Is Govtech the Next Big Frontier?

Posted by Madeline Reddington /October 29, 2015 / Entrepreneurial Advice, FounderTalk, Hot Topics, How To, Uncategorized

For someone who just became a US citizen in 2009, Ron Bouganim isn’t necessarily the most likely candidate to be championing reforming the systems behind the US government. But he has become Govtech’s loudest megaphone and greatest educator. Last year, he announced the Govtech Fund—a VC fund that selects and funds startups that provide government agencies with scalable software solutions. This week we talked with Bouganim about what Govtech is, why he believes it’s the next great frontier for disruption and why it’s been ignored for so long.

 

How did you get involved in Govtech?

I fell into Govtech five years ago. I became a U.S. citizen in 2009—I’m originally from Canada and had been in the US for a dozen years at that point. Becoming a citizen was actually a pretty inspiring experience to go through and it made me want to get involved in civic life. I had considered working on political campaigns but that didn’t resonate as much with my technology startup and investing background. Coincidentally, around that same time there was a whole series of conversations going on—led by folks like Tim O’Reilly and others—about what it might look like when (not if) movements like mobile and cloud entered the government. One of the initiatives that spun out of those conversations is Code for America (CFA), and I got very involved as a volunteer where I observed that governments were desperate for new technology. Out of that experience, I launched an accelerator for govtech startups where I observed startups seeing incredible growth velocity. That’s when I decided to launch the Govtech Fund. So it’s been kind of a journey from becoming a citizen to becoming a venture capitalist.

Why is NOW the time for a Govtech revolution?

The U.S. government, with 22.5M employees, is 3-4 times bigger than all 30 companies of the Dow Jones Industrial Average combined.

And yet, the single biggest “enterprise” in the U.S. economy, the U.S. gov’t, is running on a bunch of old technology from the mid-90’s.  Tweet this

That 90’s tech are the tools that these 22.5M government employees have to work with. So the basic investment thesis here is not complicated: for a very long time startups never worked with government. I equate startups with innovation, so if you don’t have any startups working with government agencies, innovation is quite limited. Replacing these legacy systems is a massive investment opportunity. Now there is a change, where startups, for the very first time, are engaging with government agencies. That’s why I started the fund; to capitalize on that movement.

Why are startups now finding themselves able to support and scale this move into offering services to the government?

There are really three main reasons.

1. The Cloud.

The cloud is, for the first time allowing government agencies to adopt technology that is off the shelf, built across multiple customer bases rather than custom for each agency.  Tweet this

This is the perfect environment for software-as-a-service startups to sell into. On the flip side, government agencies get the benefits of updates when a new module is built, and the cost is literally 100 times cheaper than the old way of doing things – hiring contractors, spending years defining requirements and building an on-premise custom system that can quickly become out-of-date.

2. Shortened Sales Cycles.

One of the big reasons that startups didn’t work with the government was the perception, and frankly, the reality, that it would take years to close a deal. And if you’re a startup, you’re just not going to do that. And your VC’s aren’t going to let you do that as well. Contrast that to what’s happening in my portfolio: the average sales cycle is 86 days. In the year since I launched the Govtech Fund, my six companies are now working with 12K agencies. That’s because with the cloud, the cost of adding a new customer is so negligibly low for the startup, that pricing can be very flexible. My companies can go in and pitch a price just below the procurement threshold rather than going through a protracted Request For Proposal process. This means that government agencies can literally buy solutions on the spot vs. engaging in a multi-year procurement process.

3. Cultural Shift.

Finally, you have a huge retirement cycle with 25% of employees at government agencies set to retire in the next 10 years. That’s sometimes half of—or all of—an agency’s IT department retiring in the next 2-3 years. The people replacing those jobs are coming in with a much different perspectives on technology. They are modern technologists who want, and expect, to get the best tools there are and are comfortable working with startups.

What’s the biggest misconception about Govtech?

Many VCs don’t know that, for the first time, startups can build real businesses serving the government sector, and those businesses are growing at a venture-backable rate.    Tweet this

As VC’s, we’re in business to ultimately make money for our limited partners, and historically the issue with working with government agencies has been the long sales cycle, slow growth, et cetera. That’s undergone a massive change, which is why I’m working actively to bring private capital to this space, and mostly that’s just evangelizing. I’ve done probably 50 “Lunch ‘N Learns” with VCs in the last year. When I was raising my fund I did 562 pitch meetings—I didn’t need to do all those pitch meetings to raise my fund. I did it because I know what’s happening on the ground. Globally, this is a trillion dollar industry of governments spending money on technology that is now undergoing a massive replacement cycle. It will take decades to modernize all of these agencies. When I show investors the month-over-month results of my portfolio of startups, I don’t really have to say much—the results speak for themselves.

So there’s a faster sales cycle and cloud technology, but doesn’t it seem unusual for generally risk-averse government agencies to partner with startups given that a startup might not be around in a couple years?

I would say the exact opposite, actually. I would frame it this way: what is the greater risk? Option one: a government agency spends 3-5 years developing specifications, hires contractors to build a custom system, spend tens or hundreds of millions of dollars on the project, which in turn is likely to be technologically irrelevant on the day it’s delivered. That’s actually a huge risk. Option two: a government agency opts for a modern software-as-a-service inexpensive solution that is off the shelf and up and running in a few weeks. If it doesn’t work out, if the thing blows up in my face, it was such a small bet to begin with, I haven’t lost that much. And if it does work, on the upside I’ve got this amazing technology that works great and I’ve just saved my agency a ton of money and time.

22M employees but more than 100K agencies – that means scaling to all those agencies is a huge feat. How does that affect sales? Does it mean that there is a different timeline for Govtech companies as far as growth and liquidity?

Government is indeed a massive enterprise. The good news is that once you’ve sold into one agency, they talk to their peers and they’ll recommend you. In fact, in the early days, many of my startups’ best customers were acquired by existing customers calling up all their peers at other agencies in other states and other cities and saying “you should check this out.” So there’s a natural network effect.

Are there other governments that are more sophisticated or advanced than the US with wrapping tech innovation into government work?

The UK, for example, is a thought leader in this space. The United States Digital Service (USDS) was modeled after the UK’s Government Digital Service (GDS). GDS has been doing work in this area for a number of years now, and I would say really trail-blazed the space of government agencies building modern technology solutions in-house. What you see now is an awakening at all levels of government. Many people will point to Healthcare.gov as an example. It’s fair to say that if that website had failed, ObamaCare wouldn’t be in existence today. That’s a stark example, but it is an example that

any policy you want to execute, any program you want to deliver at the government level—you’d better have the most modern tech that’s available.    Tweet this

You’d better get it out the door on time, and it better work. Everything we’re accustomed to in Silicon Valley, that has to happen now within government building their own solutions or buying from third-party startups.

What would you tell entrepreneurs who are thinking about Govtech or Civictech—what must they know?

There’s a desire amongst millennials to do good, and many in that generation see startups as a path to achieve that good. We’re in a time where we have this incredible coalescence of young folks who want to build startups that matter choosing to go into the govtech sector – almost all of the Govtech Fund’s portfolio company CEOs are under 30 and are graduates from some of the most prestigious colleges in the US. If your govtech startup is successful, think about the impact it could have. So my advice to anybody who’s looking to launch a startup is to think about what your goals are—what problems are you trying to solve? With a govtech startup, you may have an opportunity to rewire government and in turn impact a massive number of people. What could be more awesome than that?

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