Startup Investment: Not Dead, Just Difficult
We demystify investment in this type of company, which is far from “dead”, although it is relegated to other sectors.
The govtech sector, which includes startups aimed at improving and digitalizing public services, has gained attention in recent years both from public administrations (to implement their solutions through internal challenges and needs) and from private investors. Although the path is not without challenges, the opportunity to contribute to the digital transformation of public administrations is significant.
Understand the investment ecosystem in Govtech It is essential both for those institutions that are starting their first steps with the development of Govtech Laboratories As for the startups, since it allows both Maximize the impact of collaboration between the public sector and this type of company.
In this article, we provide data about the market and explain why investors today do not prioritize this sector (although many are investing in govtech without being fully aware of it). To give a more grounded view of why this sector should have greater exposure to the ecosystem, we have the assessments of Tenity, Archipelago Next and Bynd Venture Capital, three actors in the startup investment sector at national and international levels, who tell us about the challenges they face and the opportunities offered by govtech startups.
Current state of investment in startups: sectors and main players
Precisely, in this third quarter of 2024, investment in technological startups It has reached a new record in Spain, with 867 million euros inverted, highlighting the growing interest of investors in key sectors such as eHealth and tourism, which in many cases have a direct relationship with Govtech.
At Gobe, we have analyzed the investments of the 35 largest investment funds and these have 175 transactions related to startups with high public value in their portfolios. Some of the most notable are:
- Capital Key: 15 govtech investors such as Quibim, Predictheon, Nexkin or Corify Care... most of them related to the health sector.
- Easo Ventures: 15 investments such as Berrly, V-Vision, CodeContract, Beseif, Ironchip or Educa Reality, more diversified in terms of sectors such as sports, education, sensory and internal efficiencies.
- Angels Capital: 13 govtech investors, such as Solved, Dcycle, Uelz, Dost or Uphint.
- K-Fund: with 9 publicly valued startups such as Graphext, Vitaance, Iristrace, Durcal or Quibim.
Bynd Venture Capital has 10 startups in its portfolio with public value (Easy Virtual Fair, Trebellar, Psious, Fraudio and others). Archipiélago Next has 7 govtech startups in its portfolio (Nymiz, Neopension, Gocleer, Classlife, Inspide, Enthec and Erudit ai).
In the US market, the startup Opengov, developer of accounting, services and purchasing software for the public sector, has reached a valuation of 1.8 trillion of dollars and Zencity, from Israel, has closed $54.7 million in funding over several rounds.
In Spain, thanks to the work of Alberto Hospital, Partner and Chief Operating Officer of Aptki, who has completed an extensive list of Business Angels and investment funds, which include the sectors in which they are most interested, we have been able to detect, due to their close relationship with Govtech, the following references:
Of investment funds in their different forms (252 in total), more than half (65.9%) invests in sectors closely related to govtech:
A market with potential for B2B startups that want to enter B2G
The govtech solutions market in Europe presents a great opportunity for growth for technology startups, especially those operating under the Business to Business model (B2B) and seek to expand into the Business to Government field (B2G).
According to data collected by the Heliad Investment Fund, it has been detected that in the United States The GovTech market is larger than other more mature markets. As for Europe, the Technological public purchasing potential is valued at 200 trillion dollars.
In addition, it is estimated that between 7.4% and 9% of European tenders could be answered with govtech solutions and currently only a 0.23% of them are aimed at this type of start-up companies, which shows a clear untapped potential.
This gap represents a significant opportunity for B2B startups to adapt their technologies to the public sector, offering solutions that improve the efficiency, the transparency And the sustainability of government services.
Referring to Paolo Ottaviani's interest in this sector Tenity, Gerard Adell from Bynd Venture Capital and Pablo Santana Quesada from Next Archipelago, experts in investment in startups, agree that the B2B business model validated in other industries It makes them more attractive, when it comes to attracting investment, startups that seek to collaborate with the public sector versus those whose business depends 100% on a B2G model.
Regarding the areas most suited to the public sector, Bynd Venture Capital considers the health, cybersecurity, proptech, artificial intelligence and sustainability sectors to have a greater opportunity to impact and adapt to public administration. Ottaviani points out that the areas of Fintech for payments and financial management, Insurtech oriented to public insurance they also have a great opportunity to work with public administrations.
The challenge of long sales cycles and dependence on the public sector
Despite great opportunities, there are significant barriers that can hinder the growth of startups in the public sphere. One of the biggest challenges is the procedural part and the length of sales cycles. According to Pablo Santana of Archipelago Next, “Sales in the public sector tend to have long cycles, and this can be a major brake on the rapid growth expected of early-stage startups”
According to Gerard Adell, “to invest in startups focused on govtech, there must be some validation or interest on the part of the public administration, to ensure that the positive aspects outweigh the negative”. In addition, “focusing efforts and sales on a single type of customer involves a high risk of sales concentration, meaning that the fall of an active contract can greatly damage the startup's turnover.”
In this regard, Archipelago Next proposes a balanced strategy: “The key is to have a balanced mix of private and public sector clients”, which allows startups to diversify their sources of income and reduce the impact of risks associated with public procurement.
The value of stability: a long-term advantage
Although sales cycles are long, Stability of government contracts offer significant advantages for startups, especially in their early stages. “Contracts with public administrations tend to be long-term, which is attractive for startups with greater resilience,” explains Ottaviani.
For its part, Archipelago Next emphasizes that this stability must be well managed so that it does not become a dependency, highlighting the importance of startups having an adaptive approach to navigating the complexities of the public sector.
Support and resources: The role of investors in boosting the govtech ecosystem
To help govtech startups overcome these barriers, both Tenity, Bynd Ventures Capital and Archipelago Next offer support programs focused on mentorship, the connection with other companies and access to experts in regulatory issues, as well as key stakeholders in the ecosystem that can guide them in the hiring processes.
Precisely this is one of the focuses of Gobe Ventures, a program that has just started its second edition and seeks to provide startups with the necessary tools to navigate a complex market and access opportunities that might otherwise seem out of reach.
Conclusion: How to take advantage of the strategic role of investment funds in the growth of govtech startups
On other occasions we have mentioned that govtech ecosystems offer a unique opportunity for the public sector to be a driver of innovation and entrepreneurship in a territory. With this objective in mind, it is key to include investment funds and private equity in ecosystem dynamization activities, whose objective is to strengthen the supply of innovative solutions for the public sector. To overcome some of the barriers or disadvantages of investing in govtech companies, administrations can invite investment funds to learn about the success stories of pilots and projects carried out with govtech startups to show the potential for impact and their scalability. You can also count on their participation in debates to inspire public programs to incubate or accelerate emerging companies with B2G models, thus demonstrating the public sector's commitment to the growth of the govtech entrepreneurial sector.
Involving investment funds in the promotion of govtech startups will result in startups that are better prepared, more robust and economically sustainable and with the ability to adapt its products to the needs of the public sector. In this way, administrations can increase their capacity for innovation and optimize the provision of public services by reducing costs and improving the citizen experience, creating a more agile and digital administration.
For startups, this dynamization of investment actors should mean better opportunities to access private capital and gain financial stability.
As we have mentioned many times, a govtech ecosystem does not consist only of public administrations and govtech startups, but must have all those actors that make it possible for this relationship to be fruitful. We hope that with this article you will better understand this important actor such as investment funds and will encourage you to collaborate with them.
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