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Gov Tech Buying Frenzy Likely to Continue in 2022 and Beyond

One market expert expounds on the combined influences of the pandemic and multiple federal spending bills — and why 2022 will be the year the gov tech ecosystem gets real at the grass-roots level.

Local government is at the core of people’s lives, but as lockdowns and other COVID-19 containment measures hit in March 2020, many struggled to withstand the shock. Like many industries, the pandemic highlighted flaws in public-sector services and accelerated the need for the adoption and implementation of new technologies. As the shock lifted and post-COVID reality set in, states and municipalities realized they could no longer wait to get in front of challenges that are clearly here to stay.

After years of grappling with underinvestment and service and technology gaps, 2021 has brought about a major dynamic shift. On the demand side of the ledger, there’s big money to be spent. With robust emergency stimulus measures passed in response to the pandemic in 2020 and 2021, followed by the massive infrastructure bill enacted in late 2021, there’s a surge of money flowing out from Washington to the nation’s local governments to improve services and increase efficiencies. That money spurred an already huge investor appetite for gov tech businesses offering lightweight, simple solutions that make life easier for local government workers and the citizens they serve.

As that money trickles down to the state and local level, we see multiple trends at play that lead us to the firm conviction that the robust merger and acquisition activity for innovative gov tech companies will continue — at least through the current four-year election cycle. Exit or growth-minded operators in this space need to be actively considering their options because the time to move is now.


It’s well known that government and public-sector agencies have lagged their private-sector counterparts in IT spending and adoption — nowhere moreso than at the local level. The prevalence of outdated and siloed IT solutions across all levels of government is a primary reason many agencies still require business to be conducted in person and rely on that relic of 1980s and ‘90s communication: the humble fax machine. The pandemic did its part to highlight the need for increased automation as the abrupt demand for remote solutions exposed the extent to which many local governments were still doing things manually.

As just one representative example, for a municipality that was still accepting cash and check parking fine payments solely in person or by snail mail, COVID-19 shutdowns and distancing rules were both a rude awakening and an opportunity to modernize.

Help is on the way, led by the federal government and its big spending bills. In March 2021, Congress infused $1 billion into the Technology Modernization Fund as part of the American Rescue Plan, pushing federal agencies to address urgent modernization challenges. The Biden administration is looking to boost it further in FY 2022 by adding another $500 million to the effort along with $2.8 billion in IT spending for the State Department, where improving cybersecurity is a key priority.

Meanwhile, IT spending across states and localities is expected to exceed $118 billion this year as American Rescue Plan funds are distributed and put to use. Capital infusions of this kind only add fuel to the M&A bonfire that continues to rage.


To date, the biggest gov tech companies providing tech-based solutions at the local level — companies like Tyler Technologies, Granicus and CentralSquare — have scaled by building integrated solutions for large, complex municipalities that must address idiosyncratic needs and use cases across diverse populations.

These companies have generally struggled to move down-market. Their solutions are frequently too complex and too expensive for smaller cities, towns and counties. Startups with user-friendly solutions that follow a rough version of the 80/20 Rule (in this case, covering 80 percent of use cases at 20 percent the cost of a custom solution) are positioned to thrive at this level of the marketplace.

Entrepreneurs see this opportunity to create lightweight solutions for local municipalities. Open source software platforms and widespread adoption of cloud solutions have sparked innovation aimed at encouraging local government employees to rethink almost every aspect of how they do their jobs.

The value that can be unlocked via simplifying complexity is vast. However, companies operating in this space are frequently undercapitalized and unlikely to attract the attention of VC investors because of the heavy lift required to reach key milestones — like $10 million in annual recurring revenue (ARR).


This is where private equity enters the story, eager to use its capital resources to drive the consolidation of local-government SaaS solutions, innovation and the optimization of service suites. All the hallmarks of classic private equity investment are at play:

  • A massive addressable market: One-third of U.S. GDP is spent by all levels of government, with the bulk of government IT spend occurring at the state and local levels.
  • An anti-cyclical play: Local governments have the ultimate reliable revenue source in the form of taxes and state and federal funding — the demand for their services is evergreen.
  • Underserved populations: With 90 percent of municipalities below 30,000 in population, operationally sound, low-cost and sticky gov tech solutions that target underserved municipal governments are in high demand.
  • A huge disruption opportunity: Operational consolidation of solutions in a single platform offers the opportunity to bundle and monetize a relationship with a single municipality many times over via a suite of product offerings.
  • Desirable metrics: Government and other public-sector institutions are generally resistant to change, making them the most desirable SaaS customers and allowing well-run providers to achieve robust levels of logo retention, net dollar retention and ARR.


The surge in gov tech M&A activity has continued, with deals spanning every nook and cranny of the space. Now, the next wave of consolidation is upon us.

We see 2022 as the year when private equity platforms and integrators begin to gather and bundle best-in-class SaaS solutions that address the core needs of local governments serving populations under 100,000.

Company owners addressing smaller municipality challenges with straightforward, simple and affordable technology will have opportunities they have never seen before — capital to grow and/or partner with larger platforms needing specific, integrable solutions.

Douglas (“DJ”) Palmer, Jr. is a director at Ascend Capital Group, a middle-market investment bank with a focus on gov tech. He has worked with some of the most reputable technology companies in the world, having completed over $3 billion in M&A transactions.