What Founders Need to Know About Govtech Exits

All right, welcome back to In Case You Missed It, our weekly roundup of what's hot in GovTech. Good to see you, Joe. It's hard to believe now it's the 8th of December. We're plowing through this month and this year.

It's unreal.

So, you know, one of the things that we often talk about on In Case You Missed It is kind of the different paths, the different stories of individuals that have made a mark in our market. And, you know, There's not a one-size-fits-all approach, but, you know, one thing that we haven't really addressed is often the exit itself. And so today we wanted to do a special episode really digging into kind of this notion of what GovTech founders need to know about GovTech exits. And so as Joe and I were thinking of who would be best to talk about this, of course, one name was front and center that had a recent exit. And that's Katherine Generakos. She's a great friend and the former CEO and co-founder of CityGrows who exited to ClearGov in 2022. So Katherine, I want to bring you into our stage again. Now, this isn't your first episode of In Case You Missed It. For those in our audience that have missed her other appearance, you definitely want to check out the show notes because she was one of our kick-ass women in GovTech. on a previous episode earlier this year. So welcome back. But for those that missed it, tell us a little bit about yourself and your background.

Sure. Hi, thanks. Great to be back. Yeah, so I am a little bit of a nontraditional founder. I had a first career in public health and social services, but then I worked in politics and tech and was appointed and served as a Commissioner of Innovation for the City of Los Angeles for a few years under then-Mayor Garcetti. And that really was what moved me me from like a civic govtech hobbyist, like I had co-founded Hack for LA, into being like, oh no, I want to help solve these problems. So my business partner, Steven, and I started CityGrows in 2016 and went through the whole adventure together. Still like each other. That's a good metric for an exit. Do you still like your co-founder? And now I'm just doing some consulting and figuring out what's next. Had a really amazing sabbatical 2023. I highly recommend that for those who can pull it off. It was necessary after the full ride of founding a GovTech startup.

So we're envious of that. So we'll put that on our list, Jo.

Yeah, I'm happy to be a sabbatical coach for people too. I'm really good at helping people like Detox from, um, from these adventures. So there we go.

We get a sabbatical and a sabbatical coach, Dustin. We're, we're set. You know, that episode that you were on actually was one of our top-performing episodes of the, the entire year. So that's, uh, just wanted to point that out.

That's cool.

As we watched, you know, through this journey, you know, we had our event just last month, our State of GovTech event. A lot of the sessions focused on how to raise capital, how to enter the market, how to understand the, the market. Not so much on the whole exit part. And that's why we're so happy to have you on this episode today to share a little bit of your insights. Maybe you could initially walk us through some of those possible outcomes for GovTech startups. Sure.

And part of the reason I wanted to do this is because people call me to talk about this all the time because people don't really talk about it that much. And I really benefited from speaking to a couple of founders who who had gone through the process as we were moving through our decision tree with CityGrows. And so I thought, why not just do this at a bigger scale, right? Yeah. I mean, everyone who founds a startup imagines that they will have the dream outcome and they'll be ringing the bell and they'll be IPOing, right? And it's pretty rare in the GovTech space, let's be honest. You know, a lot of that is determined by the sort of speed and characteristics of our market. But, you know, it's possible. Dream big, friends. It will happen for some of us. But there's a lot of intermediate choices in between there. There are, you know, there are obviously large private equity funded roll-ups in the space. There are, you know, the Tylers of the world that ingest companies. There are direct exits to private equity. There's private equity, both minority and majority investment. Sadly, people shut down, right? There's a whole range of outcomes that can be really influenced, not just by your performance, but by how you do and don't raise capital, like your speed of growth, size, you know, all those things kind of feed into like what these possible outcomes are.

So yeah, I think, you know, with all of those different options, I mean, I think this is the question we often get too, which would be great to get your thoughts on. You know, how do you know which outcome is the best for you, your team, your customers, your investors? You know, what does that kind of process look like and how do you know which one to really look for?

Yeah, it's, um, I guess I'll say that, like, for us, and I think for, for everybody, like, you should be thinking about this the whole way because, like, who your investors are and how much investment you take and when, and do you raise venture or use debt or, like, you know, like, all these choices, like, feed into Like, what is gonna be possible and not possible for you? And who is kind of, who gets to make that decision too, right? Obviously, the more external investment you have, the less control you have, the less you as a founder get to decide exactly what happens, right? Like, there's just a lot of levers to move up and down throughout the entire process. And at least for us, Having a clear sense of what our values and goals were for the company from the beginning and constantly checking in with each other as co-founders and with our investors and advisors on that was essential to be able to make those decisions. Because the ground's moving under your feet all the time when you're a founder, right? Everything's changing all the time.

So let's dig into that a little bit. I think when you look at the— you mentioned the levers, right? Whether you're you're looking to raise capital, whether you're trying to decide, I'm going to bootstrap this thing myself, or maybe even look at a sale. What are those conversations that you have amongst your leadership team? You mentioned your co-founder to make the right decision there.

I mean, I sort of joke about this, but it's true, is that probably if your core goal was to make as much money as fast as possible, you would perhaps not choose to start a GovTech company. You might perhaps have a faster route to immediate success, right? So you have to know like what your risk tolerance is at each stage of the game, what your kind of control flexibility is, like how much control are you willing to give up as a founder versus how much are you willing to, like what do you need in terms of— investment at any given time? Like, do you have a clear metric for what that investment's gonna get you? Are you being open to different kinds of investment paths? Like, can you bootstrap? Should you bootstrap? Like, what are your risks? Are your risks being overtaken by somebody else who could go faster? Like, you know, it's kind of open season now with AI friends. Like what, like what's gonna change? Like, like what did you not see coming, right? That could completely upend your like nicely plotted trajectory. Yeah. How fast are you growing? Not just like how much money you're making, but how fast are you growing? That's going to determine what kind of capital you can raise. How long have you been at it? Like, there's just a lot of factors that I, as a non-MBA, like kind of non-traditional founder, didn't know. But I think even my friends who have MBAs didn't— they don't teach all this, right? So all those things need to get constantly reevaluated, right? Do you want strategic investment? Do you want venture capital? Do you want debt? Like, each of those can be an amazing accelerator or can screw you over, right? So it just depends what you want and what you see for your company. And can you be objective? I think a lot of us, certainly me, I am in this field because I think these problems are important problems to solve. There's a lot of research that women entrepreneurs start companies to solve problems as much or more than for any other reason, right? What's going to get you to solving that problem? What's going to support your customers? Like all these decisions, like all these factors factor into that decision. Yeah.

And I think, you know, one thing that you've been really a big fan of and proponent of is, you know, this notion of shared values. And I'd love for you to maybe dig into that a little bit too, because as you think about All of those different options, where does shared values fit into this?

Yeah, it's interesting. I actually just saw an email from a non-govtech founder who they shut down their company in the climate tech space and had raised decent, I don't know, $15 million or something, decent chunk of capital, was trying to sell, wasn't able to sell, and was talking about balancing You know, we need to support our customer. Like, what's our top value? Is it your customers? Is it your team? Is it your investors? Is it you and your co-founder? Like, what are the most important constituencies in your perspective to serve here, right? People make different choices about that. Like, if you have a friends and family round, that's really your friends and family. Like, it might be the absolute most important thing for those people to have a better outcome. If you have, like, a ton of giant institutional investors who already wrote down their investment like 3 years ago and basically don't take you seriously anymore as a company. Like, like all those things are possible, right? So I think just being as objective as possible, which is hard to do for your own, for your own company, right? It's why you should have a lot of honest conversations always with your investors and advisors, because they probably have a little bit more distance than you do. And your customers too, sometimes, right? Like, what's their, what's their, you know, depending on what kind of customers and what relationships you have, like, what are their, what, how are they gonna react? And what, what do they see as most important, right? So.

We see right now a lot of startups looking for private equity deals. Interested to get your take on where does a startup need to get to in order for, for that to happen? And, and are all these PE deals kind of the same?

All right.

I'm going to answer that backwards in that no, they are definitely not all the same. I mean, there is definitely like, they want a certain X return and there's a certain timeframe in a private equity deal. Like, so there's some commonalities, but no, different PE funds have very different philosophies around how long they want to hold an investment, like how involved they are. Like, You know, are they the kind of firm that's just going to like take the management out and replace everything? Like, are, is it a roll-up or a straight investment? Like all those have very different outcomes. Right. So no, I don't think they're all the same. I think there's this, like, you know, like there are these levels of revenue that people are like, if I can just get to $1 million or $5 or $10 or whatever that, you know, The doors, different doors will open for me. And that is sometimes true, but your rate of growth is at least, or as much a factor as your revenue, depending on why somebody wants to invest in you, like somebody, or acquire you. Like somebody might be just buying your revenue really, or they might be buying your revenue plus your tech or your revenue plus your tech plus your team. Like people want different things out of those deals. Right. And And people have different levels of transparency, I guess, in what they're looking for and what they're trying to do. And so no, I think just like any, just like you would with an investor, you gotta diligence the people who you're potentially making a deal with.

Yeah, I think that's a really good point. You gotta do it on both sides and full disclosure, we're PE-backed. Now, as of December, and it's been a great experience for us, but you're exactly right that it's gotta be, you know, you get a lot of different flavors of options and opportunities and it's gotta work out. And I think that shared value dynamic is definitely one that resonated with our process as well. So now, you know, if acquisition—

Some PE funds will tell you like, we'll reinvest this much in product. Like, you know what I mean? They have a very structured, like, this is how we use your revenue. And some don't. And like, you gotta ask those questions, right? You gotta find out like really what are they gonna do? And then of course, you know, if you take a majority investment, like you don't get to control it anyway, right? So.

Exactly. So, you know, if acquisition comes into the picture and that's kind of the goal, you know, another question that we often get asked is, you know, when do you bring in kind of that M&A sales side firm? Do you run your own process? Like how do you advise companies to approach that if they're kind of thinking about, you know, that exit strategy?

Yeah.

I mean, I thought it was great that there was somebody at the conference who was an eminent, like, who was kind of starting to specialize in government, GovTech M&A, it seemed like, which was new and nice. I've definitely had seen people have great outcomes working with, working with sell-side firms. I've seen people spend a lot of time and energy working with sell-side firms and not get a deal, right? You gotta be realistic about how big your deal size is and, and how excited a firm is gonna be about you because of that. Right. So, you know, I, like I said, I've seen people hire firms and not get a deal, and I've had seen people run their own process and end up with a deal. You know, it can. It can go all directions, but there's definitely more people taking an interest in this space, I think, right? So that's good.

We see a ton of that work ourselves and absolutely can echo what you're seeing. When you look at the components of the acquisition deals that Dustin was just mentioning, what are the typical components and how do they work for those that find themselves in the founder seat? Yeah.

So, I mean, I think this is something that's interesting, right? Is that there's no rules, right? I mean, there are rules, but there are like, you know, there's like SEC rules, but like, there, like those deals can get structured in lots of different ways. Right. And again, this goes back to like, what are you and your investors and your team and your co-founder, if you have one, like looking to get out of this. Right. So there's, There's compensation that's, you know, and like there are asset purchases, there are like traditional acquisitions where everything gets bought, right? There are, you know, really just like acquihire deals too, where you're like, there's very little deal, but like, you know, there's, you know, people are keeping their jobs, right? Like it really depends on what you're kind of looking to do, right? But there's— Some of these deals, for example, have compensation that's part of the deal, right? Like the traditional structure is you're getting cash and/or cash and equity in the acquiring company or our fund or whatever, right? And then there are sometimes there's split deals, like in an asset purchase, right? Where there's some revenue going to the initial company, but the company's like selling their functional assets to the acquirer, which, and then there can be comp post-sale for the founders and the team and the acquiring entity. Like there's just all these different ways to structure these deals. You know, there's length of time you are committed, you know, like how long you're committed at an earnout. Like what percentage those earnout deals are of the revenue from your company and the acquiring company. Like all those things. Again, there's like a million levers to to move up and down based on what you're looking to get out of the deal, right?

So let's dig into, you know, the elephant in a lot of these transactions is the diligence process. And, you know, you have lived and you have breathed this and, you know, break it down. What should founders expect? I mean, no rock unturned.

We've—

you get all kinds of different extremes that we hear, but You know, what's that process look like and what should you prepare for maybe now in advance of that process taking place?

So I guess, and again, I'm a non-traditional founder. I was a first-time founder. I did not understand just how much more intense it would be than investment diligence, right? Which was hard enough, I thought. But like the level of specificity, and again, this is gonna be proportional to the size and complexity of your deal, right? Like, hopefully, honestly, from the investment side, you would think they would do more for a bigger deal, although sometimes they don't. To your point, it's shocking to me how many deals I hear about where people don't do like a full code review. Any investors listening, you should be doing a real code review. You should find out what you're getting under the hood. And to your point, like, your code needs to be pretty clean. Like, if you have open source components, which pretty much everybody does. You need to have, like, make sure there's license. There's just like a level of specificity about both your financial history and future and your technical history that is just different from anything an investor's gonna do. Right. And it's not impossible. It's just time-consuming. And, you know, again, depending on the size of your deal, you'll have more or less resources to help you with that. Same on the legal side, right? There's just, they're complex legal, there's like many, many, many legal documents, right? Of varying complexity that you need to have somebody that you really trust and usually probably more than one lawyer that you trust with different specialties, like making sure that everybody's protected in those deals, right?

So you walk through that diligence process and understand, I know that, you know, No 2 deals are the same, just like we were talking about. But maybe you can give the audience a little bit of a window into that timeline. How long do these deals take to come to fruition and how long does it take you to where you're ultimately paid out and you get that exit?

Yeah. I mean, I know of one GovTech founder who their original exit was probably 15 years ago and they just got paid out because The fund that they sold to then finally sold to the, like, the people who were actually gonna, like, write the check, you know what I mean? It can take a long time to get paid out depending on the structure of your deal, I guess, is how I would phrase it. Um, and it can take, uh, I mean, I would say the shortest possible time you're looking at is like 6 to 8 months, and that is like lightning.

Lightning fast, I think, is what you were saying.

Sorry, am I back? Yes. You're back.

We got you.

Sorry about that. Yeah, like 6 to 8 months, lightning fast, more likely between 8 months and a year. Again, just depending on the complexity of the deal and the size of your organization and, you know, kind of what the expectations are. You know, the legal stuff takes a long time. And I think a lot of founders underestimate the length of time. And that's like from I got an LOI and like we're actually doing the process, right? Like, so, you know, like it's a long time and it's hard, like as an optimistic founder, You don't really want to be thinking like, oh, when am I running out of cash? A year from now? Should I be thinking about this? I think that's a, that's a, you know, we're all optimists or we wouldn't do this. Right. Um, and so I think that is tricky and you, I've seen, I have had friends who, um, who were not realistic about that and you can end up with only one option. And then if you fail that process and look, a lot of these deals don't close. Like you might be really far into that process, especially right now. I think a lot of deals are not closing. One of our, one of my advisors was like, after our deal was done, he was like, oh, I didn't think that deal would close. I can't believe it actually finished. Right. You know what I mean? I was like, thank God you didn't tell me that.

That's to say going into it.

Right. Right. Like, but, but that's real. A lot of them get like, people fail diligence, people fa— like, Like, you know, they could find something they don't like or something. It's not what they expected in your, you know, agreements with your customers or in your code, or, you know, a team member could leave. Like, like a lot of things can happen in that timeframe that can sink a deal, right? Their, their business side might change, you know what I mean? You just don't know what's gonna happen, right?

Right.

So, and that's, it's Crazy that like, you know, it's hard, it's a hard process.

And you look at the cost of borrowing money today, right, to help fund some of these deals. So there's a lot of, you know, slowdown that's happened as it relates to that. But, you know, the other path that we've seen here that doesn't often get talked about is the aspiration for an initial public offering and really wanting to ring the bell, wanting to go that route. You know, what do you think about that in the context of kind of the current economic climate?

I mean, I guess like, you know, some of the IPOs lately, this is not necessarily GovTech, but even some of the IPOs in like non-GovTech or SPACs or other, you know what I mean? Like there, there's just not that many IPOs and some of the IPOs that have happened in our space or adjacent have not been like super stellar outcomes. Right. Which like you've seen some people get taken back. private, you know, like, is, is like, yes, we should all dream the dream. But like, just know that that's probably not what's gonna happen to your company, especially in this market. Because look, there are these like ginormous incumbents. You have Tyler and Granicus and like, it's hard to disrupt them. And like, I think honestly not great for us as people who use government, right? Like, I'm not sure that's super healthy for us as a society, that that's where we are, but that's where we are, right? And, you know, it, it, it, you gotta be realistic, I think, about what's gonna happen. And, you know, I think there are, I think there are lots of paths to like IPO-style outcomes and IPOs specifically in GovTech. And there are Certainly founders I know who are like, that's, they are directly gunning for that. But like, boy, you gotta be making decisions every single time you're making decisions with that outcome in mind. And you're gonna make different decisions than if you think you're gonna get a private equity deal or whatever. And you might try and make those decisions, but in year 7 or 8 or what, you know what I mean? Like, it's just gonna change what you have as an option as you go along, depending on whether you can. grow at the rate that you wanna grow.

So, no, earlier you mentioned being an optimistic founder. Just a second ago you talked about being realistic. I imagine there's seasons to that optimistic pessimism.

Oh yeah. Despair. Like it's the full cycle.

Full spectrum, right? Exactly. How do you go about balancing those seasons and who do you turn to to get some of that perspective?

Yeah. Well, I think it's why it's important for us to talk to each other as founders in the space. I think it goes into like, were you, did you have the opportunity to be selective in the investors that you had? Like, cuz those folks can be real resources for you. Our investors, some of our investors were incredible resources for us in our process. Like, It's part of why, like, we ran our own process, partly because we already knew all the people that were, like, potentials for us, mostly, right? Um, uh, because of our investors and advisors, right? So those people are, um, invaluable to you. And so when you, you gotta— when you're, when you're setting your founding, like, advisor group, like, you want to be thinking about, like, what kind of exit do I want to have and who can help get me there. And, you know, there's not that many people in our sector who have gone this full process, right? Certainly not that many people who've gone through an IPO. So you might find that in an adjacent, you know, in an adjacent market that you can try and kind of bring into your orbit to give you advice. And like, it could also be somebody you just call as a one-off. Like, there's a woman in LA who who IPO'd an accounting SaaS company. And she's like, you know what I mean? Like, she's somebody that I like, I'm like, oh, okay. Like, how do you manage this stuff? Right. You know, or you can look at Jack Dangermond, who, right, just grew his company forever. It's like the dream, right? Like, you know, like, who do you wanna be? Right.

So.

Absolutely. Well, for those listening in that, you know, may want to tap on your shoulder for that or get more insights from you, what's the best way for them to follow you or connect with you?

Oh yes, LinkedIn is basically the only social network I use anymore other than TikTok for dance and dog videos. So yeah, find me on LinkedIn.

Well, very, very cool, Katherine. Thanks so much for joining Dustin and I today to share your insights and look forward to seeing what you do in the future.

Yes. And yes, to all, to all the GovTech founders, like it's super fun. You will have all the highs and all the lows. And like, there's lots of people to support you in the process, lots of people who want you to succeed. So anyway, thanks everybody.

Have a wonderful weekend, everyone.

You too.