For years, Silicon Valley companies have been laser focused on selling software to millions of consumers or making large sales to enterprises. When they say “enterprise,” they usually mean the 1,000 largest corporations in the world. But perhaps the biggest enterprise buyer of all is one that’s often overlooked: the U.S. government.
Government contracting plays an important part in the investment thesis of a new $120 million fund being announced this week by San Diego-based Harpoon Ventures. Harpoon is a small VC focused on early-stage tech startups that might one day seek the government as a customer, including defense agencies. “Lars and I were really born and bred in the [defense] community,” says William Allen, who’s the cofounder and general partner at Harpoon along with Larsen Jensen. Allen was a Marine and Jensen a Navy Seal before both entered the business world (Allen did a stint at Deloitte and Jensen worked at the VC firm Lightspeed after Stanford Business School). “As junior officers, we really empathized with the customers and with the absolute end users.”
Allen and Jensen, who started Harpoon in 2018 with a $3 million fund, take a novel approach to get into deals and leverage their experience. They co-invest with such top-tier VC firms as Sequoia Capital, Andreessen Horowitz (where Jensen was once a summer associate), and GV (formerly known as Google Ventures), promising to open up a whole new (federal) market for their portfolio companies. In fact, Harpoon helped its first 10 portfolio companies close $25 million in government deals during its first year, helping it raise its approximately $60 million 2019 fund. “Our last fund raise . . . took us all of five months,” Allen says. “And it’s not because people like our smiling faces, it’s because of the track record we’ve built exclusively investing with tier ones.”
Why startups who want to sell to Uncle Sam need an expert guide
Understanding the needs of a government buyer is important, but it’s just one of the challenges that startups face when they want to sell to the government. Historically, tech startups have shied away from federal contracting because of long sales cycles, contract uncertainty, tough product requirements, and the hard work of satisfying compliance and procurement norms. It’s usually easier for tech startups—especially those backed by VCs that expect rapid growth—to focus on commercial markets that have fewer rules and faster sales.
On the other hand, the federal government is a huge buyer of software and other technology—and it has a huge budget. The Defense Department budget alone is more than $700 billion (and projected to grow even more). In 2020, the federal government paid out $156 billion just for R&D work, not even finished products. For comparison, the entire U.S. venture capital market invested $164 billion in startups last year.
To tap into that federal money, tech companies often need a strong champion within the government agency they’re trying to work with. They may also need a wise “sherpa”—as Stanford prof Steve Blank puts it—to guide them through the labyrinthine procurement process that finally leads to a contract.
Allen and Jensen are those knowledgeable guides. “We can say this is or isn’t the right time to talk to that organization, and we can go a step further and introduce a prospective customer and understand how contracting works,” Jensen says, noting that he and Allen might also suggest a special type of government contract that’s designed especially for purchasing software or services.
Since Harpoon’s inception three years ago, its founders say they’ve helped startups access a total of $496 million from 52 federal contracts across eight different agencies. This, of course, increases the valuations of the contracting companies and can speed the way toward a lucrative exit (an IPO or a sale), which in turn enriches the VCs who invested. Their proficiency in facilitating and expediting opportunities within the federal bureaucracy is helping to change the perception that pursuing government contracts isn’t worth the potential reward.
Playing a bigger game
Although the founders make no bones about being as returns-driven as any good venture capitalist, there’s a bigger picture around what Harpoon is doing. Jensen and Allen are providing a conduit between the tech sector and the government at a critical moment for the United States. It’s widely believed that with the rise of China and a belligerent Russia, the U.S. faces a world arguably more dangerous than at any time since the end of the Cold War. These threats come in the form of artificial intelligence, autonomous weaponry (drones), cyberwar, and information war. There is also a consensus among a cadre of foreign policy analysts and the Silicon Valley startups and investors focused on defense that the U.S. needs emerging technology developed in the tech sector to counter those threats and anticipate future ones.
“What we say is that we have some access, and we’re going to leverage that access to get into some of the hottest deals, which are going to return the most money for the LPs,” Jensen says. “As a result we are going to build a really fantastic fund—and we can all do pretty well while at the same time doing some good for the country.”