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Gov Tech Market Gains Steam, Breaks Records in 2021

From permitting and licensing to public safety and artificial intelligence, the market for tech companies serving state and local government hit record M&A highs in 2021 — and it's just getting started.

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To get a sense of how hot things have become in the government technology space, turn to Ron Bouganim, the managing partner of the Govtech Fund, which since its launch in 2014 has invested in 30 companies.

“It’s intense,” he said in late October at a conference in Austin where entrepreneurs, investors and government officials networked as they took stock of recent industry growth. “These past six months, I’ve never seen anything like it. There are more citizens every day who are digitally native and expect a certain level of service. COVID just dumped gas on the fire.”

Data from Government Technology supports his view: An analysis from Jeff Cook, a managing director at Shea & Co. and another industry expert, suggested that in the third quarter of 2021, transaction volume for gov tech deals hit approximately $2.2 billion, with strategic acquisitions driving much of the activity.

That’s hardly the whole story.

Earlier in the year, for instance, came the blockbuster $2.3 billion Tyler Technologies acquisition of NIC — combining two of the most established companies in this space — along with CivicPlus winning a $290 million investment from private equity firm Insight Partners, a deal that not only underscores the amount of capital flowing around in gov tech, but the increasing importance of digital citizen engagement tools.

The new year will bring a continuation of such investment and merger-and-acquisition activity, though with changes both subtle and potentially significant. The gov tech market will stay hot, responding to a variety of factors, but market experts are already anticipating the shifts to come — and all this as public-sector buyers of technology figure out what it means for them.

According to a Government Technology count, 2021 had seen more than 30 mergers and acquisitions as of mid-November, outpacing previous years, according to investors.

As for transaction activity, the Q3 figure of $2.2 billion is down from $4.5 billion in Q2, with Q1 transaction activity reaching $3 billion. According to Cook, the number of announced transactions in the third quarter of 2021 was comparable to prior quarters, but these more recent deals lacked large transactions like Tyler-NIC.

“In the second half [of 2021], businesses were turning their attention further down market,” Cook said. As he looks toward 2022, Cook says he anticipates a continuation of that trend: a high volume of deals, though with lower average deal sizes. “The acquirers who’ve been active will continue to be active.”

There are more citizens every day who are digitally native and expect a certain level of service. COVID just dumped gas on the fire.
But buyers of gov tech, along with investors, should be on the lookout for a new class to rise, so to speak. Fresh consolidators are certain to emerge, and the example of perhaps the biggest deal yet in gov tech — Tyler’s acquisition of NIC — could help steer activity in the near future.

“The big ones are almost trying to be the next Tyler,” said Steve Ressler, a gov tech adviser who recently took on the role of strategic adviser for Clariti, a permitting and licensing company that sells to state and local governments. “As long as the macro-economic [climate] continues, even in a slight downturn there will be a lot of folks investing in government technology, in large part because of its stability.”
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It pays to take a step back and review the factors that have fueled this growth so far, and how they will play a role in how the gov tech market develops over the next year or more.

One of them, as Ressler indicated, is that governments, for as slow as the bureaucracy can be, are often more
stable sources of sales and returns than other areas of the economy. Governments cannot stop operating.

Another major reason for all this activity is pretty simple, and similar to changes happening in the broader economy in such industries as health care, insurance and B2B commerce.

“There is a lot of under-penetration of tech and a lot of old business models,” said Chris Grizzard, director of Bayshore Capital, of the gov tech market, highlighting one of the main reasons that the space is attracting so much money and so much entrepreneurial interest.

He made his comments at the event in Austin — the inaugural InState GovTech Summit — where speakers and participants talked in depth about how the demands of the pandemic accelerated digital efforts among public agencies. The general theme is that those efforts were already ongoing, but the need to quickly set up remote workforces, or virtual public meetings, or web-based citizen engagement, added steam to that push.

Even as the pandemic fades — hopefully — its influences will continue to be felt, according to Meredith Ward, director of policy and research for the National Association of State Chief Information Officers (NASCIO), in comments made to Government Technology independent of that conference.

“Many procurement processes were streamlined last year as COVID-19 governor emergency orders were in place, but most of these orders have since expired,” she said. Still, “there are many practices put in place during these emergency orders that have the potential to have a lasting impact on state IT procurement processes.”


How gov tech develops over the next few years depends on much more than the pandemic, of course. Among the other main factors that will shape investment, M&A activity and how public agencies deploy and buy technology is the broader move toward cloud computing and software as a service.

One recent example of the trend’s importance — and how it could play out in 2022 among state and local governments — came from Google.

The search and online advertising giant is not exactly a gov tech firm, but in early November it announced the launch of a cloud-based “sandbox” called the RAD Lab that could help public agencies test and develop their own tools.

The lab offers an open source environment where governments, along with laboratories and universities, can quickly set up cloud environments for research projects, develop and test new technologies through trial and error in a secure environment, and receive support from Google professionals. Clients pay on a subscription basis, which Google says reduces the risk of cost overruns, a prime concern for new technology deployments.

“For state and local governments, the pandemic has driven an upsurge in innovation, and that shift is here to stay,” said Emma Fish, head of education programs and business development of public-sector cloud at Google. “Many [of those agencies] are thinking about how to upscale and support technology teams.”
As long as the macro-economic [climate] continues, even in a slight downturn there will be a lot of folks investing in government technology, in large part because of its stability.
Of course, direct sellers of cloud-based and SaaS tools will try to gain more governmental clients and more market dominance in the coming year as the market further develops. The opportunity is lucrative, at least going by the priorities mapped out by state and local governments themselves.

The Center for Digital Government's* 2021 surveys of both cities and counties indicate a lot of movement to the cloud. About one-third of cities report that at least 30 percent of their systems and applications are already in the cloud. The percentage for counties at that same stage of cloud migration is about 26.

More interesting still is what the data reveals about the future: namely that there is still much more opportunity in the cloud. More than three-fourths of city technology leaders report that 30 percent or more of their IT infrastructure can eventually move to the cloud. And that number holds for counties as well.

And while digital surveys tend to attract responses from leading jurisictions, for investors and entrepreneurs, such data shows how important the cloud is and will become in the government technology space in the coming years.

“The market is going through a big change, crossing that chasm into the cloud and into software as a service in a big way,” said John Thomson, founder and CEO of PayIt.

The Kansas City, Mo.-based company sells digital payment and other services to governments and continues to expand while using technology from Amazon Web Services. Amazon, like Google, is also striving to capture more of this market, another illustration of how big tech is trying to realize more revenue from the gov tech space, a trend that is certain to hold.
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As the PayIt example suggests — the company recently expanded into Canada, and Thomson envisions a range of digital tasks that the firm can provide citizens, such as citation and ticket payments — the next year or two promise to showcase more tech providers widening their product offerings.

Indeed, as Cook, the investment expert, pointed out, citizen engagement and digital services enjoyed most of the M&A focus just a few years ago. But now the activity covers a much wider range of public services, thanks in large part to the cloud and SaaS.

One area is public safety — law enforcement, fire protection and medical response, along with an increasing focus on disaster response as wildfires, hurricanes and other natural events turn more severe. Tech providers are offering more products with real-time data and video feeds, platforms that can be integrated by multiple agencies and even artificial intelligence.

According to Stewart Lynn, a partner at Serent Capital who leads its gov tech practice, a startup called First Due helps to illustrate how the market is evolving.

The five-year-old company’s goals seem ambitious: give firefighters more intelligence about fire calls while improving other IT systems those emergency responders rely on when they aren’t on a call. First Due also aims to serve emergency medical services agencies and police.

The market is going through a big change, crossing that chasm into the cloud and into software as a service in a big way.
The company has won funding from Serent, and for Lynn, that decision boiled down to a few points that offer examples of how investors are thinking about gov tech going into 2022.

“First Due was started to solve a specific pain point in the market that other record management software players weren't addressing: pre-incident planning,” he said. “Before First Due, most agencies had binders that sat in fire trucks that provided information about each building in their jurisdiction. First Due digitized that information and pulled in additional data sources to provide fire crews with critical information before arriving at the scene.”


As investors seek out more young companies that address specific pain points and offer end-to-end platforms, the government sector itself is shifting, a trend that promises to play a role in buying and deployment decisions, according to experts such as Lynn.

He called it the changing of the guard.

“Many private-sector folks are finding new roles within government and have understood that the current systems in place are very antiquated and in need of an upgrade,” he said.

Related to that, he said, are changes among residents served by new technology — another trend likely to catch speed over the next few years.

“As citizens have become more active online, you're seeing governments being responsive to their citizens' needs,” Lynn said. “Citizens today want the ability to go online and buy their permit, process their payment, understand what's going on with budget spending. And governments are responding to that demand by investing in digital solutions.”
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None of that means the ongoing growth in the gov tech market has every area perfectly covered. Hurdles and holes always remain.

For one thing, better gov tech means much more than new software or cloud-based applications, according to Rita Reynolds, chief information officer for the National Association of Counties.

Similar to what investors and entrepreneurs were saying at the Austin conference in late October, Reynolds talked about how attracting the right talent will play at least a short-term role in technology development and deployments.

“Counties are faced with resource [people] limitations as well as learning new skills and knowledge to maintain and support the newer approaches to technology,” she said.

That would seem to speak to at least one reason behind the launch of that Google cloud-based sandbox. But a public agency — much like a startup — can only do so much without the right people.

Security also stands as a prime concern for public agencies as the gov tech landscape expands and takes in more startups. According to Reynolds, technology sellers need to do more to ease the concerns of clients.

“Government technology vendors must be willing to update their terms of service and contracts to accept their responsibility and ensure that baseline essential security practices are in place to secure what they are hosting and providing to counties,” she said.

Reynolds said counties increasingly are moving email, finance, budget, payroll, assessments and other applications to the cloud. Those units in government are also looking for ways to better sustain remote workforces, which will lead to more technology sales, especially for video, security and communication tools.

As for Ward, from NASCIO, she said that technology is a part of just about every government project these days — from the study of so-called “murder hornets” in Washington state to the ongoing fight against opioid addiction in Pennsylvania, to name just two recent examples.

But states could do more to get more technology — cutting-edge technology — into play, moves that could add more fuel to the growth of the market, she said.

Those moves include pre-approved vendor pools; master contracts; increased use of cooperative agreements; digitization and automation of procurement processes and procedures; streamlining of approvals and rapid purchasing; and discontinuing “outdated” policies like unlimited liability and performance bonds.

Like Reynolds, Ward also urged gov tech vendors to do their part to ensure even more growth in the years to come.

“Vendors must continue to work with states on more flexible terms and conditions and other procurement-related aspects,” Ward said. “It is true that states have several mandatories and laws in place that can make doing business with state government challenging. However, states are working towards modernizing the acquisition process and are looking to the private sector for partners, not just a supplier of things or services.”
Thad Rueter writes about the business of government technology. He covered local and state governments for newspapers in the Chicago area and Florida, as well as e-commerce, digital payments and related topics for various publications. He lives in Wisconsin.