Technology is Transforming the Most Important Organization in the United States

This blog is based on findings from the Govtech Industry Primer.

The Silicon Valley is always brimming with new ideas about how to innovate pretty much everything. Google self-driving cars move up and down Alma Street, while Stanford Football players practice with the latest virtual reality gear. Wild ideas become a step closer to reality as investors of Sand Hill road channel billions of dollars into products and services that promise to change how we pay, how we get around, to how we experience the world around us. From an app on your phone to outer space and everything in between, there is very little that technology has left untouched.

The last stronghold least affected by the waves of latest technology is the biggest and most organization in the United States: the government.

While the United States government spends $175 billion annually on information technology[i], many organizations at the federal, state and local level still run on decades old “green screen” systems. The good news is that in the past five years, there has been a spurt of growth in technologies that help governments operate more efficiently and effectively.

Govtech companies serve governments as their primary market focus. Their products, services, or solutions help governments better manage internal operations and deliver services to its citizens[ii]. Recent market activities signal that the govtech industry is nearing an inflection point. According to the Govtech Industry Primer — an independent research that tracked the govtech industry in the United States– here are three most promising indications of a hockey stick growth of the industry.

Governments want better technology

The United States government on the federal and local level is becoming more technology savvy. The transformation started from within, and from the top. In 2014, the White House launched the United States Digital Service to provide the federal government consultation services on information technology headed by a former Google Engineer. 18F was established to reform citizen facing government technology using lean startup methods, open source code, and contemporary programming languages.

Local governments are quickly embracing new technologies as well. For example, the San Francisco Mayor’s office launched the Entrepreneur-in-Residence program to allow earlier stage companies to deliver disruptive solutions by working with the government directly.

These changes at the federal and local level signal that there is a greater appetite for new technologies.

Companies — big and small — are moving into govtech

Inc.com calls govtech one of the “hotbeds of opportunity for entrepreneurs.[iii]” Out of the 98 companies tracked by the Govtech Industry Primer, over 60% were founded in the last 6 years. Market entry is fueled by the rise of accelerators like Code for America, a non-profit founded in 2009 that matches technology professionals with city governments.

Large tech companies like Google parent company Alphabet are moving into the govtech space as well. SideWalk Labs, the brainchild of Larry Page and Daniel Doctoroff, was launched in 2016 to create a “smart city from scratch.”

Companies, both small and large, are accelerating entry into the govtech market.

Increased venture capital flow, especially in early stage companies

The increase of early stage investments by traditional venture capital funds is an indication of industry growth. Many govtech companies in the past have bootstrapped until they reached scale. Venture capital firms have expressed risk factors such as long sales cycle, complex processes, and lower return profile as a few reasons why they hesitate to invest in government facing companies.

However, a shift in investor appetite is evident. The $47 million investment led by Andreessen Horowitz in OpenGov — a company that aims to increase governments’ financial intelligence and transparency through web based visualization software — indicates a new model of venture backed growth in the govtech space. While not gradual, private capital flow overall increased by 50% compounded annual growth rate (CAGR) from 2004 to 2015.

Conclusion

Technology is transforming governments. The growth of the govtech industry will expedite the transformation. Wild ideas — like having a smart, effective, and efficiently run 21st century government — are quickly becoming a reality.

Questions or comments? Please reach out to Christine.Hong.Govtech@gmail.com

Citations

[i] Dustin Haisler, “Defining the Govtech Market” E. Republic. April 2015. http://labs.erepublic.com/govtech-market-2/

[ii] Ibid

[iii] Graham Winfrey, “The Best Industries for Starting a Business in 2015.” Inc.com, Feb 2015. http://www.inc.com/graham-winfrey/best-industries-2015-the-best-industries-for-starting-a-business-in-2015.html