Government Contracts for Startups

Why Startups Should Pursue Government Contracts

The U.S. federal government is the single largest buyer of goods and services on Earth. In fiscal year 2025, federal agencies obligated more than $750 billion in contracts — and by law, at least 23% of that spending must go to small businesses. That is over $170 billion in annual opportunity reserved for companies like yours.

Government contracts offer advantages that commercial deals rarely match. Revenue is predictable: a federal contract is backed by congressional appropriations, not a customer's quarterly budget. Payment terms are codified by the Prompt Payment Act, which requires agencies to pay within 30 days or face interest penalties. And once you have past performance on a government contract, your competitive position compounds — agencies strongly prefer vendors with proven track records.

For technology startups specifically, the opportunity is even more compelling. The Department of Defense, intelligence community, and civilian agencies are actively seeking commercial innovation through programs like the Small Business Innovation Research (SBIR) program, Other Transaction Authorities (OTAs), and the Commercial Solutions Opening (CSO). These mechanisms were explicitly designed to bypass traditional defense procurement and bring startup speed into government.

The common misconception is that government contracting is only for large defense primes like Lockheed Martin or Raytheon. The reality is different. The federal government has aggressive small business goals, and agencies face consequences when they don't meet them. Program managers actively seek small business partners — they just need to find you.

Small Business Set-Aside Programs

The federal government operates several set-aside programs that restrict competition on certain contracts to qualifying small businesses. Understanding these programs is essential because they dramatically reduce the competitive field.

The most impactful set-aside categories include:

Small Business Set-Aside: Any contract under $250,000 is automatically reserved for small businesses (the simplified acquisition threshold). Larger contracts can also be set aside if the contracting officer expects at least two qualified small business offers.

8(a) Business Development Program: Run by the SBA, the 8(a) program provides a nine-year developmental period for socially and economically disadvantaged small businesses. Participants can receive sole-source contracts up to $4.5 million (or $7 million for manufacturing). This is one of the most powerful vehicles for winning early contracts.

HUBZone Program: Companies headquartered in Historically Underutilized Business Zones receive a 10% price evaluation preference on full-and-open competitions and access to HUBZone set-aside contracts.

Women-Owned Small Business (WOSB): Contracts in certain NAICS codes can be set aside for women-owned small businesses or economically disadvantaged women-owned small businesses.

Service-Disabled Veteran-Owned Small Business (SDVOSB): Contracts can be restricted to businesses owned and controlled by service-disabled veterans, with sole-source authority up to $4.5 million.

Mentor-Protege Programs: Both the SBA and individual agencies (notably the DoD) run mentor-protege programs where a large business mentors a small business. The pair can submit joint proposals, combining the small business's set-aside eligibility with the large company's resources and past performance.

SBIR and STTR: R&D Funding for Startups

The Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs represent the single most important funding pathway for technology startups entering government. Eleven federal agencies with extramural R&D budgets over $100 million are required to allocate 3.2% to SBIR awards.

SBIR funding is non-dilutive — you don't give up equity. Phase I awards range from $50,000 to $275,000 for a proof-of-concept over 6 to 12 months. Phase II awards range from $500,000 to $1.8 million for full prototype development over 24 months. Phase III is the commercialization phase with no funding cap and no set-aside — you compete on merit.

What makes SBIR transformational for startups is the dual benefit: you get paid to develop technology while building direct relationships with the government customer who will ultimately buy it. A successful SBIR Phase II positions you for follow-on production contracts worth far more than the research funding.

For a comprehensive breakdown of the SBIR program, including eligibility requirements, proposal strategies, and agency-specific guidance, see our detailed SBIR Funding Guide.

Getting Started: Your First Steps

Breaking into government contracting requires upfront preparation before you can submit a single proposal. Here are the essential steps every startup must complete.

Register on SAM.gov: The System for Award Management is the federal government's official vendor database. You cannot receive a federal contract or grant without an active SAM.gov registration. The process takes 7 to 10 business days for new registrations. Our SAM.gov Registration Guide walks you through every step.

Identify your NAICS codes: North American Industry Classification System codes define what your business does. Agencies use NAICS codes to determine applicable size standards (which define whether you qualify as "small") and to categorize solicitations. Choose the codes that best describe your primary revenue activities.

Develop a capability statement: This is your one-page marketing document for government buyers. It should include your core competencies, past performance (commercial counts), differentiators, company data (CAGE code, UEI, NAICS codes, set-aside certifications), and contact information. Think of it as your resume for federal procurement.

Find opportunities: SAM.gov's Contract Opportunities section (formerly FedBizOpps) lists active solicitations. SBIR.gov lists all open SBIR and STTR topics. GovWin, Bloomberg Government, and Deltek are commercial databases that provide deeper intelligence. Start by searching your NAICS codes and keywords related to your technology.

Build relationships before you bid: Government contracting is a relationship business. Attend industry days, respond to Requests for Information (RFIs), and request meetings with Small Business Specialists at target agencies. Every federal agency has an Office of Small and Disadvantaged Business Utilization (OSDBU) whose mission is to help small businesses like yours.

Winning Your First Contract

Your first government proposal is the hardest. You have no past performance, limited understanding of the evaluation process, and competitors who have been doing this for years. Here is how to level the playing field.

Start small and strategic: Don't bid on a $50 million IDIQ as your first contract. Look for small set-aside contracts under $250,000, SBIR Phase I awards, or subcontracting opportunities with established primes. Each win builds past performance that compounds your competitiveness.

Understand the evaluation criteria: Every solicitation tells you exactly how proposals will be evaluated. Read Section M (Evaluation Factors) before you write a single word. Common factors include Technical Approach, Past Performance, Management Approach, and Price. Weight your effort accordingly.

Compliance is non-negotiable: Government proposals have strict formatting, page limit, and content requirements. A non-compliant proposal is eliminated before anyone reads your innovative solution. Use a compliance matrix — a checklist that maps every requirement in the solicitation to exactly where you address it in your proposal.

Consider teaming: If you lack past performance or specific capabilities, partner with an experienced firm. Teaming arrangements, joint ventures, and mentor-protege agreements let you combine strengths. The prime contractor benefits from your innovation and set-aside eligibility; you benefit from their experience and infrastructure.

Leverage Other Transaction Authorities (OTAs): OTAs allow agencies (primarily the DoD) to award prototype contracts without following the Federal Acquisition Regulation (FAR). This means faster timelines, less bureaucratic overhead, and evaluation criteria that favor innovation over compliance history. OTAs are particularly startup-friendly.

Common Mistakes to Avoid

After years of helping startups navigate government contracting, these are the patterns we see most often.

Not registering on SAM.gov early: SAM.gov registration takes days to weeks, and it must be renewed annually. Don't wait until you find an opportunity — register now so you're ready when the right solicitation drops.

Ignoring set-aside certifications: If you qualify for 8(a), HUBZone, WOSB, or SDVOSB status, not pursuing certification leaves money on the table. These programs exist to give you a competitive advantage — use them.

Bidding too broadly: Startups often try to be everything to every agency. Pick one or two agencies, learn their missions, understand their procurement patterns, and build relationships. Depth beats breadth in government contracting.

Underpricing: The government evaluates "best value," not lowest price. Proposing an unrealistically low price signals that you don't understand the work, can't sustain the effort, or will cut corners. Price your work to deliver quality and sustain your business.

Skipping the relationship-building phase: Submitting a cold proposal in response to a solicitation you discovered on the due date is almost never successful. The companies that win have been talking to the program office for months or years before the solicitation even posts.

Not tracking compliance requirements: Government contracts come with obligations — reporting, accounting standards (DCAA), cybersecurity requirements (CMMC), and more. Understand these before you bid, not after you win.

How Matter Labs Helps Startups Win

Matter Labs works at the intersection of industry and government. We don't just advise — we operate. Our team has direct experience on both sides of the procurement table, and we leverage that perspective to give startups a real advantage.

Through our FATHOMWERX partnership, we connect startups with live testing environments, Navy program managers, and real-world evaluation opportunities. Our clients don't just submit proposals — they demonstrate capabilities in operational settings where decision-makers can see results firsthand.

We help startups navigate the full journey: from SAM.gov registration and capability statement development, through opportunity identification and proposal support, to contract execution and past performance documentation. Whether you're pursuing your first SBIR or positioning for a production contract, we bring the network, knowledge, and operational experience that accelerates your path to government revenue.

The government contracting landscape is complex, but the opportunity is real. Startups with innovative technology and the right guidance are winning contracts every day. The question is not whether your technology matters to the government — it is whether you have the strategy to reach them.