Gov Tech Biz Quarterly Roundup: Q1 2022 With Jeff Cook
Although the dollar amounts were down relative to last year's blockbuster deals, the number of transactions has remained high with activity from Avolve, NEOGOV, RapidSOS, ClearGov, Tyler Technologies and more.
RECAPPING Q1 2022
There was no slowdown in transaction volume in the gov tech market in the first quarter of 2022 following 2021’s torrid pace of activity, although overall deal value was down.
In Q1 2022, we tracked approximately $850 million in deal value, versus approximately $3 billion a year ago in Q1 2021, though with a similar number of transactions. It comes as no surprise that deal value declined this quarter given that almost every quarter in 2021 saw a transaction of at least $1 billion (e.g. Tyler’s $2.3 billion acquisition of NIC in Q1 2021). Put simply, there are still not that many gov tech “unicorns” (yet), and nearly all of them transacted in 2021, so we expect total deal values this year to be below 2021’s record-setting activity. Despite that, the market remains vibrant, and Q1 2022 saw considerable activity though of smaller scale.
One of the trends we expect to define 2022 is the formation of the next generation of consolidation platforms. What’s a platform? It’s a word we use frequently to describe a specific type of company in the gov tech space, and can be defined as a business that is backed by institutional capital, that has customer and revenue scale, and is highly acquisitive in consolidating its segment of the market (and starting to expand into new markets). Many of the larger “platform” businesses that transacted last year walked a similar path in achieving large scale, which is roughly something like the following:
- A $10-$20 million revenue business with one or two major products in a small segment of the market takes institutional funding (typically private equity) with the express purpose of being more acquisitive.
- A period of sustained M&A follows the investment, with acquisitions to both add market share by buying direct competitors as well as to expand its total addressable market by adding strategic, adjacent products.
- After three to five years, considerable scale has been achieved through M&A, the market has grown larger and the addition of new products helps accelerate organic growth through the ability to cross-sell new products into the existing customer base.
- A strategic or larger private equity firm buys the business and, in the latter case, repeats the strategy but at a larger scale.
While the above oversimplifies the unique journey of every company, some version of this story was at work for many of the larger businesses that transacted last year — CivicPlus, Granicus, ESO, NEOGOV, Government Brands, Vector Solutions, Lexipol, Tyler and NIC, to name a few.
Today, we view the market as ripe for the formation of the next generation of these platform businesses because: 1) There is a huge universe of smaller, product-centric gov tech businesses that are getting to interesting revenue scale; 2) The consolidation that happened last year saw many highly acquisitive businesses get gobbled up by larger strategics; 3) The larger platform businesses have gotten so large that many have outgrown the small acquisitions of businesses with less than $10 million in revenue; and 4) There is more capital than ever sitting on the sidelines, much of which is in the hands of investors who are experienced in building platforms, have a thesis on the gov tech market and who have the confidence of seeing the strong performance of the platform businesses that started years ago.
Why it matters: Approving and issuing development and building permits to businesses and residents is a central function of local government, but one that has faced backlogs and delays as the pace of applications has outpaced governments’ ability to process them. It is an important constituent-facing process and also an important revenue process for local government. Accordingly, it comes as no surprise that community development emerged as one of the larger and faster growing segments in gov tech as governments invest in technology to drive more efficiency through the permitting process. While there has been considerable activity in the more mature licensing and permitting space, a quieter market (until now) has been the fragmented electronic plan review software, focused on increasing the ease and efficiency of the complex plan approval process that needs to happen before a permit is issued, a process that today is still heavily paper-based.
A classic example of establishing a platform, the merger of Avolve and and U.K.-based DigEplan creates a scale leader in electronic plan review, and one with global reach. As part of the transaction, Polaris Growth Fund made a strategic investment in the combined business. Polaris Growth Fund has been among the more active investors in the gov tech market, having previously invested in CityWorks (acquired by Trimble), Emergency Reporting (acquired by ESO) and B2Gnow.
NEOGOV Acquires PlanIt Schedule, Agency360 and CueHit
Why it matters: NEOGOV simultaneously announced the acquisition of three separate public safety firms, PlanIt Schedule (scheduling software), Agency360 (field training) and CueHit (citizen engagement and feedback). These acquisitions, in conjunction with NEOGOV’s 2020 acquisition of policy management and accreditation provider PowerDMS, creates a broad workforce management suite for public safety. The acquisitions are a continuation of the consolidation in the public safety workforce management segment, and follow significant M&A activity from competitors Lexipol and Vector Solutions in 2021.
ClearGov Receives Growth Investment from Frontier Growth
Why it matters: Budgeting and planning has become a front-and-center segment in gov tech as governments move away from Excel-based budgeting and towards purpose-built software solutions, a need that should accelerate as local governments look to deploy the influx of federal and stimulus funding. ClearGov announced a $20 million growth investment from active gov tech investor Frontier Growth, who formerly invested in GovQA and PowerDMS. Momentum in the budgeting space is evident from the pace of investment activity, with other budgeting vendors including OpenGov, Munetrix and Forecast5 announcing transactions of their own in the last year.
Brandt Information Services Acquires Terra Technology Group
Why it matters: Outdoor recreation has seen an inflection in growth through the pandemic as more people sought out outdoor activities, which has spurred further investments in technology solutions to help manage additional demand, improve visitor experience as well as attract additional consumers. The first of two notable transactions in this segment in Q1 was Brandt Information Services’ acquisition of Terra Technology Group. Brandt, backed by NexPhase Capital, has been a share-taker in outdoor recreation, and the addition of Terra Technology adds both additional state customers as well as a broad set of capabilities for governments to manage outdoor licensing, permitting and reservations.
US eDirect Acquired by Tyler Technologies
Why it matters: The second transaction in the outdoor recreation space was Tyler’s acquisition of outdoor recreation software and payments provider US eDirect. Notably, US eDirect was Tyler’s first stated acquisition through NIC (which it plans to integrate with NIC’s payments platform) following NIC’s acquisition by Tyler last year. The Tyler/US eDirect and Brandt/Terra deals are the latest in a string of transactions in the outdoor recreation space, with other notable competitors such as Aspira (investment from Alpine Investors) and Kalkomey (investment from Cove Hill Partners) announced in the last two years.
RapidSOS Receives Strategic Investment from Honeywell
Why it matters: RapidSOS announced receipt of its investment from Honeywell less than a year after announcing its $85 million investment from Insight Partners. The transaction follows considerable investment in comparable businesses over the last year (e.g., Mark43, Carbyne, RapidDeploy, SOMA, etc.), but is notable in that it was led by Honeywell. Next-generation emergency response is predicated on connecting the existing network of both software and hardware providers, as well as both the public and private sectors, and accordingly we believe strategic investments like Honeywell’s will increase in frequency as larger strategics look to influence the development of the ecosystem.
PUBLIQ Software Acquired by Springbrook
Why it matters: Springbrook (backed by Accel-KKR) announced its second transaction in as many quarters as it has continued to build its platform around its core ERP offering, following its 2019 divestiture from Accela. The latest deal was the acquisition of PUBLIQ Software (itself a divestiture from RedSail Technologies), a provider of computer assisted mass appraisals (CAMA) and tax software to local governments. The CAMA and tax market has seen growth in the number of consolidators, with both Vision Government Solutions and Government Brands announcing transactions in the last year.
CoProcure Raises $22 Million Series A
Why it matters: Government procurement is infamously slow, complex and expensive for vendors, and it’s been no surprise that a number of startups have tried to introduce technology to increase the ease, efficiency and transparency of the procurement process. In 2021, nearly every quarter saw a procurement tech deal, with notable ones being ProcureNow (acquired by OpenGov), Periscope (acquired by mdfCommerce), and SmartProcure (acquired by Thompson Street Capital). CoProcure is one of many entrants into the market demonstrating meaningful traction, raising a large Series A round of $22 million, its first funding round since its $2.4 million seed round in 2020.
Logically Raises $24 Million
Why it matters: Logically announced a $24 million funding round led by Vitruvian Partners, with participation from the Amazon Alexa Fund, XTX Ventures, and the Northern Powerhouse Investment Fund. Logically combines open-source intelligence (OSINT) capabilities and human fact-checking expertise to provide a unique solution that aims to curb the spread of misinformation across the public media landscape, enabling customers to protect against online threats to national security, public health and election processes. This funding round will enable Logically to continue to expand their technology capabilities and geographic presence.
Juvare Acquires Nusura
Why it matters: Juvare, a provider of emergency preparedness and response solutions, acquired Nusura, which marks Juvare’s first acquisition since receiving a majority investment from Five Arrows (the private equity arm of Rothschild & Co.) in mid-2020. Nusura enhances Juvare’s coverage of the national defense and federal emergency management segments and adds new product capabilities, including SimulationDeck, an application that enables customers to conduct training exercises on a simulated Internet environment. Pre-incident preparedness is critical for effective emergency response and management, so we expect to see continued consolidation in the category as the larger public safety platforms build out their portfolios.
Cardinality.ai Receives Growth Investment from Attain Capital Partners
Why it matters: Cardinality.AI, a provider of AI solutions to health and human services organizations, announced receipt of its first institutional funding led by growth equity firm Attain Capital Partners. The investment comes a quarter after Cardinality.AI acquired ClearCycle.