While Silicon Valley may have some of the most well-known entrepreneurs, the D.C. region still has a huge share of heavy-hitters. Surprisingly, though, there are some good reasons you may not have heard of them. To understand why some of the biggest movers and shakers in the government contracting space are a little lesser known than the next big tech startup, we spoke to Kevin DeSanto, managing director and co-founder of KippsDeSanto.
ABERMAN: So, how is a local market for mergers and acquisitions, and how do you compare to what you’ve seen in prior years?
DESANTO: We’re in a very unique time right now. The overall market environment, particularly in 2017 and 2018, was healthy. There was a lot of merger and acquisition activity, particularly in the government contracting space. In 2017, roughly 100 transactions. 2018, it’ll be right around 90, when we’re done getting the count in. And we think 2019 is going to be at a pretty similar level to what we saw this past year.
In general, there is a tremendous ecosystem that requires M&A to be a significant part of the strategy for the larger companies in that government contracting sector. And so, we’re seeing folks look to diversify into new customers, or into new capabilities, and one of the primary methods for doing that is through acquisitions.
ABERMAN: It’s interesting to me that a lot of people who talk about D.C. tech look back to the Internet bubble, the telecom bubble, and say, well, we’ve never had a level of activity like that again. My sense is that, in actuality, the merger and acquisition market, and the market in government contract and cybersecurity tech and so forth, is probably as vibrant, or more vibrant, than the Internet bubble.
DESANT: It is. And I’ve always said that. The only issue that we have today, versus what it was 15 or 20 years ago, was that there were more name brands in this market that the consumer knew, or the average sort of citizen in the area knew. A lot of the names of the companies that we work with, or the companies that are being acquired, are just not consumer brands. They’re not recognizable names.
And so, we’re seeing the same amount of activity, but it may not percolate up to a level of being on the front page of the Post, or in somebody’s living room conversation at a cocktail party. But we’re seeing a tremendous amount of activity, and we’re seeing a lot of folks coming in from outside of the D.C. area to try to take advantage of this ecosystem.
ABERMAN: And each time one of these businesses is sold, a founding team or management team, or the stockholders, make lots of money, and they turn around and do this again. Why is it… is it a failure of the people in the media to understand? Why is it the reality of our market, which is heavily dynamic, and you, you’re in the middle of it every day. Why isn’t that story told more often?
DESANTO: You know, that’s an interesting question. I think that this is a market where there is a great deal of subtle personalities. The entrepreneurs that we oftentimes deal with are not these sort of larger-than-life Elon Musk types that are out there. They are folks that have a tremendous amount of technical depth and background. They are very thoughtful, and in some ways, conservative entrepreneurs, which can be sort of an oxymoron, or can be an odd combination. But generally, we see folks that have really worked hard to stay out of the limelight. And therefore, they’re not seeking it. Even when the transaction is a great success, they’re oftentimes behind the scenes.
ABERMAN: I think that’s a great point. I also think that many people who come to this region, come here to serve, and they do serve. And if you’re involved in public service, or involved in national security, guess what? It’s not about you.
DESANTO: That’s right. It isn’t about you. It is about the greater good, and there is a great deal of that. And that’s one of the things that I’ve always enjoyed about the sectors that we focus on. Whether it’s national security, or it’s healthcare, or it’s other parts of this government industry, we just get to meet great people who have sacrificed a tremendous amount in order to provide a better service, or to make the citizen experience better, or have put us in a position where we’re gonna get much greater benefit from what the government provides.
ABERMAN: So, this market is incredibly dynamic. There’s a lot of wealth creation, There are serial entrepreneurs everywhere, if you know where to look. But they’re not venture capital backed. They don’t wave their arms, they’re not talking about an anti-gravity machine. They just get stuff done. With all that: we just went through a government shutdown. In a couple of weeks, maybe there’s another one; you never can tell, it seems. What was the effect of the shutdown? Was there any effect on the companies in this region, from the first shutdown?
DESANTO: There was, In late December through January, there certainly was an impact. And it does depend the customer base, because the shutdown wasn’t universal. It was a smaller portion, from a dollar vantage point. It wasn’t the majority. And so, there were companies that were absolutely fine as a result of that, particularly if you’re in the defense or intelligence arena. The V.A., the Veterans Affairs organization, is an example. But if you were supporting DHS, or some of these other places, where there were more impactful implications of the shutdown, it’s hard. It’s a difficult experience to go through. I think we’ve seen it in lots of different ways.
When you saw the news footage of the federal employees, or the contractors that were really upset and really struggling through those times by missing paychecks, or being in difficult financial situations. But I think, from a company vantage point, it’s also tough, because there’s some tail to this as well. If there were decisions that were needed to be made, they didn’t get made, and then everybody has to get back into their seat, and it takes a few weeks, a few months, to get there. It could be a contract award, it could be a deliverable that requires approval of a customer before you get an invoice paid, or your accounts receivable get collected. And so, there’s a definite impact. What we have seen, from the top down, is that the buyers and the investors in this community are viewing it as resilient.
And it might have been a 37 day shutdown, or it might be that there’s a hiccup here coming up in getting a full year budget passed, or might be a continuing resolution in October. But they view this sector, as a whole, as one where you can have a lot of success as a buyer and investor, and growing your business. Because you do, despite some of these challenges, have a great deal of visibility into the budgets, and into the customer needs and demands. And so, there’s a sense that, even with some of these hiccups here, which, you know, could be characterized as larger than hiccups to some of the folks or participants. Even with that, there is a very, very strong opportunity to build great businesses in this sector.
ABERMAN: Absolutely. And what we have to do in another segment is, we have to remind everybody that it’s cool to be a government contractor.
DESANTO: That’s right!
ABERMAN: Kevin DeSanto, thanks for joining us today.