GovTech start-ups struggling to create sustainable business models
- Summary:
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Clusters of GovTech - or Civic Tech - companies have emerged over the years. However, a new report calls into question their long-term sustainability.
This could be as fundamental as hosting for government clients, or companies focused on open data and transparency, voting and elections, government-citizen interaction, or citizen mobilization.
However, despite an increasing interest in GovTech - or Civic Tech - a recent report by the Knight Foundation and the Rita Allen Foundation has found that there are very few start-ups or businesses in these areas that have established sustainable business models. The report notes that very few companies have meaningfully scaled and as a result are unable to extend their reach and impact.
The report even notes how the authors began by looking for success stories to highlight, but struggled to find any that were meaningful.
Jon Sotsky, Knight Foundation director for learning and assessment, said:
Despite growing interest, activity and funding for organizations strengthening democracy and civic engagement, few civic startups have achieved sustainable and scalable business models for their work. Identifying bright spots and approaches for overcoming common widespread barriers is essential to nurturing more sustainable civic tech startups.
The report notes how after the 2016 election in the Unites States there has been an intense focus on building citizen engagement, even as communities continue to grapple with low public trust in institutions of all kinds. This is a common situation amongst many democracies in the western world. This makes GovTech event more pertinent.
Key insights
The Foundations’ report outlines a number of findings that give some more insight into what is working in the field, as well as why GovTech companies are struggling to establish concrete revenue streams, grown and scale. These include:
- For-profit organizations focused on selling software to governments and large companies show the most growth: These organizations have focused on developing their sales capacity and have often launched with strong connections within government. Organizations have grown through other business models, but generally not as quickly.
- There are clear skill and experience gaps that limit growth: Organizations that have grown the most have paired technology skills with valuable experience in government or the social sector. However, many need to invest in key areas to survive and thrive, including: business planning, sales, fundraising, impact measurement and communications.
- Business growth is harder for organizations playing a watchdog role: Revenue growth varies depending on focus area (transparency, voting, resident-to-government interaction), and based on whether organizations take a collaborative approach, working alongside government, versus demanding more accountability. For the latter, it is harder to earn money through government partnerships; they rely mainly on philanthropic funding.
- Funders should invest in core capacities that advance long-term sustainability: Unlike venture firms, philanthropic funding for civic tech companies has largely focused on providing “buyer” capital, investing to cover the ongoing costs of doing business, rather than “builder” capital, which supports growth and ongoing innovation. Before startups develop reliable “buyer” revenue streams they need “builder” capital to grow.
- Philanthropic investments in civic tech have been limited: Compared with other investment areas (e.g. higher education, health), there is relatively little philanthropic capital in the civic tech space. As a result, many civic tech startups have structured themselves as for-profits to attract capital from venture firms.
- Funders should explore new paths to advancing civic tech: Funders can advance specific mission-aligned issue areas – economic development, health, education – by seeking out organizations that focus on this work. In addition, they can play a role in mobilizing support from the impact investing community, which focuses on funding organizations to create a measurable, social impact. To date, little funding for civic tech has come from impact investors.
Recommendations
On the latter three points highlighted above, the report makes a number of recommendations, specifically regarding: competencies, capital and collaboration.
- Competencies - The research identified a clear skills gap in many GovTech organisations. For example, it notes how companies have been launched with technology that solves a problem, but with little idea about how to make money off the back of that. If companies can’t afford to hire a CFO, they need to find alternative means for building in that capability. Equally, these businesses often launch with a ‘if we build it they will come mentality’, rather than implementing a sales team with the relevant experience. Doing so is imperative. Finally, Civic tech organizations largely need to improve their ability to tell compelling and comprehensible stories about their impact. They could be doing more to frame their work and outcomes in a way that resonates with beneficiaries and current and potential funders.
- Capital - Unsurprisingly, founders of GovTech firms often find that they exhaust their pool of existing funders and competition for resources is high. The report recommends that founders should cultivate support from funders of specific issue areas (such as economic development and education) whose interests are advanced by their work. Equally, funders should consider supporting networks, convenings and programs that increase the visibility and connectedness of civic tech startups to angel investors and high net worth donors (typically untapped resources for GovTech), particularly those in Silicon Valley and those working in the technology industry. It also calls on Civic tech funders, whom often invest in isolation, to seek opportunities to coordinate their support - to develop a pooled fund to invest growth capital into high-potential civic startups.
- Collaboration - Finally, the report notes that the maturation of civic tech as a field will depend on greater collaboration and coordination. For example, it notes that there is a promising opportunity to form or partner with incubators and accelerators focused on civic tech startups. Incubators and accelerators have played a crucial role in the nascent stages of other fields and serve several important functions. For instance, incubators and accelerators could help early civic tech startups with prototyping and assessing market fit. Equally, start-ups should be collaborating with organisations and people that can help them overcome the challenges that they face with procurement processes. Government procurement can be incredible complex and daunting for a small company. But if Funders played a greater role in demystifying procurement processes and facilitating introductions to potential government users, this could help massively.