The 2020 GovTech 100: Investors Bet Big on Gov Tech
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By Ben Miller, Andrew Westrope
GovTech – January/February 2020
Five years ago, Government Technology saw something happening: Civic tech was changing. Fueled by new technologies, modern methodologies and a sudden interest from investors, startups were beginning to work more with government. In a space long dominated by incumbents, notorious for complex procurement and implementation cycles, agencies were hungering for something new.
We took note, and launched a list of 100 companies that represented that ecosystem. Now in its fifth year, the GovTech 100 has reached a new level of maturity. A lot has changed. A lot hasn’t.
In terms of the headline-grabbing venture capital world, gov tech has not yet arrived. But it has come a long way.
That is to say, the venture-capitalist deals that garner attention are “unicorns” — the companies worth at least $1 billion, often more, the companies that make apps one is likely to find on millions of people’s smartphones. More focused, gov tech is not an environment conducive to that kind of scale. And so to many venture capitalists, gov tech is not going to look like an amazing area to invest in.
Nonetheless, the change has been palpable.
“I think it’s still scary-looking to a lot of people, but when I talk to other investors today in other funds in my peer group, I don’t get that look like ‘Are you crazy?’ … as much as I used to,” said Frederik Groce, an associate at Storm Ventures who has invested his firm’s money in gov tech companies. “So I think we’re seeing increasing comfort with gov tech.”
That has translated into what Groce calls “gov-curious” investors. Some of the larger, more generalist firms such as Sequoia Capital, Insight Partners and SJF Ventures have collectively made a handful of investments in the space. But there aren’t a lot of venture capitalists out there who specialize in gov tech.
Such expertise is valuable for gov tech companies. After all, investors influence what companies do, and government is a unique kind of customer.
“The go-to-market does look a little different in government,” Groce said. “So knowing what that looks like … and building empathy with civil servants — asking what they need and how tech can help them, versus hearing a prescriptive pitch about what they need.”
That increasing comfort with what it means to be a gov tech company, and what it means for government to work with startups, isn’t limited to investment dollars. Here are four trends that help tell the story of what’s happened in gov tech these past five years.
Few recent trends have had a more profound impact on technology than the rise of the cloud. The move, still very much underway, fundamentally changes the way people use technology — in a word, from centralized to shared.
And government, despite its reputation as slow to change, is no exception. In recent years, the public sector has become more comfortable with cloud and turned to software-as-a-service solutions to make itself faster, more flexible and more effective.
Tiffany Chu, CEO and co-founder of the SaaS transportation startup Remix, has watched government officials’ attitude toward cloud change in real time in her company’s first four years.
“I remember early on I would always have to spend five or 10 minutes … I even had a slide that explained what software as a service was and how it was different from on-premises,” she said. “That was something that I usually had to cover because that wasn’t common knowledge.”
These days, government appears more comfortable with cloud as a whole.
The public sector is certainly more familiar with cloud, but a number of things have also given the technology more credibility. Those include the Certified Cloud Security Professional certification, changes to procurement methods, and the federal government’s FedRAMP program, which verifies that cloud technologies have met rigorous security standards before agencies use them.
For FedRAMP, vendors created government- specific clouds, and that helped, too.
“The security stuff, FedRAMP, that investment helps state and local government,” said Steve Ressler, president of the public safety tech startup Callyo. “Having these gov-only clouds helped [vendors] say, ‘Hey, a government-only cloud is probably safer than your own data center — we actually have more controls than you do.’”
Still, the penetration of cloud technology is uneven. It tends to succeed in government in places where it provides an obvious return on investment, such as reducing costs or dramatically improving the efficiency of workers.
An easy example comes from the city and county of Denver, where CIO David Edinger said cloud-enabled field inspectors have increased the number of inspections they can complete each day — in some cases, from eight to 12.
The time savings came because inspectors would previously collect information in the field, then drive back to the office at the end of the day and re-enter it all on a computer. With an app, they can put it in as they gather it.
“What you’re doing at the end of the day is just repeating the work you did in the field,” Edinger said. “By leveraging these cloud applications, these mobile applications, you’re making it so they [aren’t wasting as much time].”
Cloud technology also allows Denver to better keep up with fundamental duties such as app updates.
“Staying up to date with versions is a perennial challenge,” he said. “It’s not unusual for us to get many, many versions behind.”
Roughly half of the city’s 400 apps are in the cloud now, but Edinger is adamant about one thing: Denver is not barreling toward the cloud. It’s using cloud when it makes sense.
So in places like Denver, cloud is changing the gov tech picture. But not all at once, and not across the board.
“Basically it boils down to we’re not a cloud-only or cloud-first government … we’re cloud-where-appropriate,” Edinger said.
Both a factor and product of market growth, technological innovations opened new possibilities for startups to serve state and local governments of all sizes. Advances in data collection, processing, analytics, smart city devices, consumer tech and other fields created niche markets and tools that didn’t exist, and in some cases were not conceivable, only a few years prior.
The availability of lightweight consumer drones, for example, has created a demand for new applications, laws and platforms for safety and communication. This led to the companies Wing, AirMap and Uber working with standards bodies around the world on the open source InterUSS Platform to create a standardized way for drone pilots to plan flights and communicate.
With the continued explosion of smartphones and consumer apps came a need for government regulations, data management and software. In response to the popularization of Airbnb and VRBO, permitting software companies such as Accela and Host Compliance (which was acquired by Granicus in November 2019) launched new products to help local governments navigate regulatory issues that followed.
A revolution in urban transportation options driven by mobile apps such as Uber, Lyft, Bird, Lime, Jump and Waze generated massive volumes of new data about the movement of people on streets and sidewalks. This created a space for collaboration between mobility companies and local governments, who realized they could use the data for urban planning. This new space inspired several startups, such as Ride Report and Remix, to make the data useful.
Martin Morzynski, vice president of marketing at StreetLight Data, said a steady stream of innovations helped his company get a foothold in the government market. One of StreetLight Data’s first projects was finding ideal locations for EV chargers, but its opportunity grew as cellular and navigation devices replaced old-fashioned methods of traffic counting, and smart city sensors enabled faster and broader data collection on roads.
“It’s a jump in magnitude in what’s possible, and that’s what’s so exciting about this,” he said. “Our cities have gone from being heavily vehicle-driven, to being more and more open to new modes. You have Ubers and Lyfts on the street, you have light delivery vehicles delivering Amazon packages, you have commute hours expanding from a typical 9-to-5 where you’re kind of flattening commute peaks and essentially [seeing] heavy traffic all day, and that kills the old transportation models and requires a new approach that’s much more data-enabled. You’re seeing this marriage of IoT and big data becoming more symbiotic, where big data, the stuff that we do, connects the dots between the incomplete set of IoT devices, but also uses the IoT devices to validate and improve. One makes the other better.”
Few innovations have been more essential or promising than artificial intelligence, an umbrella term for new capabilities in information processing and pattern recognition. For law enforcement, companies like Axon have employed AI to recognize faces and objects in surveillance videos in order to redact sensitive information fast enough to meet deadlines for public release.
In the case of Varuna, founded in December 2018, AI provided a way to analyze huge volumes of historic water-quality data and inform money-saving, and perhaps life-saving, predictions for local utility agencies.
“By helping them to predict contaminant shocks within the system, and the impact of the shock, we help them develop a plan for addressing the shock so they stay within EPA compliance,” said founder Seyi Fabode.
He added that AI is advanced enough that most small government agencies can’t afford the specialized expertise necessary to develop AI tools in-house, but realizing what’s now possible has inspired new thinking, new companies and demands for services that didn’t exist even 10 years ago.
“It’s an interesting time for the whole AI space. It has reached a local maximum. There’s almost a cap on what most can do right now,” Fabode said. “It’s still far ahead of what we could do before, but it almost feels like we now require a few more leaps … that allow us to do more.”
As technological advances created new markets and replaced many manual processes with software, the interests of different gov tech companies increasingly overlapped. Governments found themselves dealing with ecosystems of new applications that had to interface with one another and build on existing infrastructure. In many cases, gov tech companies announced partnerships, collaborating on product integrations and joint go-to-market strategies.
Building on several acquisitions in the past few years, integrated software provider CivicPlus combined its platform for managing websites and public meeting documents with civic engagement software from Canadian startup Civil Space. Cloud software giant OpenGov teamed up with ERP software provider Superion (now part of CentralSquare), giving OpenGov access to new customers in exchange for OpenGov’s data visualizations and other tools. Itself a fusion of four companies, CentralSquare partnered with the public safety tech company Genetec to give emergency responders access to camera feeds and other information. Traffic management companies Waycare and Waze are sharing data to improve their respective products. Granicus combined its public communications platform with a public engagement and analysis tool from Bang the Table. The list goes on.
Besides advances in AI, Varuna’s water utility data benefited from the company’s partnership with CityBase, which makes payment systems for government, including for water utilities. Varuna founder Fabode explained their relationship this way: His company uses data to help water utilities improve their services, which increases customer satisfaction, which increases collection via CityBase. In turn, Varuna gets access to utilities who use and trust CityBase.
In an email, Bang the Table CEO Matt Crozier wrote that his company’s partnership with Engaged Public boils down to “product complementarity and mission fit,” succeeding by allowing both parties to diversify and stick to their areas of expertise at the same time.
“We have tried developing everything in-house before, but the more we diversify the more we dilute focus. We want to retain sharp focus on building and improving the EngagementHQ platform. We have some big ideas for it,” he said. “Our partners have equally big ideas for their specialist areas. There has been a history of companies losing focus and therefore some quality as they diversify. This will allow us and our partners to keep focused on delighting clients while giving those clients access to a range of solutions that play well together.”
Where the proliferation of new technology and markets created spaces for startups, it also made competitors out of larger businesses in once separate lanes. New ideas, innovations and competition prompted companies to add tools to their portfolios and expand their business to accommodate different types of customers. Top-level ERP software providers started selling to mid-market customers, special districts and other segments of state and local government. For those that had the resources, acquisition became a common strategy, as some product developers found it easier to pick up the best startup solutions than to build competing ones from scratch.
Since merging with GovDelivery in 2016, Granicus has undertaken several acquisitions and built a software portfolio that includes agenda management, citizen communications and website design. Launching its govService platform in 2018, Granicus got into the digital services game in competition with Accela, NIC, Tyler Technologies and PayIt.
Oracle announced several major investments in the past few years, including the construction of 12 cloud data centers around the world to compete with cloud hosts Amazon, Google and Microsoft. Oracle also launched a new cloud solution, Oracle Public Sector Community Development, which continues to add new functions but started with permitting software, pitting it against Tyler Technologies and Accela.
Backed by steady investments and fed by acquisitions, cloud software giant OpenGov made in-roads into software markets for performance measurement, budget building, permitting and citizen engagement.
Fundraising statistics from Crunchbase validate the idea that gov tech is gaining ground with investors. From 2003 to 2019, companies tagged “gov tech” on Crunchbase have raised $2.8 billion in investment. About two-thirds of that has happened in the past five years.
But what investors are looking at are exits — when an investor cashes out on their stake in a company. Conventional wisdom in venture capital is that only a handful of investments will result in highly successful exits, and those will pay for the entire investment portfolio many times over.
Gov tech has seen many exits — in the past year CivicPlus acquired SeeClickFix, Motorola Solutions bought WatchGuard and OpenGov purchased ViewPoint, to name a few — but it’s mostly been smaller deals. If the space can produce some more splashy success stories for investors, Groce predicts that more money will come into gov tech.
“If somebody is making money in a category, they’re more likely to reinvest money in that category,” he said.
Even without that, Groce expects momentum to continue in the next five years. That’s because even the smaller firms working in the space, if they can pile up those deals, will continue building capacity. And as smaller companies are acquired, it’s likely their founders will go on to create more gov tech companies. Everybody involved, including investors, will gain experience.
“That will breed more people who want to spend their time on this … and develop that expertise and specialty internally,” he said.