We believe that a few years from now we will look at 2021 as the year that gov tech moved from niche to mainstream and established itself as one of the most important markets in technology broadly. While it was a record year in the market — approximately $14 billion in transaction volume — we believe that the gov tech market is still in the early innings and that the activity we saw in 2021 will pale in comparison as we look to the years ahead.
Why do we say that? Consider the following:
- To put the $14 billion in 2021 transaction value in context, it’s a small fraction of the more than $1 trillion of transaction volume for technology globally in 2021, according to 451 Research. This is despite state and local spending being one of the largest segments of the U.S. economy at about 11 percent of gross domestic product.
- Almost every pitch deck we see cites the industry-famous statistic that only one-third of the market is using modern systems, with the remaining two-thirds being served by either legacy homegrown systems or manual processes. There are still massive amounts of opportunities to be captured.
- The market is still hugely fragmented. Every segment of the market has the capacity to create a few $1 billion-plus businesses, but very few market segments have those companies today. That creates a large number of opportunities to create tomorrow’s market leaders. Despite how big the market is, there are comparatively few $1 billion-plus valued businesses that exist in the market relative to other markets in technology. There is no doubt in our minds that the number of those “unicorns” will continue to emerge through both organic growth and market consolidation as tomorrow’s market leaders are established.
- Across the market, businesses are doing very well. While strong revenue and client retention has always been a hallmark of a gov tech business, many businesses are growing at rates that we have not seen in years past. Gov tech businesses have strong financial KPIs (generally stronger than their counterparts in other industries), which in turn is attracting strong investor interest.
- We have never seen as much investor interest in the market as we have in 2021 — internally, we track the number of active investors in the market across all stages (both with active investments and those pursuing an investment thesis in the market), and those numbers continue to grow year on year, with significant growth in 2021.
- Importantly, the growth in capital formation at the early stages of the market (gov tech-focused startup accelerators, seed, and Series A funding) has catalyzed a wave of company formation across the market.
- The ranks of experienced operators are growing, providing much-needed talent and advisory for the next generation of companies. Scaling gov tech businesses brings a unique set of challenges, and the number of experienced managers who are looking for the next growth-stage business is increasing, in part due to the growing number of exits.
- Gov tech has become a growth market. It’s in part because of strong demand for digital transformation that has accelerated dramatically since the pandemic, but it has also been enabled by purpose-built-for-government, modern SaaS solutions that are easy to procure and deploy (captured well in a recentGovernment Technologyarticle). This has resulted in a rising number of high-growth businesses that are attracting growth capital from investment firms that have historically ignored the gov tech market due to perceived limitations on growth.
