Editor's note: This story is part of Voices in Gov Tech, featuring the unique perspectives of leaders in the market. Read the full story here.
Startups aren’t evenly distributed. But solutions can be.
The number of gov tech startups founded and funded since 2007 has grown by more than 10 times over the last 10 years. More than 4 billion private dollars (mostly venture capital) have helped fuel this growth. The geographic distribution of that growth mirrors, with some variance, the patterns of most of the startup ecosystem with a large percentage located in cities like San Francisco, Boston and New York. This means that although great founders can come from anywhere, startup investing is not distributed equally. Startups in a few cities benefit from network effects, power laws and geographic luck.
Nonetheless, this shouldn’t correlate with how and where solutions can be distributed. Here are a few ideas for correcting this problem, which is ultimately an inefficiency in matching the best solutions to needs.
Local officials are often the first to admit that the RFP process in most cities is weak, not only because it’s complicated and takes a long time, but also because typically, the people who should know about startup solutions are not even finding out about them. Startups offer a fairly cheap and low-risk way to explore new ways of doing things, but most cities have no guidelines or framework in place on how to work with startups, how to evaluate their viability, etc. As a result, few city leaders — and importantly other staff — get exposed to startups or know how to handle them.
One solution that’s helping is to change the wording of RFPs. As my partner Shaun Abrahamson puts it, “There is a difference between asking for mobility solutions versus buying buses.”
Rethinking the City-Startup Relationship
For many cities, trying out new technology is a top priority. But there’s a better way to think about relationships with startups.
The National League of Cities surveys the priorities of mayors annually, and economic growth consistently gets the No. 1 spot. It’s not that other priorities like affordable housing, mobility, crime and pollution don’t matter; they’re high on the list too. But when measuring startup activity or seeking startup engagement, most policy stops at that first “economic” priority. But there’s more that cities should consider.
“Cities need to understand that involving startups is not just about economic development, but a fairly cheap and low-risk way to explore new ways of doing things,” said Sascha Haselmayer, founder and CEO of Citymart, who added that most cities don’t have processes in place to evaluate and work with startup companies. “As a result, things get stuck on the economic development side, because they feel a certain degree of ownership.”
Trying to Be Third
Government is slow-moving for a reason. Its resources are limited, and it needs to make sure taxpayer money is spent responsibly. So, government isn’t always jumping to try new things.
Perhaps if they aimed to try solutions early, but not first, they could move forward more effectively.
“I honestly think that being first is not what cities are after, and never will be,” Haselmayer said. “Our goal should be a world where cities have the realistic ambition to be third adopters: Buy something that is proven elsewhere, but don’t let 40-plus years go past before you get it.”
This approach would result in communities seeing the quality of services and effectiveness grow much faster. It would also dramatically affect the vendor ecosystem and stimulate perhaps trillions of dollars’ worth of private investment and competition.
How Startups Should Think about Their First Customers
There are problems in the way startups think about their relationships with cities too.
Startups, young and resource-strapped, can’t be everywhere and must be very deliberate about their early growth strategies. This includes picking their first customers. In other words, cities must compete for opportunities to work with startups too.
Our 2017 Business-to-Government SaaS Global Survey found that more startups are selling to medium-sized cities (populations of 100,000 to 1 million) than large cities (populations greater than 1 million). Of the respondents working with large cities, more than half indicated they are also interested in working with small cities. Less than 30 percent are solely focused on large cities.
“Depending on the business model, the lifetime value of a customer (small versus large city) varies massively,” Haselmayer said. “For example, if your business model is to onboard users in government across departments, New York City would have at least 20 times the value of Syracuse, N.Y.”
But there’s value in smaller customers too.
“We also pay attention to the reputation of the customer as a reference. As an ambassador, how can they contribute to our brand? That has worked well for us, since it meets an aspirational need in smaller cities, for example, to deploy tools validated in well-run cities,” he added.
In the end, startups have something to gain from working with a blend of small and larger jurisdictions, despite the challenges presented by city RFP processes. It can be easier to build relationships with smaller cities as they often don’t have as many stakeholders involved. Second, the aggregate speed of acquiring new customers can help a startup signal growth, making it easier to raise money. Finally, larger cities have the advantage of room for meaningful growth within the same organization.
Stonly Baptiste is a partner in investment firm Urban Us.