By Yanev Suissa
We’ve reached a point when venture capitalists and their limited partners must capitalize on the rise of the public sector as a key revenue driver of commercial startups.
If you look at the most successful enterprise tech exits in the venture world, you’ll notice that the public sector is almost always one of the top three verticals driving their revenue. The public sector is effectively another Fortune 500, with several hundreds of billions of dollars spent on new technology every year—as a customer and as a tool for driving innovation.
The public sector has the ability to add significant upside to venture capital returns, but unfortunately, most investors are woefully ill-equipped to navigate it.
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Take Databricks, a data analytics platform expected to be the largest enterprise tech IPO ever. Databricks recognized that its quickest path to growth was by dominating industry after industry, rather than trying to boil the ocean.
It started by focusing on just a few industries at a time, one of them being the public sector. Public sector was a primary driver in the company’s expansion from Amazon Web Services to Microsoft Azure, opening up hundreds of millions of dollars in commercial and government contracts. This was perhaps the most important decision the company made on its path to its current $29 billion valuation.
Public sector can lead to early success
Those venture capitalists and entrepreneurs who understand the competitive advantage of cracking the public sector must expand their perspective to maximize returns from this second Fortune 500 customer base. It’s easy to miss that the public sector isn’t just the government anymore. In many cases, it’s one of the primary drivers of new growth for these businesses—a backdoor to getting the attention of the commercial Fortune 500 on both the public sector and the commercial side of the house.
In fact, if you look at the history of the biggest successes in the tech world, they are almost all tied to the public sector early in their development. While working in the government, Larry Ellison came across source code from the defense community that became the foundation of Oracle, while Larry Page and Sergey Brin used public sector fellowship money to create an algorithm for ranking websites, sparking the origin of Google.
And most dominant tech players—Amazon, Microsoft and even Facebook parent Meta—had substantial revenue streams from the public sector early in their growth, contributing to greater enterprise value and higher returns.
Silicon Valley’s blindspot
But Silicon Valley has long ignored, and in some cases even rejected, the public sector vertical, arguably because few VCs have operated at senior levels of both the public sector and the venture world. As a result, few VCs know how to tap this multibillion-dollar opportunity. It is an area of venture capital where the right team with the right expertise could significantly drive outsized returns across a commercial tech portfolio.
From a limited partner perspective, partnering with the right firm means the ability to tap returns from a technology portfolio with accelerated growth and a much stickier revenue stream. For such venture firms, the ability to add this strategic value also provides a competitive advantage. And the returns prove it.
Limited partners have begun to invest in this largely untapped vertical. As it provides access to the highest-quality deals in Silicon Valley, and additional alpha.
Either way, the public sector is a powerful vertical for startups, and one that venture capitalists need to get their heads around if they want their portfolio to compete effectively and drive outsized returns.
Yanev Suissa is the founder and managing general partner of SineWave Ventures. Prior to SineWave, he was an investor at New Enterprise Associates (NEA), where he sourced, managed and helped advise dozens of early stage investments.
Illustration: Li-Anne Dias
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