A Conversation with Shea & Company's Jeff Cook

Happy Friday, everyone. I'm Joe Morris. This is In Case You Missed It. Dustin Haisler's not with us this week, but we've got a great guest. I want to bring on Jeff Cook, the managing director with Shane Coe. Jeff, thanks so much for taking time on this Friday to join us.

Yeah, happy Friday, Joe. Thanks for, uh, thanks for having me. Excited to be here.

So you're a frequent contributor to Government Technology magazine. We, Dustin and I, and many others Frequently read your market roundups on the GovTech market. Why don't you start by telling our audience a little bit more about your background in GovTech and your role?

Yeah, yeah, happy to. So I'm a managing director and partner at Cheyne Company. And Cheyne Company, we're about a 50-person firm headquartered up here in Boston, which is what you see behind me. We have an office in San Francisco. And as a firm, we live a pretty narrow existence. We advise software businesses on mergers and acquisitions. as well as on capital raises. Most of what we do, about 3 quarters of what we do, is mergers and acquisitions. About a quarter of what we do is capital raising. We're focused on the middle market, so that's— think of it as $100 billion in enterprise value at the low end. Largest deal we've done over the last 18 months has been about $3 billion. That's the firm in general. Myself personally, you know, I have covered public sector government technology for the better part of a decade. And so, you know, that has become one of our more active practices here at the firm. We'd like to think we have one of the most active practices out there advising government technology businesses on mergers and acquisitions, on private capital raises. And, you know, we've advised on about 30 transactions over the last 5 years. We cover, you know, so our purview of how we cover the world is if it's funded by taxpayer dollars, that falls within our coverage of government or public sector. So that's public administration, it's public safety, it's education, it's transportation and infrastructure. And we've worked across all those sectors. And, you know, to name some, you know, I guess to share some of the names of former clients, you know, we work with some of the largest businesses, we work with some of the higher growth SaaS businesses. So on the public administration side, it's been business clients have included, you know, Central Square, OpenGov, CoFile, GovOS, Granicus, Optumir. So a lot of the, you know, the sort of household names in public administration. On the public safety side, it's been Lexipol, Envisage Technologies, Emergency Reporting, Collio, and then the list goes on. So it's been a market that we've, you know, we've really enjoyed covering. It's a very different market than it was, you know, 10 years ago when we really started covering it, but it's been an awesome ecosystem to be a part of. So that's our background.

You know, you mentioned a handful of deals that we've covered here on In Case You Missed It episodes over the last year or a couple of years, from Civic Plus to Optimir to Granicus to the most recent Rock Solid and Granicus deal. Do you think that these deals that you found yourself in the center of are representative of the broader market activity that you're seeing in the GovTech market?

Yeah, I think so. You know, look, you know, if you look at what's common across all those deals, one, they're strategic in nature, right? Two, the dynamic is a larger strategic, what we typically think of as a platform business, is buying, you know, a smaller business to expand its addressable market, expand its product portfolio, expand its geographic reach. And that's been, you know, the tried and true sort of way that this market has evolved over the last decade. You know, there's been a lot of activity, consistent amount of activity over time, but a lot of that activity has been, you know, larger strategic businesses acquiring other, you know, smaller businesses, as I just mentioned. And so every one of those businesses you named, you know, Civic+ acquiring Optimere, you know, Civic+, you know, sort of a big player in citizen engagement place or space, acquiring Optimere to add compliance and, you know, archiving capabilities for digital communication. So sort of expanding that citizen engagement, you know, reach. Same thing with Granicus and RockSolid. And if you look at the activity over the last 18 months, a lot of it has fit that, you know, fit that, you know, that character of activity. The other thing that's common across all those is every one of those businesses is backed by private equity. You know, I write frequently on my quarterly roundups about the influence and sort of the effect that private equity has had in this market. And you look at all those businesses and they've been backed by private equity that, you know, likes to put more money to work by continuing to consolidate. So I look at those absolutely as sort of a bellwether of like the typical activity that we've seen over time in the space. What I would say is that, you know, it's certainly not representative of deal activity as a whole. While those are private equity-backed larger businesses buying independent businesses, we're seeing a lot of fundraising. You know, in Q3, I wrote, you know, about a lot of different early-stage, growth-stage fundraisings that have happened. And then there's also the, you know, the creation of the next Civic+, the next Granicus, the next Lexipol, where private equity investors, you know, are looking for that founder-owned business to, you know, be a consolidator in its own right, and start the, you know, the next generation of these larger businesses that have been very active. So, so yeah.

You hit on a couple things, but I wanna pull the thread on that a little bit more. Are there certain types of companies, be that what stage they're in, solution type, that you see are having more activity right now in the, in the GovTech market?

Yeah, I would say that the most activity we're seeing has been on the early-stage side. And so when we say early-stage, that's businesses that are, you know, less than $10 million of ARR. You know, no doubt there has been sort of a more vibrant ecosystem than we have ever seen of founders, of, you know, second-time founders, of, you know, incubated companies that are, you know, scaling rapidly in sort of that early stage. of the market. And so, you know, no question, there's— in terms of the number of transactions, that's where we're seeing the most activity. And it's not, you know, public admin, it's not citizen engagement, it's not public safety, it's across the board. If it's in government, I think we're seeing a lot of early-stage company formation, and that's been awesome. I would say on the other side of it, there's been a lot of activity at the very large end of the market. So a lot of the names we just mentioned, you know, these larger private equity-backed businesses have gotten very— a lot larger, especially over the last 18 months. And so I think where we've seen a little bit of a dearth of activity, especially this year, has been sort of in the middle tier, right? So not the big large consolidators, not the early stage, but the middle tier where frankly there's a little bit of a void in the market right now where last year a lot of those, you know, $20 to $50 million ARR businesses were acquired by the larger businesses, you know, those larger consolidators. And so, you know, I think that's gonna create an interesting dynamic for, you know, the next few years where this early-stage, you know, batch of companies that are less than $10 million ARR are gonna become like this big next generation of, you know, these mid-sized companies. So we're very interested to see how that plays out over the coming years.

As you look at all those deals that you've had a thumbprint on, are there any learnings that you've taken from these deals in terms of something that the broader market should be aware of or take note of?

Yeah, look, every deal's a little bit, you know, a little bit different, right? And so I think the takeaways are, you know, tend to be deal-specific. I think that, you know, overall there's there's been very much a bias towards growth in the activity that's been happening. And I contrast that with, you know, 10 years ago, there was a lot of consolidation for, you know, for the sake of consolidation, because I think on a spreadsheet, you know, the ability to put 2 competitors together and take out a lot of costs, you know, that made sense. You know, in contrast, I think today we see a lot of the capital that's coming into this market is really having a bend towards growth. And that can be for, you know, an existing business expanding its reach, expanding its products, developing new features. For the early-stage business, it's being able to, you know, be that much more aggressive in terms of, you know, hiring that incremental developer or developers to get to, you know, to market faster. And so at the highest level, I think that it is, you know, there's— it's good news because it accelerates the pace of innovation in the market. I think as you go through the different constituents in the ecosystem, it impacts everyone a little bit differently, right? For the government employee, there's probably gonna be disruption if there's a little bit of disruption, if there's a strategic that buys one of your software vendors. I think if you are an early-stage company and you see the bigger fish get that much bigger, that probably over time creates a lot more white space opportunity for you to scale the business that you've been building. I think from an investor perspective, there's a considerable amount of running room wherever you look, just given how fragmented and how much modernization needs to take place. So a little bit different depending on which part of the world you're looking at.

Throughout what you've talked about, you've talked about the role that capital's playing in accelerating innovation. And I know you mentioned a decade's worth of experience experience here. I know looking at the early days of the GovTech 100 to where we find ourselves today, it seems like that pace has certainly picked up and we're no longer, um, trying to prove that there's a market here.

Yeah.

Um, it seems like it's now, it's very, very apparent that you can have an impact and, uh, and have it be, you know, fairly lucrative. What role are you seeing that, uh, the capital play in accelerating the, the GovTech market as a whole?

Yeah, yeah, look, I would say that, you know, it's both the availability of capital as well as what that capital brings with it, namely expertise, operating expertise, you know, experience in scaling software businesses. Because, you know, you ask any investor out there, be it early stage or, you know, late stage private equity, and everyone is going to differentiate, you know, sort of the dollars they're bringing to the table by the expertise they're bringing the table. And so, you know, at the highest level, just the fact that capital is available, that there are investors, some dedicated to the GovTech market, some that are, you know, more general software technology investors that now want to invest in public sector, that was different than what it was 10 years ago. There's a reason why this market overall, you know, overindexes towards founder-owned businesses that funded themselves through their own revenue, through their own operations, and never really took outside capital. I think about that relative to other areas in software, there's just not a whole lot of venture or growth money, but there is today. And so I think that we're gonna see the pace of innovation increase that much more in the years ahead because there is capital now where you don't have to, if you wanna take on that risk, if you wanna find that investor to help you scale that much faster, that's available to you now in a way that it wasn't years ago. And going back to what I said, you know, in the prior question, where a lot of the capital coming in is— has a bend towards growth, right?

Mm-hmm.

And growth fundamentally is tied to how do we do what we're planning to do, but do it that much faster? How do we hire that incremental salesperson? How do we hire that incremental developer? How do we make that really strategic acquisition that is gonna accelerate our product vision. So I think overall capital is very instrumental in sort of accelerating the pace of innovation in the market, and we've certainly seen that over the last few years, but that's only gonna continue to increase.

In Case You Missed, its audience is equal parts industry to government, and you look at Government Technologies readership, if you put yourselves at the front lines as a CIO, IT manager, an IT leader, What do you make of all this activity, whether it's mergers, acquisitions? Earlier you talked about maybe some of that concern that could bubble up, but if you put yourself in the shoes of a public servant, what do you make of the market activity?

Yeah, you know, it's probably confusing, I think, to see all these, you know, headlines and then what that, you know, what that means over the long term. I think the good news is that You know, if you rewind 10, 15 years ago, there were a lot of, you know, there was a lot of consolidation that happened in the market that, you know, that I don't think quite got it right, right? Maybe they, you know, they said, hey, we have 2 duplicate customer success departments, we can get rid of one, right? But that customer success person's instrumental to maintaining those relationships, you know, for whomever their end customer were, in some cases 20 years. I fast forward to today, and I think people have learned from some of the, you know, the challenges in the past, especially for these very acquisitive businesses. And they realize that I think overall that, you know, the value of any GovTech business is, you know, its customers and the people that are serving those customers, right? And so I think a lot of the, you know, the investors that have done well in this space that frankly can see the value of businesses you know, put that on a pedestal first and foremost, that the one thing we need to protect is our relationships with customers and the people serving that. And so I think that that is good news, where in years past, you know, that was not the case. But look, you will see some disruption, right, if you're on the— you know, if you're a consumer of the software within government. You know, anytime 2 strategic businesses you know, come together, there's going to be some, you know, some change. And so overall, I don't look at that as a net negative. Again, I think a lot of the capital coming into this market is to, you know, of the mindset of how do we serve our existing customers better? How do we, you know, give them products that, you know, can interoperate better? And so, you know, I think overall it's, you know, it's a net That positive, but certainly not without some of the day-to-day challenges, you know, that are involved in any M&A.

Yeah, you look at our surveys, you look at the past episodes, there's a number of big trends obviously impacting the market at any time. I mean, cybersecurity is a constant, workforce now has rapidly moved up the priority list, cloud, low-code, no-code, you name it. What's your perspective on some of the big macro trends right now that you're seeing across government technology?

Yeah, yeah, look, I would say at the highest level, it's continued adoption of cloud. I don't think we can have a conversation anywhere across the market where that thematically isn't, you know, at the top of folks' list. And then, you know, you unpack that a little bit, and I think it's, you know, it's the, you know, the fact that it's easier to consume and deploy, you know, cloud software. Of course, security is a huge, you know, a huge piece of that. And so, you know, as we look at the macro trends, especially coming out of the pandemic, I think it's just, you know, an acceleration of what we'd seen in years prior, which is, you know, modernize, you know, a lot of the existing technology. And frankly, there's still a lot of, you know, pen and paper. There's a lot of manual processes out there. A lot of our clients aren't going out there and displacing, you know, existing software that's been installed. They're displacing a binder. right, or a pen and paper or something manual. And so, you know, I think that the, you know, the next handful of years are still going to be sort of the basics of, you know, of just getting modern software in place. You know, above and beyond that, I, you know, as we think a little bit longer term, a lot of the technologies that have shaped, you know, private sector and are currently shaping private sector inevitably are gonna be adopted by government. The wealth of data that exists in government and the decision-making in government, how do you use that data to inform better decisions? Like, that is going to be a massive category across all different segments of government. You mentioned low-code, no-code. There's still a lot of very manual, highly custom software out there. And you look at what's happening in private sector, A lot of that shifted towards low-code, no-code. And so I think that that is going to inevitably, you know, be, you know, an influential technology trend in government. And then you go to things like State of GovTech, right? And you meet a lot of the, you know, the very early-stage companies, and then you can kind of see what the, you know, what the next 10 years are gonna look like in the market. And frankly, it looks a lot about the— a lot like the trends that have defined the public sector, sorry, the private sector.

You know, I, I'll, I won't ask you the 10-year outlook, but, uh, I will ask you, you know, you think, uh, the market will kind of be consistent over the next 12 to 24 months, or are you expecting any, any big shifts over that time frame?

Yeah, um, so, you know, I, I would, um, to put it in perspective, I look at sort of what's happened the last few years and what do we expect for, you know, the next few years. Um, So 2021 was absolutely, you know, by every measure, you know, a record year by number of transactions, by size of transactions. I mean, the market was— has completely changed from 2021. And so that is a— that will, in my mind, set the high bar for some time. Up until '21, we saw, you know, a steady, consistent run-up of deal activity. number of transactions, diversity of investors in the space. And then we had, you know, the spike that was '21. This year is— this year I think will settle as the 2nd busiest year on record, followed only by '21. So down year over year, but still a tremendously active year by any way you want to cut it. And, you know, as I look to '23, I think '23 is going to be pretty flat over over this year. You know, the first half of '22 was, was pretty busy, continuation of what we saw in '21. But because of what's going on sort of in the broader macroeconomic environment, I think a lot of, you know, a lot of companies that may have elected to raise capital or, you know, decide to go pursue an exit, I think people have a mindset of let's wait, let's wait till it feels a little bit more stable out there. If we don't have to do something, why take on the risk of the capital markets right now. And we see it continuing into, you know, maybe the first quarter of next year until we start to see some, some pickup. So look, I think, you know, Q4 is gonna be a little bit slow. I think Q1 might be a little bit slow as well. But I think as we look at '23 as a whole, it's gonna be similar to volume to '22. I think once we get into '24, you know, I think we'll start to see that consistent, that return to growth year over year in terms of you know, dollars and number of transactions and all the stuff we look at to measure sort of the health of, you know, and momentum of the GovTech market.

Yeah, for that industry investor community, are you seeing any unmet needs out there today in the market that might be white space for the right industry partner?

Yeah, I mean, look, I think there's a lot of unmet needs. And, you know, really it's where does pen and paper still exist? You know, where does that homegrown, you know, that homegrown system that, you know, is a green screen, where does that exist? And, you know, I think the answer to that is kind of everywhere, right? And so there's, you know, from an opportunity perspective, I think anywhere you look, there is going to be some process, some problem in need of modernization. I think from a business model perspective, you know, I really like Dustin's article that he wrote last year just about the App Store moment, because, you know, it used to be that, yeah, you could build a product that's, you know, that can solve, you know, a built-for— there's a lot of built-for-purpose companies solving very specific problems. The challenge was how do you reach your customer? How do you have that distribution to actually build a business around it? And I think a lot of that has changed, right? Where, you know, with SaaS, within cloud businesses, it's software that's easier to consume, it's easier to sell. You know, the whole inside lightweight sales model is something that we've seen really pick up steam in the market. And so I think that business model is going to be one that continues to, you know, be very influential over time relative to a lot of, you know, the sort of incumbents in GovTech that have a bunch of people flying around in really long sales cycles, traditional enterprise sales. So yeah.

You're right, it's a target-rich environment, right? That's what's so great. Any advice for someone that's listening in today that's, hey, thinking about entering the market, thinking that this may be a marketplace for them?

Yeah, look, I mean, I think we see limitless opportunity here in the market. You know, for as much activity as we've, you know, we've talked about here and as much activity as I write about every quarter, you know, we're only getting started. And I do think that coming out of the pandemic, you know, the industry is just on a different trajectory. You know, I don't look at what's happened over the last 2 years as, you know, as a temporary bump. I think it's a, you know, a step change sort of function in the trajectory of the market overall. So it continues to be a growth market, and I think that's a great place to start a business. You know, going back to one of the things I said earlier, for advice for people that are starting out, is that there's a lot of resources for early-stage founders in the way that there were, you know, 10 years ago at this point. You know, there's accelerators, there's incubators, there's capital, there's operators that have gone through an exit or 2, you know, that are now spending their time, you know, advising, you know, early-stage companies. There's more conferences, there's more ways that the ecosystem sort of gets together so there can be that knowledge exchange of, you know, everything that people have learned. And so I think that the, you know, the GovTech industry overall has just reached a state of maturity in terms of company formation that mirrors private sector, right? Where, you know, there are those resources that, you know, can help founders navigate the difficult first few years of, you know, of building a product and building a company around it. And going from there. So, I mean, you know, I think a lot of those resources are good at finding, you know, the interesting ideas and founders and companies, but to the extent that the early-stage founders aren't finding it, you know, I don't think you have to look all that hard to see that stuff, and it makes a difference.

So, Jeff, outside of finding your quarterly roundups on govtech.com, what's the best way to keep up with you?

Yeah, so the link that just popped up at the bottom of the screen, that's That's my LinkedIn. You know, our corporate website is a great place to find us. And I think my email is published in the quarterly roundups as well. So any of those ways are a great way to reach me.

Well, we'll make sure to drop the corresponding links in the show notes. And Jeff, we appreciate you taking time to join us on In Case You Missed It, and obviously greatly appreciate your insights on the GovTech market.

Yeah, awesome. Thanks for having me, and I look forward to the next time.