On the face of it, the burgeoning B2G market offers exciting opportunities for the GovTech sector.
Public procurement is the largest single marketplace across developing and developed economies, accounting for around one-fifth of global GDP.
Better still, Governments around the world actively encourage private-sector tech start-ups and SMEs to transform public sector services to make them more efficient, responsive and accountable.
But operating in the B2G market has its challenges.
In this interview, Private Debt Finance Broker Ifti Akbar explains how appropriate funding can help GovTech entrepreneurs manage the lengthy sales cycles and uncertainty associated with awarding and starting public sector contracts.
1 . What challenges do companies operating in GovTech face?
Slow and unwieldy procurement systems, complex tendering processes and multiple decision-makers result in lengthy sales cycles.
As a result, GovTech entrepreneurs can expect pressure on their cash flows and high customer acquisition costs.
Beyond that, Government departments operate to a fiscal year, ending in April.
Consequently, GovTech entrepreneurs need to overcome problems of cost overruns, lumpy revenues and potential pivots, customarily associated with seasonal businesses.
At the same time, GovTech entrepreneurs need to manage investor expectations.
2. Does political uncertainty also pose a problem?
Yes. We’re seeing the largest increase in public sector technology spending in decades. But ongoing uncertainty over Brexit and now a General Election means GovTech entrepreneurs experience delays in funding filtering from strategic projects through to programmes scheduled to start in 2020. Again, this puts pressure on cash flow and investor expectations.
3. How can private debt finance help GovTech entrepreneurs?
It very much depends on your use of funds and where your GovTech company sits in the business lifecycle.
Pre-profit start-up companies burn cash. If cash flow is tight because of lengthy sales cycles, private debt finance can extend your cash runway to the next valuation.
On the other hand, growth-stage companies that have secured sizeable public sector contracts can use private debt finance to scale their businesses to cope with increased demand while maintaining efficiency.
For instance, large contracts can demand the appointment of new talent ahead of the curve, a move to larger premises, or even new product development.
Mature GovTech companies can use private debt finance to fund acquisitions or buyout a shareholder.
4. When should GovTech entrepreneurs start looking for debt finance?
It is always important to secure capital before you need it.
Why? Because securing capital before you need it puts you in a good negotiating position when government departments commence planning at the start of the fiscal year.
In addition to that, securing finance before you need it helps you to manage your cash flow through long enterprise sales cycles.
After that, towards the end of the fiscal year, government departments work hard to spend remaining budgets. So securing finance before you need it ensures you can capitalise on event-driven opportunities.
Moreover, securing finance before you need it helps you to
avoid problems associated with external pressures such as political and economic changes.
5. What experience do you have in GovTech/B2G?
Before setting up Fuse Three, I, along with my co-founder Russell successfully built and sold a B2G energy efficiency company.
In doing so, we secured contracts with government departments at various levels, including local and central government and government agencies.
Of these included delivering energy efficiency programmes and software to the NHS, universities, police, Department for Education, local councils and the Home Office.
6. How do you see the GovTech/B2G market growing in the coming years?
Despite the challenges of running a GovTech business, we see enormous opportunities for entrepreneurs involved in HealthTech, Cyber Security, HR Tech, Cloud Computing, FinTech and Enterprise Software.
I read a statistic recently that told me spending on GovTech in Europe is €21.8bn, and that could grow five-times over in the years to come.
7. How do you typically support your clients?
GovTech companies talk to us when they need funds to support them through enterprise sales cycles — also, growth finance, M&A finance and funds to enable international expansion.
You see, private debt finance specifically caters to the needs of GovTech companies, without diluting the equity of founders and existing investors.
8. Who makes up your GovTech client base?
GovTech is an area we know well and in which we have a lot of success.
To secure funding, we can draw on our personal experience of growing a technology business supplying central and local government.
We understand our clients’ challenges. What’s more, we know the funders that want to lend into this space.
At present, our client base includes companies operating in HealthTech, Cybersecurity, Data Centres, Enterprise Software, Cloud computing and software development, and VAR’s.
For these companies, we have sourced, structured and negotiated loans including venture debt, IP secured lending, mezzanine finance, growth loans, acquisition facilities, bridge finance and shareholder buy-backs.
9. Do you see many UK focused B2G companies expanding internationally?
Yes. Upon successful contract completion, B2G companies often decide to replicate their success internationally.
To date, Fuse Three has funded international expansion projects in Asia, the US, Australia and the Middle East.
Where can people find you, Ifti?
You can connect with me on LinkedIn at: https://www.linkedin.com/in/ifti-akbar-7532014/
If you would like help smoothing your GovTech company’s cash flow peaks and troughs, also managing your investor’s expectations, then do get in touch. You’d be surprised by how easy it is to secure private debt finance.