Recently, Draper Associates closed its $190 million seed fund. Draper lists FinTech, GovTech, Healthcare, Education, Insurance and Logistics as ‘ripe for transformation’, and says that the fund is open to any entrepreneur who is willing to challenge the status quo. However, this is not the first Fund targeting Government for the next disruption. In 2013, a $22-million GovTech Fund was established for the same reason by Tim O’Reilly and Ron Bouganim. Total funding received by GovTech startups is already more than $1 billion.
So what is GovTech?
GovTech startups primarily focus on local, state and federal government and derive the majority of their revenues from the public sector.
Why is GovTech HUGE?
Worldwide annual spending on IT is $2.7 trillion according to Gartner. If we look to the worldwide spending on IT by verticals, Banking & Securities is first ($485 billion), followed by Manufacturing ($477 billion) and Communications ($429 billion). Meanwhile hot verticals such as Healthcare ($105 billion) and Education ($64 billion) are 9th and 11th.
Surprisingly, Government is 4th on the list with annual spending of $425 billion on IT. While the number is huge and from the first sight promising for a better governance, governments manage the spending dramatically inefficiently both in developed and developing countries. According to the Office of Management and Budget under Obama, 27% of Federal IT spending is mismanaged. As a result, there is a reasonable assumption that in developed countries 20-30% of government spending on IT is mismanaged, while this number in emerging markets is more than 40%.
On the other hand, within governments there is a trend of outsourcing IT development to businesses. Today 23% of IT development and services of US counties is already outsourced to businesses; and the number grows about 15% annually.
So, we are living in an age when governments own huge resources, but dramatically mismanage them. On the other hand, Silicon Valley introduced Lean Methodology to the world which helps innovative entrepreneurs build new types of companies with a different culture. I strongly believe that with YC funding a study on Basic Income and Google experimenting with Liquid Democracy the world will see serious changes in governing systems in the next 15-20 years.
Written by Hambardzum Kaghketsyan, DU Spring 2015 alum, who is currently building WISESTONE GovTech accelerator. Previously, Hambardzum worked for government and the World Bank Group.