Investor interest is helping to point a lot of startup energy at government. Does this mean there's a place for innovation at city hall?
When SeamlessDocs came to life in 2012, “there was no such thing as government-focused investors,” recalled CEO Jonathon Ende.
In its most recent round of funding, the company, whose products help government implement electronic forms management, raised $7 million from investors including Govtech Fund, 1776 and Motorola’s public-sector investment arm, Motorola Solutions. All these funds play specifically in the government arena.
“It shows that people see us not just as a great gov tech business, but as a great business. We and others have been showing that you can build a real business, a strong business, that is focused solely on government,” Ende said.
The rise of gov tech is evident in the numbers. Govtech Fund estimates a $400 billion market for products that help make public agencies more effective, while helping citizens interact more efficiently with government.
What’s happening to drive the rise of gov tech? What kinds of companies are leading the pack? What are investors looking for? And what should government IT leaders be doing in the face of this rising tide?
The rise of gov tech is being driven in part by the usual concerns of government: the need to provide services while acting as responsible stewards of public funding. But there’s more to it than that. For one thing, the rise of new consumer technologies is helping drive the train.
Gov tech is rising fast, an industry coming into its own. Who are some of the leaders in this emerging field? Here’s a representative sampling …
CityGrows aims to bring collaboration and transparency to governments and public institutions. The company helps its clients develop “process templates,” a simplified outline spelling out the steps in a given activity, everything from getting a manager’s approval to assigning a case manager. With its cloud software for government employees, CityGrows claims these uniform processes will make people more efficient and less error-prone. It’s all automated, and the cloud-based nature of the tool allows for collaboration among teammates engaged in a common process.
“At least here in California we are all surrounded by technology in our daily lives, so that now it is permeating all the thinking of government leaders,” said Kish Rajan, chief evangelist at technology and innovation advocacy coalition CALinnovates.
Popular technologies are boosting citizen awareness and expectations, while spawning a new generation of government professionals who already accept technology as a solution to many woes. “There are more and more people coming into government who have that blended background of technology and public service, who are accustomed to seeing technology as a driver of change,” Rajan said.
Chief data officers, innovation officers, digital officers — all these are “bringing that kind of talent and innovation in city government, so that it has changed the way cities think about technology and the kinds of firms they want to partner with as they deploy that technology,” said Rajan.
What kind of firms are we talking about? From the investors’ point of view, they are the companies that can make money.
Omidyar Network has invested about $100 million in gov tech over the past decade. As demand for these products has swelled, Omidyar’s criteria have remained largely the same. The network backs companies that have a big potential market, a reasonable sales cycle and the ability to scale.
As to potential volume, “the sky is the limit,” said Omidyar Investment Partner Stacy Donohue. Government is vast, with endless areas of activity in which technology could move the needle.
Vertical needs. Beyond sheer scale, Omidyar also has begun to look at more vertical niche markets within government. “There are a lot of solutions coming to market in human and social services, for example,” Donohue said. “There are incredible inefficiencies in things like food assistance that can be addressed, or you may have companies targeting a particular population — for instance veterans — and building a platform to give them access across the entire spectrum of available resources.”
Local awareness. At CALinnovates, Rajan said that some of the strongest firms in the gov tech world are those that hone their solutions to meet specific local needs. “There are so many huge public problems, health and water and transportation,” he said, “but when you are on the city council it becomes potholes and parking, the truly local issues.”
Automation. At consulting firm PricewaterhouseCoopers, U.S. Public Sector Technology Consulting Leader Jeff Kaplan said the gov tech market increasingly favors companies whose offerings help government to go hands-off on certain tasks. “One of the top items on any government budget is labor, including contract labor. So anything that can reduce the labor requirement has a large attraction,” he said. “That may be automation, workflow, or the management of sustainment costs and maintenance expenses inside the IT shop.”
While these examples sketch out a range of possible approaches, some investors still have found it challenging to predict the likely trajectory of this still-emerging market. Gov tech is a newborn sector and a lot of questions remain as to what government will need or want or be able to buy, and which firms will likely be best positioned to meet those needs.
“We have invested in technology that is just for law enforcement or first responders, but if you had asked me six months ago whether I would have picked them first, I would have said no,” said Shaun Abrahamson, managing partner at the $10 million venture enterprise Urban.Us.
“Sometimes it still is like a SpaceX launch,” he said. “There’s a very good chance it will explode on the launch pad, and then when it does work people go: ‘Oh, commercial space flights.’ There is the moment where you just have to try it and see what happens.”
Because the market is so raw, investors often see mixed signals. “We can look at a company that says it can do permitting workflow or parking enforcement, and these might be interesting if we can see productivity improvements,” Abrahamson said. “But there often is a downside. Can you deploy them fast enough? Is there too high a level of customization? Are there pricing issues that make it difficult to sell?”
So the matter of winners, losers and possible contenders remains for now a very open question.
As hard as it may be for gov tech investors to separate the wheat from the chaff, companies themselves have an equally high hill to climb in their efforts to hawk their wares in the municipal marketplace. Contrary to conventional wisdom, just because the tide is rising, that doesn’t mean all boats will float.
First there is the matter of access, something not easily achieved in the meandering corridors of city hall. “You still have to get to whoever the top technology and information officers are,” Rajan said. “The heads of administration, the politicians, they may all be very interested in telling a technology story. That’s becoming more politically attractive. But the technology leaders still have to be engaged.” After all, they will be the ones to implement.
Even with a foot in the door, closing the deal remains a significant challenge. For many gov tech startups, “the main theme right now is the procurement issue, the long and arduous process of contracting with government,” said Lawrence Grodeska, founder and CEO of CivicMakers, a technology and consulting services firm working with both gov tech vendors and municipalities.
Besides keeping promising technology from getting into play, these procurement issues may in fact be stymieing the development of more and better products for government. “That barrier right now prevents younger, more nimble companies from being able to develop creative solutions,” Grodeska said.
In response to the problem, some governments are aiming at reform, trying to streamline processes while still safeguarding public funds. Many tech firms in the meantime are simply trying to get in below the radar, pricing products low enough to avoid meeting the threshold that would require an RFP.
“Instead of a fixed-price contract they will do a seat-based license, where you pay for only for what you use, so that it can be paid through petty cash or credit card expenditure,” said Grodeska. “That way it can be spent across different budgets and different line items.”
Even as they try to enter the marketplace, many startups are working on the back end to secure venture backing. Here too it’s a tricky business. “The public-sector business is a long game. Many investors may not have the patience or the resources to play out that game,” Kaplan said. Tech startups need to make their case, especially among investors unfamiliar with the gov tech market. “Yes, it is a long process. But the payout of capturing a public-sector technology market can be tremendous.”
Investors must vet prospective firms. Startups must beat at the doors. Who’s missing? Government IT leaders, the ones who will be tasked with putting all the pieces together — and they are going to need backup.
“The demands on IT are only going to grow, and they are going to grow rapidly over the next five years,” said Rajan. To weather the storm, “you need trusted partners, you need existing relationships with trusted consultants, you need systems integrators, you need a technology road map that is well thought out and well underway.”
Given the relative novelty of the gov tech space, some say IT leaders would do well to look for guidance from those who have taken the first steps. “They can seek the support of colleagues and peers who are blazing these trails,” said Donohue. “There are people on the front lines of innovation in city government. There are cities that are well known for creating these innovation offices. It can be extremely helpful to reach out to some of those cities and to share what everyone is learning.”
Editor's Note: This story was updated July 25 to reflect that Omidyar Network has invested nearly $100 million in civic tech.
Startup in Residence Is Back and Expanding
By Jason Shueh
The partnerships were announced as part of the San Francisco Mayor’s Office of Civic Innovation’s Startup in Residence Program (STiR). After a two-year hiatus, the program returned officially in January with support and participation from the nearby cities of Oakland, San Leandro and West Sacramento. The group intends to borrow the startups’ entrepreneurial flair for problem solving by physically embedding them inside city departments for 16 weeks, tasking them with co-developing solutions with staff and presenting them at a demo day this September.
San Francisco Chief Innovation Officer Jay Nath said the second iteration of STiR (formerly known as the Entrepreneur in Residence program) builds on the city’s long-held belief that the best way to answer community needs is by involving the community. This principle, he said, applies most poignantly to the tech sector that has grown so adept at disruptive product and service innovations.
“When we think about all the many problems we’re facing in society, we at City Hall can’t do it alone — we need to work across sectors,” Nath said. “We need to be collaborative, and we need to be open.”
At its inaugural launch in 2014, the city received an overwhelming response from entrepreneurs of all sorts. Nearly 200 startups applied from 25 different cities and countries, and six were chosen.
This year, 14 startups were chosen from a number of industries, such as analytics startup Decision Patterns, which is developing a tool for officials in San Leandro to analyze budgets and city performance data.
San Leandro IT Manager Tony Batalla said he thought the joint effort would be groundbreaking and serve as a springboard for collective city-to-city finance and performance analysis. “To me that’s a huge opportunity to standardize [performance metrics between cities],” Batalla said. “We can come in and create a standard where one doesn’t exist.”
The program is fueled by a $10 million, three-year grant from the U.S. Department of Commerce, out of which the Commerce Department has allocated more than $474,000 for STiR. Jeremy Goldberg, STiR’s program coordinator, said the funding ensures that STiR will last for at least three more years.
6 // BINTI is working with the San Francisco Human Service Agency to create a mobile app for potential foster care parents that guides them through the certification process.
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