Governments have rarely been praised for their efficiency nor for being frontrunners in cutting-edge innovation. Their reputation for being slow, inefficient and laggard adopters of new technologies has made it an unappealing category for entrepreneurs and young tech companies. Logically they’d rather focus on tech-savvy consumers or businesses with deep pockets and an existential need to increase efficiencies across their organisation.
However, governments around the world are far bigger than any enterprise and any consumer market. Around 20 million people in the US work for the government, making up around 15% of the total workforce. Government spending accounts for 37% of US GDP. In France, government spending accounts for an astonishing 56% of GDP. Whether efficiently deployed or not, that kind of spending is under new scrutiny that is only set to increase.
Naturally, the market for technology solutions specifically designed to boost public sector productivity (known as GovTech) is massive, currently worth $400 billion. Governments around the world spend around $30 billion on software each year, that is at a point where most haven’t even adopted efficient new software solutions at scale.
However, despite the vast untapped opportunity, the appetite for GovTech investments has remained relatively small compared to venture capital investments in other sectors. While a dog walking app raised $300m in early in 2018, the total volume of all GovTech deals in 2018 is only around $400m. Food delivery startups have raised around $6 billion in 2018 while total funding for GovTech startups accounts for $2 billion over the last 10 years.
The good news is that we might just be at an inflection point: 2018 has been a record year for GovTech investments. Renowned investors like Sequoia Capital, Atomico, Andreessen Horrowitz and others have recently made bets on GovTech startups and average deal sizes are increasing. Given how big the market is, this might just be the beginning.
The bad news: 85% of all GovTech deals have been made in the US and only 7% in Europe. This is alarming for two reasons:
Firstly, Europe has so far not been able to participate in the creation of large platform businesses and no European business can currently compete with the likes of Amazon, Google or Tencent. This opportunity was largely missed in the early 2000s. European policy makers are now concerned that history will repeat itself with AI applications and France and Germany both announced that they’ll spend billions on AI strategies in order not to miss out again. They shouldn’t be any less concerned about missing out on GovTech.
Secondly, entrepreneurs build their businesses where their customers are. The lack of GovTech investment in Europe points to the lack of demand for innovative solutions. Despite some notable tech savvy moves from places like Estonia, it also shows that barriers to entry for GovTech businesses in Europe significantly higher than in the US. The implication: Europe could fall behind China and the US in the digital transformation of the public sector. Although the Chinese government’s approach towards digital transformation shouldn’t necessarily be a role model.
That being said, there are many counter examples of great initiatives where European governments work with tech businesses to offer innovative services, for example the partnership between Babylon Health and the NHS in the UK or between Via and the Public Transit Authority in Berlin. In these cases, the technology solution has rapidly given the public sector effective answers at scale to important problems, where they had previously been struggling to provide sufficient services. There are also inspiring GovTech businesses in Europe that attract funding from prominent investors, like Scytl from Spain or Mapillary from Sweden. The lack of ecosystem for GovTech businesses in Europe is also being addressed by PUBLIC, a venture capital firm that is promoting the GovTech sector in Europe and help tech startups to accelerate.
Governments need to adapt their procurement policies
Governments in Europe need to do much more to promote GovTech across Europe in order not to miss out on an opportunity that can simultaneously create a number of successful leading edge technology businesses, while helping governments across the continent with their digital transformation to deliver the end game: Which is better services, value and outcomes for their citizens.
There’s a number of things the EU and European governments can do:
- Open data initiatives: Startups need to have access to public data in order to build their solutions on top of it.
- Seamless procurement: Sales cycles with governments tend to be extremely long and without the right incentives procurement teams tend to stick to their legacy providers. Making procurement processes transparent, simple and open for young businesses is crucial. Quotas for young technology businesses can be useful to lower barriers to entry.
- Test-and-learn culture: No one is suggesting playing poker with government services, but running pilot programs with startups and being open-minded about failure is crucial for getting successful partnerships off the ground. Budgets and sandbox style infrastructure that is dedicated to testing-and-learning can create the right incentives for public sector employees.
- Access to finance: Public funding programs and government grants should specifically consider GovTech startups and encourage them to apply. Governments can be strategic investors that also help GovTech startups with go-to-market.
- Single market: In order to make the European market attractive it needs to be easy to do cross-border business. Procurement regulations should make sure that they look at the EU as one single market.
Governments in Europe will eventually be forced to go through a digital transformation. The question is whether they will buy their solutions abroad or if they’re able to build an ecosystem that allows them to spend the money in Europe and support their own economies. It is not too late for European governments to build their GovTech strategies and ensure that they are not missing out (again).