"GovTech is gaining more and more momentum"
The government could be a huge market for start-ups. But for a long time, little of the billions that the state spends reached them. Now the market is changing. Together, Oliver Schoppe of UVC Partners and Manuel Kilian of GovMind have taken a closer look at the GovTech ecosystem and visualised it on a map. They explain why they are convinced that GovTech is becoming increasingly important for the modernisation of state and administration, what mistakes the ecosystem should avoid — and why it is so difficult to grasp.
You took a closer look at the European GovTech ecosystem and created a map. Why are you doing this right now?
Oliver: We have noticed that five of the almost 30 companies we work with already do significant business with government clients. That is far more than was conceivable just a few years ago. Back then, the map would have looked much emptier. At the same time, there are many more people involved in the topic of GovTech and we see the first big success stories emerging.
Manuel: We can confirm this with our database. Since 2010, a total of 1,447 GovTech start-ups have been founded in Europe that now have marketable products. At the same time, around $20.7 billion of venture capital has poured into the European GovTech space. Strikingly, the number of company foundations has actually increased by another 73% from 2015 to 2019 compared to 2010 to 2014. On the supply side, GovTech is gaining more and more momentum.
If you take a closer look at GovTech, you will notice that the term is not really that distinct. How did you define the field?
Oliver: In fact, it’s not that easy, because the term GovTech describes more of a spectrum. On one hand, there are start-ups that sell exclusively to the public sector. On the other hand, there are companies whose direct customer is not the state, but whose products nevertheless influence administration and social coexistence. The largest percentage is in the middle: start-ups that have sold their products primarily B2B in the past and have only discovered and acquired the public sector as a customer in recent years. In our map, we represent this diversity in circles. The further we move away from the centre, the more indirect the connection to the state.
Manuel: In addition, there are many thematic focuses within GovTech, the different pieces of the pie on the circular map, so to speak. GovTech is therefore enormously diverse and, depending on the pie slice, we see very different business models and technologies being used. The map consequently also shows: GovTech is everywhere where the state and administration are active.
Who specifically are the start-ups selling to the state?
Manuel: This is also very multifaceted. There are several levels with which B2G start-ups interact: Municipalities, federal states, federal ministries, large public authorities and institutions under public law. In Germany alone, there are about 30,000 contracting authorities that could obtain GovTech solutions on their own. So it is by no means always just about the federal government. We have noted time and again in our analysis: There is no one characteristic of the public sector. While you have thousands of potential buyers at the municipal level, a start-up like Isar Aerospace, which develops and produces rockets, can only work with very few state institutions.
How is business with the state different from business with companies?
Manuel: One fundamental difference is the sales mechanism. As a GovTech start-up, you can’t just approach the government and offer them your product. Instead, you have to first draw the attention of the respective government agency to the problem your start-up can solve. If there is subsequently a public tender, you can participate in it. In addition, there is a certain cultural difference between start-ups and the state. But that is not much different when it comes to working with large corporations.
Oliver: We can still remember the time when start-ups barely got through the complicated purchasing processes of large companies. That was less than ten years ago. Today, start-ups are an integral part of B2B business. The exciting thing is: the start-ups that have already been able to go through and master the complex purchasing processes of large companies are now ideally positioned to do business with the state. Everything they have learned in B2B, they can now apply to B2G.
What can the state do to accommodate start-ups?
Manuel: It’s not about the state accommodating the start-ups. It’s about getting a level playing field. In public tenders, it should always be about the best solution winning. In reality, however, this is often not the case because, for example, project references or a certain size company are required, which many start-ups do not yet have. This excludes them — often without reason. Calls for tenders should therefore be more open to innovation and place less emphasis on experience and parameters such as the number of employees in a company.
Oliver: This is exactly what we hear from the start-ups in our portfolio. Start-ups are in principle always open to competition and want the best solution to win. At the same time, the public sector perhaps sometimes needs a little appetite for risk! Those who want to exclude all risk always put security above innovation. That’s not the way to move forward. Instead, we should face the calculated risk with composure. Even if someone in a government agency has not purchased the right solution, that is not necessarily the end of the world. In such cases, you just have to change providers. This also creates a competitive intensity that the B2G market currently lacks. In general, it helps start-ups much more when the state becomes their customer than when it supports them with millions in funding.
Where do we currently stand?
Manuel: There is still a lot of catching up to do. We recently showed in an analysis that GovTech start-ups and SMEs accounted for only around one percent of around 15,000 public contracts awarded in Germany in the software sector between 2014 and 2021. This is shockingly low and certainly does not correspond to the available potential on the provider side.
Are there European countries from which Germany could learn a lesson?
Oliver: Estonia, for example, has a high level of digitalisation in the administration and works intensively with start-ups.
Manuel: Abroad, in the UK amongst other countries, there is often greater transparency in tenders. They are simply easier to find than in Germany. Also, the share of tenders that go to innovative solutions is significantly higher in other countries such as Finland than they are in Germany.
What pitfalls should a start-up in the GovTech sector avoid at all costs?
Manuel: We see again and again how big the cultural differences are. If you want to do business with the state, you have to understand how bureaucracy and administrative procedures work, that is essential. Only then can you get on the same level with your counterpart and understand his motives.
Oliver: Another common mistake is to underestimate time spans. Award processes can sometimes take half a year to a year longer than originally anticipated. Moreover, long-term business relationships are structurally more difficult to establish, as tender processes are designed for one-off cooperation. This is something to be aware of.
Reach out to us if you have any questions regarding this article:
- Manuel Kilian: email@example.com or LinkedIn
- Oliver Schoppe: firstname.lastname@example.org or LinkedIn
About UVC Partners: UVC Partners is a Munich- and Berlin-based early-stage venture capital firm that invests in European B2B startups in the areas of enterprise software, industrial technologies, and mobility. The fund typically invests between € 0.5m — 10m initially and up to € 30m in total per company. Portfolio companies benefit from the extensive investment and exit experience of the management team as well as from the close cooperation with UnternehmerTUM, Europe’s leading innovation, and business creation center. With over 300 employees and more than 100 industry partners, UnternehmerTUM can draw from many years of experience in establishing young companies. This cooperation enables UVC Partners to offer startups unique access to talent, industry customers, and other financial partners.
About GovMind: GovMind is a young Berlin-based technology company that systematically collects, analyzes and interprets information on GovTech solutions. In this way, GovMind brings innovative solutions into use in government and administration.