GovTech — Government Leveling Up
B2C, B2B, and Now B2G
Technology products have transformed every major industry — but one. The public sector still remains a major exception. Although this is changing — and changing more quickly than many anticipated, the government still represents one of the final frontiers for major technological innovation.
So What Exactly is GovTech?
GovTech is the classification of technology that supports or enables the provision of public services. As a sector, it encompasses companies using technology to modernize the operations of government. The term is generally associated with startups building products for government customers, but can also refer to companies who rely on government referrals or work with government suppliers. In addition to the GovTech startup environment, there has been an increasing amount of GovTech related activity concentrated among larger players such as Deloitte and Accenture.
The “GovTech” classification is extremely broad. There are subsectors unique to specific government services which can be seen in the graphic to the left. But just as there are unique subsectors, there are also functions of government that are shared by every other enterprise customer. HR, Communications, Finance, Customer Service, Productivity, Employment, and IT are all essential functions of government that make up sizeable additional markets.
The Opportunity
Governments are massive. The global GovTech market size was estimated to have been roughly $400 Billion in 2018. Out of context this number makes it sound like governments spend a lot on technology, but at the moment it still only makes up a small fraction of their total budgets. In that same year U.S. state and local spending alone was $3.81 Trillion. When thinking about the economy as a whole, U.S. government spending (federal, state, and local) makes up 17% of total U.S GDP. In fact, if states were treated like companies, 26 would be ranked in the Fortune 100.
There is a huge opportunity for startups to begin treating states, localities, and federal agencies more like businesses — to finally capture this massive amount of untapped value.
Unique Characteristics of GovTech
As there are barriers unique to GovTech as a sector, there are also characteristics of the industry that make it an extremely exciting space.
- When other parts of the economy are adversely hit due to macro level shifts, governments are known to be steady and stable. In times of turmoil, government is almost always the most stable customer.
- As it may be hard to sell into government, once you are in, it is very hard to get out. Although, on average, one’s customer acquisition cost will likely be higher than your average B2B or B2C businesses, customer retention rates are higher and churn rates extremely low.
- Many people perceive government to be classified as “one customer”. It’s not. Just as one would sell to different businesses, one also has to sell to different government agencies at different government levels. Each of these agencies is a large potential customer that comes with interagency network effects.
- Selling into government develops credibility. This credibility validates quality and and often makes a company’s path to the private sector much easier.
- GovTech has a massive opportunity to positively impact society aka make the world a better place. Private sector and public sector collaboration is generally a more powerful means to make change.
GovTech and COVID-19
COVID-19 has changed a lot. That much is clear. In the context of government, the pandemic has accelerated government’s willingness to accept new technology products and has very much highlighted the flaws with their current technology stack.
Over the past 12 months, legacy product after legacy product has collapsed as seen with SBA Example, Unemployment Example, Cobol Mainframe Example, Supply Chain Example. As things being to normalize, governments will be moving their focus from trying to keep these systems running to updating these systems to prepare for the next pandemic and beyond. When the next crisis hits there should be no excuse to be this unprepared.
The UN breaks up this shift to digital government in three ways. The first two (React and Resolve) are in direct response to the COVID-19 pandemic, and the third (Reinvent) follows a more long term outlook. “Reinvent” highlights the full opportunity moving forward for GovTech as a sector.
Barriers and GovTech Risks
Although there may be a correlation between big customers being more attractive customers, there is not exactly causation to say that bigger is therefore better. In fact, there are a number of unique barriers and risks associated with GovTech that make the sector particularly challenging.
The first being the act of selling to governments. Historically, selling to governments has been an off-putting idea to many VCs and investors. One of the main concerns has been the long sales cycle associated with government procurement. On top of generally long sales cycles, every state, municipality, and federal government has a different formal procurement process — making it challenging to understand the landscape without previous government experience.
Most procurement processes require open and fair competition, so even if you are the only one creating a specific product, a government entity may open the bidding process to other potential competitors — often going out of their way to convince others to apply. These selling processes have been thought to take anywhere between three–nine months on average.
Often times, it is incredibly difficult to even know who to reach out to when attempting to sell to a government entity. Generally speaking, most government workers don’t advertise themselves on Linkedin, Twitter, or anywhere on the internet for that matter. Finding an initial point of contact proves to be more challenging for GovTech businesses than for B2C or B2B-facing companies
Governments have traditionally been slow to adapt to new technology. At some level, the risk averse nature of government and slow formal processes that come with them is what good government is supposed to be. Most people just want their basic services to be delivered and their tax dollars to be allocated well. If governments were constantly innovating, pivoting, and disrupting — people’s daily lives would be disturbed, flaws would be made, and inconveniences would be had. This is part of the reason that 70% of the U.S. government’s IT budget is spent on maintaining legacy systems — perpetuating a system where a small number of incumbents dominate.
Myth. Busted.
Although the three–nine month rule of thumb has been commonly perceived by investors and company's alike, The Govtech Fund, a GovTech focused VC firm founded in 2014 says otherwise:
“The average sales cycle of our govtech startups is 86 days.” -Ron Bouganim, Founder and Managing Partner of the GovTech Fund.
For context, the GovTech fund has invested in nearly 30 startups that work with over 30,000 government agencies around the world.
When thinking about B2B sales cycles, smaller deals can often take around three months where larger and more substantial sales are likely to fall between six to nine months. Hmmmmm — makes you think.
Being exclusionary with capital because “selling to governments takes too long” and then investing in enterprise software businesses exposes a certain level of cognitive dissonance. The reality is B2B and GovTech sales cycles aren’t all that different…
Traction
Funding: In 2019, 100 of the top U.S. GovTech companies had raised total funding of $2.9B, a number that shot up to $4.8B in 2020.
Some individual GovTech companies that made recent headlines with their raises:
- Payit raises $100M from Insight Partners
- Passport Raise $65M from Rho Capital Partners + more
- ArchiveSocial Raises $53M from Level Equity + more
Additionally, a handful of specialized GovTech-focused VCs have surfaced over the past couple of years: The Govtech Fund, Urban Us, 1776 Ventures, and the Urban Innovation Fund to name a few.
Here is a list of VCs (generalists and specialists) who invested in the GovTech 100 in 2020.
Notable Exits:
Palantir is very much a GovTech business. One of their core goals is to “Become the default operating system for data across the U.S. government.” Palantir IPOed in September of 2020 at a valuation of $22 Billion and is currently trading at a market cap of nearly double that ($43.90 Billion as of 1/9/2020).
Darktrace is one of the world’s fastest-growing cyber defense companies and a leader in Enterprise Immune System technology. It is targeting a 2021 IPO which would likely place a value of $5 Billion on the business.
GTY Technology Holdings completed a six GovTech Company merger in 2019 and currently has a $305 Million market cap while trading on the NASDAQ.
Motorola acquired WatchGuard, one of the most prominent body camera makers in the country in 2019 for an undisclosed amount.
2021 and Beyond:
States and local governments face a multi-year revenue challenge as they continue to experience high unemployment rates and lower consumption levels.
Although budgets are tight and funds are low, states and local governments are relying on technology like never before.
Subsectors I am excited about
Space! Space! Space! From space manufacturing, satellite transportation, space tourism, and space station development, there are so many areas within space to be excited about. Private companies are partnering with NASA and selling to the government (and other businesses) while solving complex problems in space.
- Varda is working to build the “Foxconn of space” and manufacture commercially viable products at scale in space.
- Axiom Space is a human spaceflight services company that provides access to the International Space Station and is also working to build their own low orbit commercial space station.
- And companies like Space X, Blue Origin, and Virgin Galactic are all fundamentally changing access to space travel.
Public Health: Pre-pandemic, the idea of telehealth seemed farfetched. Fast forward to April of 2020, nearly half (43.5%) of Medicare primary care visits were provided through telehealth compared to less than one percent (0.1%) in February. This period has cemented the fact that technology collaboration with public health is a partnership that is just getting started.
- MD Ally is a telehealth emergency care platform that allows EMS to triage the patients to virtual care instead of dispatching costly, emergency services.
- Cardinality.ai has created cloud-agnostic solutions for frontline workers in HHS to better provide critical services to vulnerable citizens.
Other Cool GovTech Things
- Danish Agency for Digitisation: Created a mobile ID and drivers license for Danish citizens
- BioBot analyzes sewage to map out population health in cities, counties, and states
- Element: Slack for government with extra cyber security
- Loop and HyperLoop projects from The Boring Company
- Any and all things PUBLIC
In summary,
2020 has highlighted the importance of technology in government. All it took was a global pandemic and damn near government failure to put technology and innovation at top of mind for government officials. Looking forward, there are a number of areas ripe for change within government and I am betting a lot of those needs will be met by startups and other innovative technology providers. Now is the time to reimagine the delivery of public services — it’s time for government to level up.
