How Startups Can Brace for a Government Shutdown
Although politicians from both sides of the aisle want to avoid a government shutdown, and we are already seeing some last-minute deals as a result, there remains a strong likelihood that we will see one this October. While shutdowns used to be enormously rare measures of last resort, as our political system becomes more and more polarized, shutdown threats have become more commonplace. Here in D.C., we know what happens locally when the government stops, but as investors, it’s critical that we understand how to support our portfolio companies headquartered in cities across the country.
During a shutdown, discretionary spending stops, but mandatory spending continues. This leads some people to argue that the impact of a shutdown is ultimately very minor — painful for a period of time, but as workers are eventually compensated after the fact, not the economic maelstrom some TV pundits claim it to be. This thinking fails to acknowledge the challenges inevitably faced by small businesses and startups during that time period — however short it may be.
While it is somewhat of a running joke to talk about how startups and the tech sector prefer to ignore the government, the truth is that they, like other forms of business, are dependent on our system working as intended. This may be even more true for early-stage companies. Here are a few areas of potential impact our team is currently preparing for with our founders:
1. The government as customer: Is any government office or agency on your customer list? If so, assuming your business doesn’t fall into the category of mandatory spending (unlikely), that customer — typically not a small one — will soon be unable to pay their bills. The good news? Eventually, they will pony up all the money they owe. The bad news? As all founders know, young startups are often reliant on certain, regular revenue streams to operate the business. A delay in payment, even a relatively short one, could have very significant consequences.
2. The government as investor: The SBA is often a lifeline for startups — especially those who are based outside of Silicon Valley and need alternative sources of capital to start or complete financing. In the event of a shutdown, the SBA will likely halt new financing efforts, and those already in process will be massively delayed. We are recommending that companies work to secure alternatives now (or expedite any processes with SBA-affiliated lenders).
3. The government as gatekeeper: During a shutdown, because federal employees are not working, access to any of the agencies who are helping you with research or approvals may be limited or fully restricted. Access to all channels of the federal government, from FDA reviews of in-process biotech and pharma solutions to physical access to federally funded research labs may be limited or fully restricted.
4. The government as legislator: Despite its reputation for arguing over vs. passing legislation, the federal government passed two landmark bills last year: the CHIPS and Science Act and the Inflation Reduction Act (IRA). These laws both have the potential to push significant amounts of funding into the startup sector and create regional tech hubs across the country. A government shutdown will almost certainly slow down implementation (which has already been slower than expected), rule writing and funds allocation.
5. The government as service provider: This is where the ripple effects of a shutdown come into play. Founder based in Chicago that needs to fly to New York? That security line might be a little longer than expected. Even though the TSA is considered mandatory spending, they are already behind in recruiting and staffing — hiring and onboarding will slow during a shutdown. The same pattern will hold for other agencies. Additionally, where there is a density of federal government employees and contractors, services like Uber may also be less available and more expensive — trust us, we’ve lived it.
Based in D.C., the federal government is our largest local employer. A shutdown will have significant consequences for transportation, rent payments, and local businesses that sell everything from groceries to gas. As investors, we are attuned to the more far-reaching consequences. We hope founders everywhere are paying attention.
