Should You Invest in Govtech? Yes.

Govtech is really hard. However, the industry is worthy of increased investment. Why?

The role of technology in the future of cities is so significant any current assumption about the future of cities should be questioned. What’s happening in govtech right now?

1. Startups and big tech companies are entering the urbantech / govtech sector and attempting to induce radical change.
2. The impact of these changes have and will drastically alter the operations of government agencies.
3. Private sector companies that shape the physical attributes of cities will see significant impacts to their business models. These companies include architectural / engineering / construction consulting firms and real estate developers, among others.

Nick Grossman recently wrote this post, referencing Carlota Perez and her book Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages. It’s an amazing book, one that every urban planner should read. After reading his post, I went back and re-read the book. While her book largely addresses technical revolutions at a macro level, it’s fun to think about the theory within specific industries, like govtech.

What govtech is experiencing is not an unfamiliar model of change. These revolutions impact different industries at different times. Effectively, new technologies and products enter an industry and bring chaos / progress to the way business is being conducted. The early stages of that change are typically resisted out of fear of change. That results in gradual advancement, sometimes over the course of a decade of more.

Per her research, a highly visible “attractor” appears, symbolizing the potential of positive tech induced change within an industry. Most importantly, this attractor proves that businesses can and will be cost-competitive. It’s easy to debate exactly when the govtech “attractor” appeared, but it seems fair to conclude that the originating moment has occurred.

If we agree the seminal moment (Perez refers to this as the “big-bang”) has occurred, it means the industry is currently in some form of adaptation and assimilation phase. As with other industries, you see an influx of outside capital enter the market, hoping to push the pace of change. The primary issue is the existing industry framework created to handle operations is based on a previous set of technologies and products — and is largely unfit for new products. The outside capital enables more products to be created faster, inducing even more chaos within the existing framework. This creates an interesting opportunity for those with higher risk profiles, notably entrepreneurs and VCs.

Specific to the govtech / urbantech industry, each of the primary actors will be impacted differently:

• Startups / Tech Companies — Inducing much of the change and chaos. Many of these startups lack an understanding of the current decision making and operations framework, resulting in low adoption and inconsistent growth. Over time, companies create hyper-focused sub-categories within the industry. They attempt to solve a smaller problem set with more rigor. Every category and sub-category ultimately concentrates, leaving one or two companies that understand the customer best and delivery the very best product.
• Private Sector Consulting (AEC) — Protectors of the old model. Their incentive structure makes them naturally protective of the existing framework. The relative inefficiency of the existing framework requires consultants to provide “services” to fill these operational gaps — often times meaning hiring more people or acquiring specialty firms — but never growing revenue without growing head count. Increased head count means increased liability in an industry with rampant change. Many of these firms will become casualties of change trying to protect the old framework, while few will adapt and in some cases lead the industry into new operational models.
• Government Agencies — Recipients of change. Customers of new products. Given the regulatory and procurement environment of government agencies, adoption of new technologies and products will be unpredictable across and within these agencies. Many of the processes currently utilized within these agencies are so institutionalized, users are unable to imagine or articulate better solutions. Which circles right back to startups and tech companies.

Generally speaking, these are the kind of ingredients that attract smart people and capital. Big market. Wide open for new entrants. Few established outfits. Customers beginning to request and demand better solutions. It may take a decade or more to sort out the winners, but there will absolutely be big ($) and impactful companies built.