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Is Gov Tech a 'Safe Haven' for Investors in Uncertain Times?

With many stocks taking hits and investors fretting about the possibility of a recession, gov tech market adviser Jeff Cook explores whether uncertainty is pushing investors toward the stability of gov tech.

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Whenever someone has posed the question “Why is there so much interest in the gov tech space?” there is one theme that comes up every single time — the durability and stability of gov tech as a category. It may come as no surprise that, despite the doom and gloom dominating the finance and technology headlines, the gov tech market has not seen a major downturn in activity from the “good times” of 2021. In addition, valuation multiples have generally held from 2021 levels, with many deals in the first half of 2022 (and notably in the most recent quarter) getting completed at or near the record-setting multiple of 2021. In Q2 2022, we tracked $2.9 billion in deal volume, an almost 4x increase over Q1 2022 volume of $850 million, although still short of the record-setting $4.5 billion quarter a year ago in Q2 2021.

To use a metaphor, gov tech is more the tortoise in the technology world — consistent, steady and reliable through economic cycles — versus the hares chasing growth at all costs in other sectors of technology. And in today’s climate of economic uncertainty, capital is quickly migrating to durable segments like gov tech. So, what makes gov tech a “safe haven” relative to other sectors of technology?

  • Loyal and reliable customers: Gov tech companies retain the vast majority of their customers each year (95+ percent on average, from our internal data) — in contrast to private-sector organizations, governments do not go out of business, are not merged into competitors and they pay their bills.
  • Predictable business models: Because there is little revenue churn in the market, business models tend to be very predictable. Gov tech companies tend to have very high recurring revenues (75+ percent on average) which, paired with high revenue retention rates, creates a large base of revenue that can be relied on to show up every year. Gov tech companies can look at the year ahead with confidence and know what revenues will be coming in, then manage costs accordingly.
  • “Must have” for government operations: Regardless of the economic climate, governments still have to budget, issue permits, repair potholes, respond to emergencies, investigate crimes and everything in between — and there’s little ability or appetite from government agencies to rip out the system enabling that process. Because of this, the solutions gov tech companies sell are more “must have” than “nice to have,” underscoring the high revenue retention. In addition, adoption of gov tech solutions creates efficiency within government agencies and it’s still not uncommon to displace manual, paper-based processes. Technology adoption enables governments to do more with less, which takes on even more importance in a downturn if budgets are slashed.
  • Founder-owned, bootstrapped DNA: While there is more early-stage venture capital entering the market, the majority of gov tech companies started out as founder-owned businesses that were bootstrapped (i.e. not heavily funded with institutional capital), investing only the profits they generated every year and creating an operating mindset characterized by discipline and efficiency where every dollar matters. Most of the gov tech companies we have seen, regardless of scale, are either breaking even or making money — efficient, profitable operations are part of the DNA of this market.
  • Profitable, “lean” business models: Most gov tech companies turn a profit and do so early on because they run relatively “lean” from a cost perspective. First, gov tech companies generally do not over-invest in sales and marketing because there are practical limits to how fast they can efficiently grow, in large part due to the longer sales cycles endemic to the market. As an example, the largest gov tech companies spend 15 percent to 20 percent of their revenues on sales and marketing, vs. 40+ percent of revenues for their counterparts in private sector, based on our internal analysis. In addition, gov tech companies are found across the nation, typically not concentrated in the high-cost coastal cities where personnel and overhead costs are materially higher, keeping development and G&A costs much lower than other tech companies. When paired with high recurring revenue and high gross margins, it’s a recipe for great profitability. And profitability is imperative to help weather the storm in times of economic uncertainty.

More simply put, it is a market landscape of companies that balance growth and profitability with better-than-average customer and employee loyalty that underpins their business. It’s not a market awash with war chests of “grow at any cost” capital trying to scale rapidly. This translates to gov tech as a category having the metrics and cash flow to weather the storm, and, although growth may slow in an economic downturn, most operators and investors can sleep soundly at night knowing customers will not start leaving en masse (in contrast to what tech companies in the private sector may experience).


The other reason that activity has and will continue in the gov tech category is the interest and influence of private equity on the gov tech market. Private equity firms have $1.8 trillion that has been raised and needs to be invested — their capital has a countdown timer and needs to be put to work. In times of economic uncertainty, there is less appetite for risk, and so capital gravitates toward the sectors and companies that are predictable and have a lower-risk profile — gov tech.

We are seeing this firsthand — we have heard from more investors than ever who are actively looking to invest in the gov tech market this year versus in past years, and the rate of participation of private equity in our processes is as strong as ever. This likely will be a continued catalyst for new standalone investments, as well as strategic activity, given many of the largest gov tech businesses are backed by private equity. And this is not to suggest that gov tech will see no impact, as the cost and availability of debt and the trickle-down effect of public market valuations into private markets are market forces that we watch intently, but overall we remain bullish and enthusiastic about the activity in the coming quarters.
Jeff Cook is a managing director at Shea & Co., an investment bank that has advised in more than 20 gov tech deals (investments and exits) in the past 5 years.