It’s Make or Break Time for GovTech Investments

Governments need to become fit for purpose in the digital era. Faced with the rising expectations of digital natives, they realize that business-as-usual is over. In Chile, for example, current social unrest is a reflection of thwarted aspirations of the new but vulnerable middle class.

Bureaucracies are developing a greater appetite for new ways of thinking and doing. Progressive governments are pressuring public agencies to be more tech-savvy and data-thirsty, willing to take risks, and learn to adapt faster. In the past, governments tended to contract out tech expertise to big techs. They are now building up their capacities to understand emerging technologies better and diversifying technology providers to avoid vendor lock-in. They are creating central agencies to rationalize how they buy and deploy new technologies. Britain created its Government Digital Service in 2011 and saved £3.56 billion between 2012 and 2015. The United States and Sweden are the latest to follow suit.

Energy buyer

The public sector is in fact the largest purchaser of technology, spending more than USD 400 billion annually on technology. With the acceleration of government digital transformation, the figure is set to increase to USD 1 trillion by 2025. There is a big market for tech companies willing to service the changing needs of governments in the digital era.

Countries are aggressively competing against one another to attract digital talent and tech start-ups. In Europe, there is a fierce battle to succeed in Britain as the leading digital innovator after Brexit. In September, French President Emmanuel Macron raised EUR 5 billion from venture capitalists and asset managers to invest in new technology companies over the next three years. 

In this race to catch up with the future, GovTech start-ups can help build smarter governments and more agile governance. GovTech start-ups can disrupt the way governments deliver value and empower citizens. They can help the public sector absorb digital disruptions and data insights to increase efficiency and transparency in the delivery of public services. These start-ups are driven by financial returns, but they are also seeking public value and social impact.

GovTech Growth

The GovTech industry is still in its infancy, but has great growth potential. The most developed GovTech ecosystems are in Europe and North America. According to some estimates, there are more than 2,000 GovTechs in Europe. In Spain, Electronic IDentification is developing digital identification systems. French Manty offers public administrations and local governments a business intelligence tool to analyze their data quicker. The British platform Novoville connects local authorities with their citizens. More than 45 cities in Europe are using it.

Governments are taking note. Governments are looking for new businesses to accelerate innovation, at a time when citizens expect better services. According to Alexander de Carvalho of Public, a leading GovTech venture, they face three tech challenges: an over-reliance on legacy systems, a lack of investment in technology and a small number of dominant incumbents creating situations of vendor capture.

In France, President Macron is trying to put “the state in a start-up mode,” incubating start-ups within public agencies and deploying a EUR 700 million challenge fund to incentivize agencies to innovate. Israel, Britain, Denmark, Portugal and Poland have all established GovTech challenge programs through which government agencies go to the start-up market for solutions. For Simon Kollerup, Denmark’s minister for industry, business and financial affairs, “the Danish GovTech program is a new approach to adopt new technology in the public sector. But it is also a great opportunity for tech companies to understand our operations and demands.” Innovation labs are mushrooming, especially in cities. Countries are introducing flexible procurement rules, regulatory sandboxes, GovTech funds and tax incentives.

Venture investors, too, are developing greater appetite for GovTechs. They are often put off by red tape and remain cautious, as return on investment is still uncertain. Investing in GovTech entails different approaches; it requires “patient capital” akin to impact investing that can sustain the long cycles and complex rules of government contracting.

In the most mature markets, GovTech investing is picking up. For Ron Bouganim, founder of the GovTech Fund, seed investors need to “break down the myths of investing in GovTech” and realize that they can generate financial returns. In the US, funding for GovTechs totaled USD 336 million in 2016, a 300% growth between 2012 and 2016. In 2018, the GovTech Fund announced a EUR 450 million joint venture to invest in early-stage GovTechs in Europe. “For savvy investors,” as Daniel Korski, founder of Public, says, “GovTech is a relatively unknown but lucrative opportunity based around long-term contracts and large margins. We’ve already seen a few big valuations and large exits, and this is only set to increase.”

For Idoia Ortiz de Artiñano of the Madrid-based PublicTech Lab, “Latin America is the next frontier for GovTech.” In Colombia, the promotion of creative industries and start-up ecosystems has been at the center of President Duque’s agenda. At the Development Bank of Latin America, we developed an index to measure the maturity of GovTech ecosystems in the region, which confirms the incipient nature and, at the same time, the tremendous potential of GovTechs in a region in which governance challenges are particularly acute.

Many GovTechs operate at the city level. Several Argentinian municipalities are using Munidigital, a real-time data and cloud-based platform to manage their public services, generating important returns on investment, efficiency gains and fiscal savings. OS.City is bringing cloud computing, artificial intelligence and blockchain solutions to transform municipalities into integrated platforms of digital services. In Brazil, Gove is helping small Brazilian cities raise taxes and allocate spending more efficiently. In 2018, it generated savings of, on average, 6% of the city budget in the 10 cities using its platform. Guadalajara in Mexico created its own GovTech spinoff, Visor Urbano, to digitalize business registration and the city’s cadaster; it contributed to a 20% increase in local taxes. Also in Mexico, CivicaDigital is helping improve government digital services.

The emerging GovTech movement offers a unique opportunity to create new public-private partnerships in the digital era. It is gathering pace, as Paris organized the second GovTech summit in November 2019.