Big government is not the most popular subject in Silicon Valley, especially when it comes to software. Startups and investors have traditionally stayed clear of trying to build and invest in solutions looking to sell into one of the largest customers in the world — the government.
The United States federal government invests over $80 billion in IT spend annually, yet much of this spend is dominated by large companies who understand how to navigate the intricacies of the RFP process (often with the help of lobbyists). The top companies that dominate technology contracts with federal agencies outside of the Defense Department are CSRA, Lockheed Martin, HP Enterprise, Booz Allen Hamilton, and Accenture. Even Palantir, backed by the CIA’s venture arm In-Q-Tel, hasn’t been able to break through these ranks despite having built a large business on top of its government contracts (in addition to its private sector contracts).
The venture capital mood seems to match this outlook. The number of venture investments, as well as the total investment dollars invested in GovTech related startups has remained relatively flat over the past few years according to CB Insights (~40 deals annually / ~$300M+ invested annually).
Despite these headwinds, I believe there will be exciting opportunities ahead for those looking to build and innovate within the government context for two primary reasons:
- Over the past few years, there has been an immense growth in the number of senior level positions within government focused on bringing technology, data, and innovation into government. Former President Obama appointed the first White House Chief Technology Officer during his first term, and codified the position into law before leaving office earlier this year. President Obama also created the White House Innovation Fellows, the U.S. Digital Service, and the position of Chief Data Officer to attract top technical and entrepreneurial talent into government to work on some of the toughest issues facing the nation, from healthcare to immigration to veterans affairs to open data. This federal-level effort set the stage for state and local governments to follow in suit as Chief Technology, Innovation, and Data Officers have been added across the nation to work closely with Mayors and Governors on top agenda items. A Harvard Kennedy School report uncovered that states, counties, and cities have been hiring a Chief Data Officer at a pace of nearly one a month — just in the second half of 2016. This momentum and increased awareness within government provides an exciting opportunity for startups looking for champions within government to push forward new solutions.
- The pain within government is still real. Having spent time working in government for former Newark Mayor Cory Booker, it is almost self-evident that digitizing workflows and creating technology tools for government employees can alleviate burdensome processes, surface better insights, and deliver improved services to their citizens. Legacy data silos and unstructured data still burden many state and local agencies, blocking the path towards creating end-to-end solutions for specific departments as well as easy to use data platforms for decision makers at the top-levels of agencies and administrations. Government officials are also feeling the pressure to adapt to the changing tide of digitization as recruitment and retention of younger government employees will likely be predicated upon strong technology-forward policies within administrations.
With this context, below are some thoughts for what could allow a team to build a successful company in the GovTech space:
Sell to state and local governments.
Forrester predicts that IT spending at the state and local level will increase in the next two years, while federal spending decreases. They forecast a $4 billion increase in 2017 at the state and local level, bringing total spend to $112 billion in 2017, followed by another increase of $5 billion in spending in 2018 at the state and local level. And this is just in the U.S. Having a solid, reference set of cities and states in the U.S. will help open the door in other cities around the world, easily multiplying the market size without having to get entangled in messy RFPs at the federal levels.
Not only do state and local governments maintain large aggregate spend that exceeds federal IT spend, the ability to build enterprise like sales models to sell into this segment is more easily defined as these governments and departments have discretionary spending, or a more lean RFP/budget approval process than the federal government. This approach obviously comes with other differences that need to be managed, including smaller potential contract sizes and a larger customer base to sell into (one or a handful at the federal level vs. tens of states and thousands of municipalities), but overall provides a much easier foundation upon which to build an early-stage GovTech business.
Know your buyer.
Luckily for both entrepreneurs and investors, many best-practices from the broader enterprise space still hold when selling to government. For example, spending time understanding the specific departments within a government body that are a best fit for your solution and understanding the budgetary approval processes for each jurisdiction will be important as you build out your sales and pricing strategy. Similarly, given the broad base of potential customers (e.g., federal agencies, municipalities, multiple local departments), setting up a proper funnel and corresponding enterprise sales motion will be paramount for success.
However, at the same time, it is also important to identify the nuances of the public sector. For instance, many local governments are much smaller than traditional large enterprises. This could lead to much easier word-of-mouth sale and adoption cycle, but also smaller budgets and contract sizes. Similarly, identifying which issues and workflows may be politicized will also be important (e.g., budget forecasts, investments) in order to understand why certain technologies may face more resistance than others.
Ultimately, like any enterprise company, it is important to identify what drives real value within government and what will agency and administration leaders be willing to pay for. Although higher civic engagement and futuristic modes of transportation are important areas for innovation, there are lots of low hanging fruit across government that would make the lives of average government employees much better, and save money / create efficiencies in the short-term. There’s an often repeated phrase in venture investing, “invest in pain killers, not vitamins”. In this context, understanding and identifying real pains within government is even greater since the appetite to spend on nice-to-have’s or bets on risky investments is not high.
Balance your team.
For entrepreneurs looking to build solutions for government, it will be important to maintain a balanced team. Like many vertical enterprise companies, having strong technologists and product visionaries are often not sufficient. Founders should strongly consider having someone early in their company who has had exposure working in or around government. This early DNA will still allow the team to innovate with fresh eyes, but also stay honest to the realities of navigating the government ecosystem, building credibility with potential customers, and identifying ripe opportunities for innovation.
Like many businesses we fund at Lightspeed, the exciting part of the innovation in this sector is the tangible value a new entrant can create in this industry and the reverberations it can create in the larger market, specifically with consumers. Building a successful GovTech company will not only make the lives of thousands of government officials easier, but it could create powerful step-change improvements in how cities and states can govern, and ultimately in the lives of our fellow citizens. As a new generation enters the government workforce, the pull for better and improved processes and tools will only continue to increase. The opportunity ahead is large and important, and I’m excited to spend time meeting with more companies in this space.