Mid-Year Gov Tech Market Update

All right, TGIF everyone, and welcome to our mid-year market update. We brought 2 rock stars on to dig into what is happening in the world of GovTech. Rachel Stern is the founder and CEO of GovTech Ventures, a company that partners with pre-seed to Series A GovTech companies and finds, you know, helps, works with funds to help fund them. And she has a mission to empower the entrepreneurial and funding ecosystem shaping the future of government technology. Jeff Cook is the managing director at Shea and Company, a software-focused investment firm that works with emerging and established leaders in software. At Shea, Jeff heads a practice focused on advising GovTech companies on mergers, acquisitions, and capital raises, and has advised on more than 40 transactions in GovTech in the last 5 years. I almost thought that was like last quarter, Jeff, but I guess it's been 5 years. But Jeff and Rachel, thank you so much for carving some time out to join me today.

Thanks for having us.

So as unbelievable as it might sound, we're kind of at that midpoint in 2024, and it seems like, you know, now we're in June, writing May on checks. And, you know, my first question for both of you is just, what are you seeing kind of in this market as we think about this midpoint, you know, reflection? And so, Jeff, I'll start with you on this one.

Yeah. Yeah, I mean, it's been a very busy first half of the year. You know, in terms of the significant trends, I would say that, you know, the biggest trend is one that's pretty broad, which is— and I'll kind of unpack it— which is the GovTech market feels really healthy right now. You know, we write this quarterly article, and this time around for Q1, I mean, it took longer than usual just because there were so many transactions that we had to You know, we had to go through, which is a good thing, right? And so, you know, as we look at the market, one, we've had 4 sequential quarters of growth in transaction volume, right? Haven't seen that since 2021. 2, Q1 was the busiest quarter we've seen in GovTech in terms of the number of deals, in terms of the volume of deals since 2021. And 2021 was, you know, was gangbusters. You know, there were transactions happening what felt like every day. So busiest quarter since 2021. And then, you know, as you look at the composition of activity, last year you saw some transactions that were situationally driven.

Right.

Some, maybe a company had to do something, but it wasn't leaning into company performance. It wasn't leaning into a strong market. You know, there was a reason a company was out there doing something. I contrast it to this, what we've seen so far this year, And you're seeing great deals getting done. You're seeing really large deals getting done. You're seeing public strategics buy businesses. You're seeing private equity be very active. You're seeing private equity-backed portfolio companies sort of downmarket being acquisitive and starting to consolidate their segments of the market. You're seeing acquisitions to expand product portfolios and just the diversity of what always has kind of kept the GovTech market healthy. We're seeing that across the board right now. You know, there's things that we've covered already in Q1 that have been announced. There's a lot more that's kind of in the background that will be announced here. Again, large deals, small deals, you know, in the next few weeks and, you know, and looking ahead. And then, you know, the final point too I would make is that valuations are, you know, they've kind of returned to one, a level that feels more 2021-like. You know, as I look at valuations in '21, You map out revenue growth, you map out scale, you map out, you know, cash flow margins, and you started to see like a very high correlation between revenue multiples, EBITDA multiples, valuation multiples, and financial performance. And in '22 and '23, it was really erratic. You'd see, you know, A+ companies getting A+ valuations, you'd see B companies getting D valuations. And, you know, there was really a, like a, there wasn't a sense of clarity in terms of if you're a seller thinking, if I went out to market right now to try to raise money or try to sell my business, what is it worth? So there's this element of risk. And I think one of the most encouraging signs of what we saw in Q1 is you're seeing this consistency, you're seeing a volume of data where I think a lot of sellers that have been interested in accessing the capital markets in some way, you know, just have that much more confidence in saying, okay, I understand what the art of the possible would be valuation-wise or outcome-wise. So I think that is, you know, that has predicated There's just more interesting conversations, I think, of, you know, other GovTech companies, you know, doing something and then, you know, driving more activity, which, you know, there's kind of this flywheel effect. So big trend is that, you know, market is healthy, growing, and a lot more in the come.

And it's just getting started. Rachel, you know, you've seen this from several different vantage points in the market. So tell me a little bit about kind of what you're seeing right now as we enter this midpoint of 2024.

Yeah, of course. And it's always so great to hear Jeff talk about sort of the later stage stuff and how healthy it is, because I think it gives hope to folks building in the earlier stages that there is an exit opportunity and there's a growth opportunity. I think what Jeff mentioned is exactly right. It's never felt healthier to invest in this space. And I think that sort of later stage transaction volume is trickling down into those middle and early stage markets and giving investors who may or may not have GovTech as a specific thesis, may have one or two GovTech companies in their portfolios, um, a little bit more confidence in pursuing other deals in the space. And so there's some sort of momentum in a way that I haven't seen certainly in my decade plus of investing in this space of people proactively looking for GovTech, understanding that the markets were so wackadoo the last few years, understanding the valuations and everyone sort of in B2B SaaS seeking unicorns way overpaid. In the last 3 or 4 years, and there's this desire to be in sort of a more stable environment and a more stable investing environment. With that, though, with all that new money comes some education elements of folks that haven't maybe been in the GovTech world quite as long around those longer revenue cycles, around sort of the lumpiness of helping those companies scale, meaning very hard to get that first customer. Um, okay to get the $5 million, but then probably need to raise again before they've maybe crested that $1 million ARR mark. And so, um, finding, finding investors that are comfortable and patient with that capital cycle and are going to be willing to be in sort of that seed, uh, pre-seed all the way to seed cycle and get you ready for the A is going to be crucial as companies decide which partners they want on their cap tables.

Yeah, I think, you know, what's interesting, we did an analysis one time where we looked back at kind of the GovTech market during recessionary periods of time and whenever there's economic uncertainty, and we actually found that not only did the market perform, but it overperformed during those periods of uncertainty because there's greater needs in the market to use technology to do more with less. Now, you know, as we think about kind of the biggest M&A story of 2024 thus far, Jeff, I want to get your thoughts on this. I mean, what do you see? Are we going to continue to see these kind of record-setting deals in the market?

Yeah, um, I, I think we will. You know, I think back to 2021 where some of the elements that drove a lot of the activity there are falling into place this year, right? Where you have some really large deals where, you know, private equity has come in or control investors come in, and, you know, a lot of the, um, a lot of the capital for these larger businesses is earmarked for M&A, further consolidation, you know, with the underlying thesis that if you have a— if you're a large business, you're serving probably thousands, hundreds if not thousands of government customers who have diverse technology needs, you know, like to buy more from vendors they trust, and are able to drive cross-sell incremental revenue, you know, by buying additional products. And so, you know, for these larger businesses, M&A is a huge sort of leg of their growth stool, with the idea being sell more into the existing base. And so whenever you see these large investments, what often you will see is follow-on, you know, tuck-in M&A, smaller M&A around that. And so, you know, I think those pieces are falling into place. But, you know, the biggest M&A stories, you know, for in my mind this year, you know, to pick 2 deals, one on the public safety side, one on the public admin side, you know, on the admin side, I think it's certainly the OpenGov deal. You know, that beyond just being a large deal, one of the largest in some time, You know, what I thought was really interesting about that was that, you know, it was real validation sort of at that enterprise value level of $1.8 billion of a company that just got there in a different way, right? So, you know, not to be like overdramatic, but, you know, the market has slowly adopted SaaS, right?

Mm-hmm.

It slowly has moved to this, you know, to this kind of moment where, you know, SaaS was a trend, but now it's very mainstream. It's very here and now. And I think about a lot of the other businesses that have gotten billion-plus dollar valuations, and the way they got there was a lot of consolidation, right? Maybe it's an ERP business that, you know, went through and, you know, sort of acquired market share, acquired customers by consolidating, you know, their segment of the market. You know, we've seen that across all different sectors of GovTech, and you build really great durable businesses that, you know, that grow well, but they really drive a lot of cash flow, and those businesses have been driving have overall been valued on cash flow. But I think what's really interesting about the OpenGov deal was that was one where I think the bet and the value of the business is not based on, hey, this was a 50% EBITDA margin business. It's there is a changing of the guard that will happen with modern SaaS solutions eventually becoming the next Tylers, the next, you know, pick your sort of household names in GovTech. And that bet in my mind was much more on the market opportunity that exists for SaaS businesses and the growth opportunity that exists there. And so I thought that was just a different style transaction at that valuation level that, you know, I think is important for, you know, from— for the market overall. And then on the public safety side, I think, you know, not as big a deal, but Axon acquiring Pusis, I thought was an interesting one. And, you know, that we'll talk about it later because I know there's a question just around some of the different investment themes, but in public safety, this idea of like, how do you start to unify a lot of the systems out there? How do you provide better data, more contextual data to inform emergency response? You know, that was sort of centered on, you know, that theme. And there's a lot of capital that's come in sort of around that theme. There's a lot of different sort of categories playing on that. But in my mind, those have been the 2, you know, defining sort of transactions so far in, you know, year to date. And, you know, I think a lot more you'll see under those 2 themes in terms of transaction activity moving forward.

And Jeff broke down many of these and more in his column, so definitely, you know, take a look at that on GovTech. So, you know, Rachel, as we think about kind of where we're at in the environment now, I know one of the key themes that we've heard this year has been the funding cliff, the federal funding cliff. You know, we're coming off of a period of unprecedented federal funding for state and local and education, and, you know, they were outlaying all of that capital to very rapidly modernize. But now that, you know, total cost of ownership and all these other things are kind of coming back of the conversation, this has created a far more competitive dynamic for a lot of the private sector companies. I mean, what are you seeing in terms of kind of the investment need here? I mean, what, what are those dynamics in terms of the companies that are playing this space and their, their, you know, use of funds for, you know, that competitive dynamic?

Yeah, it's funny because sometimes the market and the need aren't always aligned. I'm seeing a lot of companies now going out to raise their A that raised money around sort of that federal funding stream, that bullishness of the billions and billions of dollars. And investors, of course, were responding in kind with, frankly, ludicrous valuations and just sort of throwing money at the problem. And what I'm seeing in the market right now in terms of fundraising health are the companies seeking an A are having the hardest time, particularly when they've raised a lot of money in the last few years. And actually, the seed market is pretty healthy, again, because there's that sort of newfound investor confidence that's coming from some of these later-stage transactions and some just environmental elements about the industry as a whole. But it's leaving folks who have been growing at a relatively steady clip. I mean, even, even at a clip that we would have considered impressive in the, in the past few years, having a very hard time and being held to really high efficiency standards. There's a, there's been a sort of shift in perspective, I think, towards making these companies really efficient and really focused with bigger and bigger margins and high NRR that we maybe weren't holding them to 3 or 4 years ago. And so I think there's this funny, this funny mix where the market is definitely still there. States and localities, particularly for the companies that have been selling into them for the last few years and have found value in it, are really sort of scraping between the couch cushions to continue to pay for them. Because they understand how useful and innovative it is to have services online or digitally or data-driven in a way that sort of pre-2020 they wouldn't have found as much value in or seen as much sort of immediate need for. So there's going to be this interesting reconciliation, I think, between the buyers sort of needing to either pay a little bit less for for the technologies and sort of companies needing to right-size their price offerings and/or companies starting to partner together. And I think Jeff talked about this in terms of sort of the roll-up strategy later in later stages, but more and more I'm seeing companies that are solving for really niche parts of a specific vertical. And I think there's this really interesting opportunity as budgets get tighter with government buyers for companies to start partnering together. and solving for a lot of little pieces of the string, the string of pearls, instead of trying to eat the whole elephant and really starting to stay competitive with both the new and the old guard who would typically go after these larger-scale contracts. So I'm encouraging a lot of my companies to look at the market not just in terms of a competitive edge, but in terms of a collaborative edge so that they can start going after the dwindling dollars more effectively.

The best of breed versus kind of the traditional platform approaches. So yeah, definitely see the same thing. And we had a viewer kind of comment on another record-breaking deal with, you know, Bain Capital and PowerSchool. We saw that a few hours ago, $5.6 billion, you know, acquisition of PowerSchool by Bain Capital. So one of the providers of K-12 cloud kind of products. So, you know, as we think about GovTech now kind of as a market segment, I mean, what are the aspects of the market that are driving the most investment dollars today? Are there kind of emerging areas that investors should be watching closely? Rachel, let's start with you on this one.

Yeah, you know, I, I've, um, been honing in on a sort of narrower thesis than generalized administrative tech around public safety tech. I'm seeing a lot of later-stage deals happening in that space around roll-ups or acquisition, um, and, and sort of less competition or less focus on it in the seed to A range and helping those companies reach sort of that $5 to $10 million ARR threshold. So to me, there's a hole in that market, and I think there's a couple of reasons for that. One, it's a— if state and local government buyers are reluctant to innovate, frankly, first response and emergency responders are sort of even more reluctant because it's such a person-to-person style business. style of work. And so there's almost this sort of secondary market that you have to sell into, and it's very disparate, and selling to a bunch of small fire departments is a really hard way to scale. So completely understand the downsides of it. And on the other hand, we have more and more natural disasters. We have more and more expectations of sort of real-time data in public safety, not just sort of prescriptively in terms of first response, 911, but in terms of proactivity, in terms of making our cities and our grids resilient. Managing homelessness, managing the things that are making our cities hard to live in right now. So that's a space that I'm really excited about. And I'm seeing some very innovative early-stage technologies that, again, I think will benefit from partnering with each other to sort of tackle these large-scale issues. So that's, that's a space I'm very excited about. And I think it's hard because a lot of the founders of those companies tend to be first responders themselves. And maybe haven't raised venture money before, maybe haven't scaled in those areas, you know, that they're used to sort of selling to their buddies. And so there again will be an education element of helping those founders with the great technology learn the vocabulary of fundraising, learn the vocabulary of scale and margins. But if you can do that, it's a pretty interesting space.

Absolutely. Jeff, what about you? What are you seeing? What, what areas are attracting kind of the the lion's share of attention right now.

Yeah, so, you know, if you look over the last few years, I feel like there's, you know, multi-year themes in terms of where you see a lot of transaction activity. And, you know, in the 2020 to, you know, 2022 timeframe, you saw a lot of activity around citizen-facing technology, right? You can pick your large citizen engagement vendor, There's a lot of consolidation going on. There's a lot of recapitalizations of those businesses, but, you know, it makes sense, right? You know, as we were getting through the pandemic, delivering digital services, providing more digital touchpoints for citizens to access service, government services, you know, that was a theme and it drove a lot of investment. You know, what we've seen over the last 2 years has really been around the financial systems, right? You know, as I think about some of the larger deals over the last 12 months, you know, you had Civica, you had OpenGov, You had BS&A, you had Edmunds, and the list goes on, and there's more on the come in terms of just core ERP and the surrounding financial systems. And so there's a lot more to do around— I think there's a lot more consolidation, there's a lot more interesting growth companies sort of in that financial suite. And, you know, I think when you see a lot of activity in a certain sector, what that ends up doing is it educates a lot of investors around the dynamics of the market, around the market landscape, potential exit opportunities. I'm gonna go get my light, I'll be right back. And, you know, once you have this level of education, you know, it's this idea that deals, we get more deals in certain sectors. And so I think we'll see a lot more in sort of the back office financial systems. Where I think we see that spilling next is, you know, what are the systems that touch that?

Mm-hmm.

And I think a lot of the transactional systems that drive revenue for cities, so think tax systems, whether that's business taxes, property taxes, licensing and permits, payments. I think you're going to start seeing a lot more happen in that sphere, both because of the back-office providers moving up into that sector, but also I think that's viewed as sort of the next pillar of GovTech that's going to go through sort of a wave of growth investment and consolidation. And then another theme that I would say it's less you know, a specific end market, but more a business model that we're seeing more and more is, you know, businesses that are serving sort of what I think of as a lower mid-market of GovTech. So think tier 4 and below population centers. You know, in the days of on-prem software, a lot of that, you know, a lot of those smaller population centers were kind of priced out, right?

Mm-hmm.

Because, you know, on-prem, you know, required more appropriations. It's more expensive to implement. It had a higher service attach rate. But I think with just the maturity of SaaS, you're getting solutions that— and you mentioned this in your App Store sort of moment article last year, Dustin— you're getting these more modern, sort of easier to sell, cheaper, easier to implement solutions that are being paired with these higher velocity sales models where you don't have someone with a bag flying around on planes, but you have more inside sales driven, higher velocity, models where we're seeing companies that have 90-day sales cycles in this market versus the typical 6 to 12 that we see. And so we're starting to see a lot more of those businesses that are growing a lot faster than we've seen traditional GovTech software businesses grow. And I think as people look at that segment of the market, they say, wow, there's a lot of greenfield here, certainly more in Tier 3+. And that's, I think, the performance of those companies and as they get scale, Rachel, I think you've got some thoughts on this one as well.

Yeah, you know, it's— I think Jeff is exactly right. And I'm also seeing this increase sort of to that narrowing of the sales cycle, which of course is always the hardest part of scaling GovTech. A lot of companies that are starting to go to the folks already selling to government and using channel partners as a scaling method to really get down that sales cycle to smaller margins, of course, smaller revenue, but far more deal flow. And I think that's a really interesting way to scale. It's like you're not necessarily trying to completely change the model or the backend system, but you're going to the people who are selling that anyway. And I have been seeing that more and more. And that's just another example of sort of partnership or solving a small piece of the puzzle, being an asset in helping to accelerate a company's growth. But sales cycles narrowing just by selling to the people selling.

So any thoughts on, you know, as we think about the next 6 months, right? You know, we've got kind of the economic uncertainty that continues to like be part of the conversation, but what are the other factors that you think are going to kind of impact the way that we finish this year in GovTech that you're watching? Rachel, let's start with you on this one.

Yeah, and I know AI is a topic in the comments and certainly maybe a topic for later, but I think that we're seeing a lot of companies Of course, the conversation in the private sector around AI is starting to trickle into the public sector. And the conversations I've had with public sector buyers is sort of this fear of being flat-footed and being slow to respond and also a little bit afraid of the possibilities, as maybe we all should be. But, you know, this idea that they feel like they should be cutting edge and maybe there's just a lack of sort of education and translation between that industry and what that actually means in terms of implementation for a state and local government. What does that translate to in terms of a tool or outcomes or measurements? So I think AI, you know, we certainly haven't heard the last of AI. I think that what that, you know, and we can get into sort of more specific use cases. You know, in state and local governments, I find that changing of sort of federal guards sort of changes the buying cycle, but it doesn't really implement the day-to-day or change the day-to-day. I think that folks start thinking about how their priorities might align with an administration and starting to align with more of those federal dollars tying to, you know, key, key KPIs. But the reality is cities and states are dealing with homelessness, they're dealing with a migrant crisis, they're dealing with crumbling infrastructure, and those things are going to stay the same sort of between or, or, or, um, with a new administration. So I, I think that in terms of their buying cycle and the things they're looking to procure, I don't see a big shift.

Jeff, what about you?

Yeah, no, I agree with Rachel on, you know, I think the election is not going to have a huge bearing, especially the further you go down market. Certainly with some areas of federal, you might see some stroke of the pen risk with an administration change, but the state and local level, it's not something that we think a whole lot about in terms of, you know, determining the, you know, the direction of, of the market. You know, thinking about pros and cons, like what will drive activity and what could slow down that activity, you know, I think starting with the latter, you know, things that could be detractors, it's the typical stuff you read about. It's inflation, it's interest rates, you know, and alongside interest rates, it impacts, you know, the credit markets, which impacts valuations. Um, and so there's always that, but, you know, honestly, I think that environment feels more stable today than it did a year ago, than it did 2 years ago. Um, but that risk is always, you know, is, is, is still out there, right? Um, I would say on, on the other side of the market, um, or on the other side of the ledger in terms of what's driving activity, um, you know, I think private equity, and I wrote about this in sort of the 2024 preview article, that we expect even more private equity activity. this year. You know, I think you can't read the word private equity in, you know, in a financial, you know, journal without seeing the, you know, the term dry powder in quotes next to it. But, you know, it's a real thing, right? Where, you know, I think a lot of firms are behind on capital deployment because 2022, 2023 were not, you know, were not years that had all that much transaction activity, especially relative to '21. And that's for, you know, that's for M&A in general, tech in general, And to some extent, GovTech. But I think as people are forced to be a little bit more aggressive to deploy dollars in this market, this element of risk that still feels like it's out there is still causing gravitation towards more resilient sectors, right? And GovTech still stands at the top of that list. When you look at any business serving governments and retention rates in terms of how well they retain their customers, how well they expand their customers, you know, stand at the top of really any other area of software. And I think paired with some of the more secular trends around cloud adoption, around digital transformation in government, you're seeing businesses that are growing, you know, faster every year serving government paired with that resiliency. And so, you know, I think there's more capital that's chasing GovTech that, you know, is starting to fall behind on capital deployment. And, you know, that's going to be a real catalyst. It has already been this year, and I think that will continue. continue to be, you know, through the rest of the year. So we're optimistic.

Yeah, we're optimists too. So let's dig into the AI question just a little bit. We had a, you know, question from our audience around, you know, just kind of this notion of the slow adoption and updates to government policy regarding AI. Is that impacting or affecting innovative companies looking to differentiate and enhance GovTech solutions? What's the trend happening here? I know Rachel, AI is near and dear to your heart. So what are your thoughts on this one?

Well, mostly just like everyone else, trying not to get totally outpaced by the rate of the market. So, you know, in terms of AI offerings to governments as sort of a tool or as a GovTech solution, I think there are a lot of people, of course, building on the GPT suite, I think there's gonna be sort of a natural consolidation of that market eventually because building not on your own AI core is dangerous. And there's a lot of companies in the space who have been developing their own AI for years and are sort of trying to figure out how they stay at the tip of the spear with all of this rapid development. So everyone in the market is just sort of trying to figure out where they fit in and things. For government buyers, I'm seeing a lot of interest in chatbots. as a use case for AI and sort of the most basic understanding of how do you create a contained language model just with your website so constituents have better access to services and don't have to go looking for it. But I'm also seeing a lot of innovation in the AI space around public safety and how do you take all of this enormous data that we've been either mandated to collect in the form of body cameras or are seeking to collect in the form of sort of human movement and/or car movement in a city, um, and making it searchable and queryable. And to me, that's one of the most exciting things that AI can do for governments, which is taking these enormous datasets that they've been working so hard to build, often with the help of other GovTech companies, and, and actually being able to glean real-time insights from them and, and make real-time decisions and sort of rapid decision-making based on that data. I think, again, because there's sort of a lack of translation or education between the private sector and the public sector on adoption and what AI means, I've seen the most successful companies use AI as part of their services, but not sell it as an AI service. They're selling a platform, they're selling a technology that makes data more consumable and searchable and usable, but sort of as soon as they mention AI, you can just tell government buyers get nervous. So my recommendation to companies that have it as part of their tech stack is just talk about the benefits of it. You don't necessarily need to get into what AI is and why we use it, but really think about it as an enormous dataset asset. I saw that LA County did a project a few months ago. I don't know if you guys read about this, but where they were able to use AI to track across a lot of different data points about their citizens to predict homelessness so that they would catch people before they were actually experiencing homelessness, but when they were at the highest risk and try to create intervention services and work for the county and the city. And I actually think that's an incredible use case for AI where you're just taking all of this data and you're making it predicted and you're making it usable. And I think we'll start to see more of that.

Absolutely. One thing to add on to what you were saying too, we did drop some new market data on generative AI market size for state and local government. on the Center for Public Sector AI's website. Just so if you Google kind of GovTech Center for Public Sector AI or go to govtech.com/cpsai, you'll see our market size info and our survey that we did on AI utilization. What we found though that was interesting is even if, you know, like the perception is government is slow to adopting AI from a policy standpoint, that may be true on the policy side, but agencies are moving on it in terms of BYO AI. We're seeing a lot of employees that are just using it, right? Microsoft found 75% of knowledge workers are using GenAI in their work streams. We found 56% of government employees are. So it is very real. It is here, and it is one that we're tracking. So definitely take a look at some of those new data points. And it will eat about 10% of the IT budget by 2027 is our estimates, but very quickly go from standalone today into what we call embedded AI. Just like when you buy an application, you don't buy an application and the cloud environment. You just buy the application that's hosted on someone's cloud environment. we're going to start to see more of that dynamic. Now, you know, Jeff, I want to bring you back in now because as we think about, you know, this market, you know, what would you tell investors, uh, that have not considered GovTech before? Any, you know, kind of thoughts on how you would frame this market opportunity?

Yeah, um, so I, I would, uh, I think the, the, the key term is patience, right? Um, and that, you know, if you are coming from especially more horizontal areas of software and technology, and you're starting to look at the government space for the first time, you have to think— you have to rethink some of the traditional underwriting you do around, you know, just around software and what the art of the possible is, especially from a growth perspective in this market, right? Rachel hit it on earlier, but, you know, this is the market of, you know, of just where you can make very valuable investments, but the paybacks and the realization and the return on those investments, they don't play out over 3 to 5 years. They play out over 5 to 10 years. And that manifests itself in, you know, just having longer sales cycles on average. You know, products tend to be more complex. You know, adoption of those products, especially if you're, you know, if you're starting from, you know, from going to have to find your first customer, right, you know, at the very early stage, it it just takes longer. But I think people who really dig into the market realize that the lifetime value of every customer in this market is enormous. It's just that the associated paybacks and, you know, and to see that through, I think, just requires a higher degree of patience and just a longer view of, you know, investment horizon than the private markets. You know, the other thing too is, you know, I think depending on what stage you're at, I've always thought of, you know, GovTech as a collection of a lot of, you know, medium-sized addressable markets, right? It's not like CRM software, right, where you're going to have a $100 billion addressable market, right? And, you know, I think at some point, generally in the $30 million sort of ARR range, if you're a single-product company, you got to be thinking about what is your next act, right? And if you just look at historically, you know, when do GovTech companies start to do their first acquisition? A lot of it is in that, you know, plus-minus $30 million ARR range, because I think you start to see you're running out of headroom in that initial product, and you're starting— and you've probably heard from customers of, geez, we really wish you had X or Y or Z. And so, you know, thinking about the market not as just pure organic growth, but eventually using, you know, partnerships or acquisitions or something to expand what you can do for your customers, that has tended to become— that has tended to be something that has been important as companies continue to scale in this market. But overall, like TL;DR is patience.

Yeah, that's a great perspective. It's an industry of industries, so lots of different addressable markets there. So as you kind of think, Jeff, I want to get your thoughts, or Rachel, let's Let's get your thoughts on that one, and then I'll go to Jeff for, uh, for the next one.

Yeah, I, I, and I'd be so curious to hear this group's thoughts as we start to see more and more growth through that acquisition strategy of sort of smaller companies to fit in for those specific needs. If actually that long-term sales cycle shortens, um, if you start to see companies being sort of gobbled up above $5 million ARR instead of $10 or $20, And, you know, how investors— I have a thesis that because I think there, we've become more granular in our solution sets. I'd say 10 years ago, we were solving for data and we were solving for payments and we were solving for websites, like these huge sort of overarching things that are sort of starting to acquire more specific needs because the customer is saying, well, gosh, I just wish you had this feature or this feature. And it's easier to acquire both a build tool and a customer set than it is necessarily to build it in-house.

Mm-hmm.

I have a thesis that there will be an evolution sort of in the GovTech investing market of more sort of singles and doubles, but faster. I don't know if you guys have thoughts on that.

Yeah, no, I think you're exactly right. I mean, kind of back to when we were talking about best of breed versus platforms. I mean, you're going to see an explosion. I mean, we knew there were lots of companies in the market, but I think also driven by what's happening with generative AI. The democratization of cloud infrastructure, like all of these things that are kind of, you know, combining themselves into these disruptive trends are going to start to create some interesting dynamics as it relates to the ability for multiple, you know, applications to exist and the orchestration and the wrapper from an enterprise standpoint doesn't have to be through a platform, it can be, you know, from the agency themselves. So I think we're going to see some, we're going to see some crazy dynamics over the months to come, which will drive innovation, right, as we think about All of these new capabilities that are emerging, it's going to drive a lot of new growth, a lot of new attention, consolidation, and some great innovation within the public sector. Jeff, I don't know if you have any thoughts on that one as well.

Yeah, you know, I agree with what Rachel said, and we've seen some degree of it already, right, where, you know, I think a lot of the more recent entrants in the GovTech market you know, are very product and mission-driven founders.

Right.

And we've seen a lot of businesses get to, you know, a few million in ARR, you know, establish product-market fit, but, you know, find a realization that, you know, it's really hard to build— it's hard, but it also takes time just to build the go-to-market engine, the flywheel of customer references, just because of how reference-driven the sales process can be in government. And it just takes, you know, it's almost like the chicken or the egg problem. And, you know, I think because there's been a lot of, you know, emerging or larger businesses that, you know, have that product mindset, we're seeing a lot of, you know, partnering really through acquisition of finding kindred spirits, of bringing together 2 mission-driven, you know, organizations, but one is just a larger organization that has distribution, right? And I think the sales pitch to some of the earlier-stage companies of, you know, we can really accelerate— we larger, you know, company in your space can really accelerate your vision by the existing distribution they have just in terms of revenue scale and customers and things like that. We're seeing a lot more of that, and that's frankly been a really attractive way for, you know, really attractive sort of outcome even earlier than expected, I think, for some of these companies. But I think we'll start to see a lot more Absolutely.

So easiest question for you both is, you know, as, uh, you know, those that are listening in, if they want to learn more about you and your work and how to kind of follow it, I'd love for you to share a little bit more about that. Rachel, let's start with you.

Yeah, so GovTech Ventures is, is relatively new. Um, we just started at the beginning of 2024 and are just seeing some incredible response. Um, so helping companies to collaborate, helping to find investors, investing ourselves And then helping find product market fit. Great, you've got your first customer. How do you get your first 10 or 20 or 50? And then I can connect you to my friend Jeff.

And yeah, Jeff, perfect segue. How does our audience keep up with you?

Yeah, well, the website here at the bottom, you can find me on LinkedIn as well. Let me get this light fixed here. And Yeah, those are the best 2 ways. And obviously, you know, write the column for, you know, with GovTech Biz every quarter to talk about what's been going on in the market. So that's a good way to keep up with what's, you know, what we're seeing in our latest thinking.

All right, well, Jeff and Rachel, thanks so much for carving time out to join us for today's show. And we'll put all these links and more in our show notes. Thanks to our audience for hopping on as well, and everyone have a great weekend.

Thanks so much, everyone.

Take care.

Bye.