5 Takeaways: Selling Open Core to the Government with Sid Sijbrandij

U.S. federal sales are unlike non-government B2B sales—it’s an entirely different ballgame. Sales cycles are longer, dress codes are more formal, the procurement process is more complicated, and there are certification and clearance requirements. Successfully selling to the federal market can yield large contracts with high retention rates. However, overcoming the barriers to entry is not trivial.

“The federal space is super interesting from a monetary point of view. The deal sizes are typically bigger and the retention is great but it’s much harder to get in,” said Sid Sijbrandij, OCV’s founder and General Partner. “If no one in your company has a security clearance, it’s really hard to sell to government agencies. They can’t talk openly about the problems they’re facing in their organization or what they want to achieve.”*

Federal agencies typically buy software through channel partners (organizations authorized to work with the federal government) because they are restricted in what they can share with potential vendors. Early-stage open core companies tend to receive more outreach from channel partners than the typical startup because of the government’s high usage of open source software. Government agencies are encouraged to use open source software; sometimes open source is the only available option. Whether you should engage or ignore an inbound request from a channel partner depends on the partner, the product, and the usage.

“Who’s the channel partner approaching you? Are they just interested because they think there’s a potential opportunity to sell, or is there an end customer already using the product?” asked Sid. “If there are existing government users, that’s your signal to sell.”

Knowing when and how to engage with a channel partner isn’t always straightforward. If there’s real interest from a government group, navigating the federal sales process can be even muddier. To help OCV companies better understand this channel, we recently hosted a Federal Sales Roundtable with Sid. Here are the top five takeaways.

1. Not all channel partner opportunities are created equally

“Channel partnerships take time, and it’s not free to engage. Sometimes you pay a commission if you get a deal through them. The best type of partnership is when they can help you get into accounts, and then you take over the account. Don’t be dependent on them for a long time. If a channel partner owns the customer relationship and it’s their deal, the partner should pay for your time.”

Channel partners reach out to companies for many different reasons. Representing an interested customer is the best-case scenario. Sometimes the channel partner just wants to build something with you based on speculation or is competing for new opportunities. Pouring energy into the latter scenario instead of finding your first customers, learning, and iterating quickly, can sink a new startup. If a channel partner contacts you but doesn’t represent an end customer, it’s usually best to pass on the opportunity.

Channel partner relationships come in all flavors but two types are most common: the channel partner acts as an extension of your sales team, or you treat the channel partner like a customer. In the former scenario, the partner facilitates deals and takes a percentage. They should be highly invested, do a lot of the heavy lifting, and ensure you have direct access to the end customer. Alternatively, a channel partner may already have a contract with a government agency and need a software provider to fulfill the contract. They might have an exclusive relationship with the customer to provide support and services on top of your product. In this case, you can treat the channel partner as the end customer and charge them a professional service rate for the engagement.

2. Be opportunistic and act on existing usage.

“The gold standard is when a federal agency already uses your software because it’s on-prem, open source, and they’re proactively asking for privacy or security features. That’s your signal to explore the opportunity. They’re not actively using it if they don’t have three burning feature requests.”

Federal deals can take significant time to close but it’s worth assessing each potential opportunity. Act on usage. When a channel partner reaches out on behalf of an existing active government user—that’s your sign to start selling. Active government users will pay for support services and enterprise features that make the software more secure like SSO, auditing, etc.

3. Open core companies have an advantage

“Many open core companies only have SaaS competitors and no on-prem competitors. You may be the only option for agencies who need to self-host.”

Many modern software providers are SaaS only and government agencies are often required to self-host leaving open source as the only viable choice. Organizations in this category can make great customers because they likely have a long list of requirements and feature requests they urgently need and are willing to pay for.

4. Startups need sponsors for clearances and certifications

“Many companies will also ask you for certifications like FedRAMP which is an enormous undertaking and requires a sponsor. You need a customer who needs your software badly enough that they’re willing to sponsor you.”

Startups can’t apply for security clearances and certifications on their own. An organization has to sponsor you. The sponsoring organization can be a commercial company or consulting firm with an existing government contract, or a specific government agency. Getting sponsored and gaining security clearances and certifications is long and intensive.

5. Don’t put all your eggs in the federal sales basket

“It is typical for these deals to take years—make sure you get paid in the meantime.”

The standard VC advice given to early-stage startups is to avoid channel partners (unless the federal government is your target audience) because it can over-complicate the business and be a distraction. The advice for open core companies is slightly different because some have an advantage with federal customers (existing usage, self-hosted requirements). Be opportunistic and assess each opportunity but think of federal sales as a nice gravy on top—don’t build your entire business on a single thread. Have additional customer acquisition and revenue channels with much faster sales cycles.