Gov Tech Market Gains Steam, Breaks Records in 2021
Source: GovTech | Thad Rueter
From permitting and licensing to public safety and artificial intelligence, the market for tech companies serving state and local government hit record M&A highs in 2021 — and it's just getting started.
To get a sense of how hot things have become in the government technology space, turn to Ron Bouganim, the managing partner of the Govtech Fund, which since its launch in 2014 has invested in 30 companies.
“It’s intense,” he said in late October at a conference in Austin where entrepreneurs, investors and government officials networked as they took stock of recent industry growth. “These past six months, I’ve never seen anything like it. There are more citizens every day who are digitally native and expect a certain level of service. COVID just dumped gas on the fire.”
Data from Government Technology supports his view: An analysis from Jeff Cook, a managing director at Shea & Co. and another industry expert, suggested that in the third quarter of 2021, transaction volume for gov tech deals hit approximately $2.2 billion, with strategic acquisitions driving much of the activity.
That’s hardly the whole story.
Earlier in the year, for instance, came the blockbuster $2.3 billion Tyler Technologies acquisition of NIC — combining two of the most established companies in this space — along with CivicPlus winning a $290 million investment from private equity firm Insight Partners, a deal that not only underscores the amount of capital flowing around in gov tech, but the increasing importance of digital citizen engagement tools.
The new year will bring a continuation of such investment and merger-and-acquisition activity, though with changes both subtle and potentially significant. The gov tech market will stay hot, responding to a variety of factors, but market experts are already anticipating the shifts to come — and all this as public-sector buyers of technology figure out what it means for them.
According to a Government Technology count, 2021 had seen more than 30 mergers and acquisitions as of mid-November, outpacing previous years, according to investors.
As for transaction activity, the Q3 figure of $2.2 billion is down from $4.5 billion in Q2, with Q1 transaction activity reaching $3 billion. According to Cook, the number of announced transactions in the third quarter of 2021 was comparable to prior quarters, but these more recent deals lacked large transactions like Tyler-NIC.
“In the second half [of 2021], businesses were turning their attention further down market,” Cook said. As he looks toward 2022, Cook says he anticipates a continuation of that trend: a high volume of deals, though with lower average deal sizes. “The acquirers who’ve been active will continue to be active.”
There are more citizens every day who are digitally native and expect a certain level of service. COVID just dumped gas on the fire.
But buyers of gov tech, along with investors, should be on the lookout for a new class to rise, so to speak. Fresh consolidators are certain to emerge, and the example of perhaps the biggest deal yet in gov tech — Tyler’s acquisition of NIC — could help steer activity in the near future.
“The big ones are almost trying to be the next Tyler,” said Steve Ressler, a gov tech adviser who recently took on the role of strategic adviser for Clariti, a permitting and licensing company that sells to state and local governments. “As long as the macro-economic [climate] continues, even in a slight downturn there will be a lot of folks investing in government technology, in large part because of its stability.”
DRIVING FACTORS
It pays to take a step back and review the factors that have fueled this growth so far, and how they will play a role in how the gov tech market develops over the next year or more.
One of them, as Ressler indicated, is that governments, for as slow as the bureaucracy can be, are often more
stable sources of sales and returns than other areas of the economy. Governments cannot stop operating.
Another major reason for all this activity is pretty simple, and similar to changes happening in the broader economy in such industries as health care, insurance and B2B commerce.
“There is a lot of under-penetration of tech and a lot of old business models,” said Chris Grizzard, director of Bayshore Capital, of the gov tech market, highlighting one of the main reasons that the space is attracting so much money and so much entrepreneurial interest.
He made his comments at the event in Austin — the inauguralInState GovTech Summit— where speakers and participants talked in depth about how the demands of the pandemic accelerated digital efforts among public agencies. The general theme is that those efforts were already ongoing, but the need to quickly set up remote workforces, or virtual public meetings, or web-based citizen engagement, added steam to that push.
Even as the pandemic fades — hopefully — its influences will continue to be felt, according to Meredith Ward, director of policy and research for the National Association of State Chief Information Officers (NASCIO), in comments made toGovernment Technologyindependent of that conference.
“Many procurement processes were streamlined last year as COVID-19 governor emergency orders were in place, but most of these orders have since expired,” she said. Still, “there are many practices put in place during these emergency orders that have the potential to have a lasting impact on state IT procurement processes.”
BEYOND THE PANDEMIC
How gov tech develops over the next few years depends on much more than the pandemic, of course. Among the other main factors that will shape investment, M&A activity and how public agencies deploy and buy technology is the broader move toward cloud computing and software as a service.
One recent example of the trend’s importance — and how it could play out in 2022 among state and local governments — came from Google.
The search and online advertising giant is not exactly a gov tech firm, but in early November it announced the launch of a cloud-based “sandbox” called theRAD Labthat could help public agencies test and develop their own tools.
The lab offers an open source environment where governments, along with laboratories and universities, can quickly set up cloud environments for research projects, develop and test new technologies through trial and error in a secure environment, and receive support from Google professionals. Clients pay on a subscription basis, which Google says reduces the risk of cost overruns, a prime concern for new technology deployments.
“For state and local governments, the pandemic has driven an upsurge in innovation, and that shift is here to stay,” said Emma Fish, head of education programs and business development of public-sector cloud at Google. “Many [of those agencies] are thinking…