to sell outside of the public sector, and when hunting buyers, to market products to many cities instead of just one.

“You can’t get too caught up with one city because you can’t control the process,” Haselmayer said.

Investing in Civic Tech

Taking a dive into venture capital, there were a spate of panels, workshops and interactive sessions dedicated to capturing investment funding.

Corporate investors like Anand Shah of BMW Impact Ventures and Len Diplock of Direct Energy provided the large company perspective, while Code for America alum Alissa Black, now part of the Omidyar Network, offered points from a social impact investor's perspective — investment seeking both social change and financial returns.

If there was one single rallying cry, it was a call for research. Investors emphasized and re-emphasized that before startups consider an investor pitch, they should probe into business model fundamentals. Chiefly, these areas included specifics on exact customers, revenue sources, customer acquisition costs, and knowledge of market fit — as opposed to just product knowledge.

Marshall Hawks, market manager of Silicon Valley Bank, said when he first began developing the bank's startup portfolio, he was shocked to discover how short-sighted some were. A good portion assumed the process would be a quick decision — akin to a one-time yes-or-no transaction — and failed to see how such investments represent long-term partnerships.

“We don’t like to invest in dots, we invest in lines,” Marshall said, using graphs as the operative metaphor.

Research also came into play with investment amounts.

Black said another red flag for the Omidyar Network — well known for its investment in the civic tech sector — is when  an entrepreneur rifles through an elaborate product description and launch plan and then asks for a paltry sum to realize ambitions. The takeaway translates to poor fiscal research or a lack of confidence in their product. In either case, Black said it’s a likely deal breaker.

Lastly, there was strong warning against running too quick into a corporate partnership. Diplock cautioned entrepreneurs to do due diligence before taking corporate support. For while its true that corporations can bring products to market quicker, spread the word through an established marketing machine, and connect startups to a powerful network of advisors, there are also pitfalls.

They can also string startups along on false hopes of investment or product deployment. And they can also make sales impossible by marking up a startup’s products — once under corporate control — so government customers can no longer afford them.

For help, Diplock counseled civic tech entrepreneurs to use first meetings as two-way interviews on proper fit, spell out the real value proposition of a partnership with investors, and shy away from corporations dabbling in startup partnerships or programs for the first time.

Jason Shueh former staff writer

Jason Shueh is a former staff writer for Government Technology magazine.