Venturing forward: Exploring the next phase of govtech investment

For those of us in the government technology market, the last couple of decades have been quite a ride—full of innovation, cash injections from venture capitalists, and plenty of market twists and turns. We’ve gone from the early 2000s explosion of early-stage startups trying to bring government operations into the 21st century to a more recent landscape dominated by established players and major private equity investments.

While there’s widespread expectation that the private equity market will remain active in govtech—particularly in roll-up and tuck-in deals responding to governments’ growing need for enterprise solutions over point-source fixes—I believe conditions are ripe for another wave of early-stage govtech startups in the next few years.

Reason 1: Expansion of Mission Driven Funding

The number of family offices has grown more than tenfold since 2008, emerging as one of the few reliable capital sources for founders and fund managers during the current market slowdown. This trend is layered atop the greatest intergenerational wealth transfer in history, promising the creation of even more family offices.

Family offices tend to have a mission-driven focus. New models of venture philanthropy, championed by tech leaders like Gates, Jobs (via Emerson Collective), and Zuckerberg, have demonstrated how private capital can effectively address major public challenges.

Next-generation family office leadership, shaped by the tech innovation of their time, is likely to prioritize the convergence of technology and social impact. Broadly, this trend aligns with data from Bank of America, which shows that 75% of Millennials—compared to just 21% of older respondents—want to invest in ventures that drive environmental, social, and governance (ESG) goals.

This signals a promising increase in capital availability for companies tackling challenges governments aim to solve, setting the stage for growth in govtech innovation.

Reason 2: Ripe Landscape for Acquisitions

The COVID-19 pandemic, ARPA funding, IIJA investments, and economic uncertainty have led to a professionalization of public sector arms within big tech companies like Google, Salesforce, Splunk, and Tableau. Even with their deeper market penetration, the government remains an underserved segment.

Traditional global software providers dominate the government market but often struggle with innovation, lengthy deployments, and limited expertise in products purpose-built for government needs. Despite recent layoffs in the tech sector, government-focused business units remain relatively insulated because public sector contracts, though hard to win, are large and sticky. This creates fertile ground for govtech acquisitions or productive channel partnerships, as big tech companies often prefer to buy or revenue-share rather than build solutions for government clients.

Additionally, many traditional govtech players—like Accela and Civica—are approaching the five-year mark under private equity ownership. These investors are likely eyeing an exit, shifting company leadership priorities toward margin optimization rather than growth. This dynamic makes the market more conducive to buy over build.

While venture capital funds often claim they’re hunting for unicorns—those rare startups that can return an entire fund—the reality is that much of their funding supports companies with a clear path to a solid exit. Today, the govtech sector offers one of the clearest exit paths in its history, creating a win-win for startups and their investors.

Reason 3: Business Model Innovation

Govtech is a broad term encompassing companies that:

1. Sell exclusively to the public sector.
2. Historically focused on B2B markets but began targeting government customers
3. Don’t sell directly to the government but create products that influence public administration and the social issues governments address.

The third category—companies tackling social good challenges or operating B2B2G (business-to-business-to-government)—has grown significantly of late. These startups often align with investors’ ESG values while satisfying the high-growth expectations of early-stage capital.

There will always be a need for technologies purpose-built for government, but as governments modernize their tech stacks, the gap between private sector and public sector needs will continue to narrow. Founders interested in serving the government should consider models where the government isn’t the direct buyer. This approach can accelerate short-term growth and expand long-term market potential.

The Time to Build is Now

The govtech market is ripe for innovation. Government buyers are ready—and in some cases, required—to adopt modern solutions. Funding is increasingly available, and there are proven business models and compelling paths to exit, as evidenced by OpenGov’s recent significant investment from Cox Enterprises.

For those with a twinkle in their eyes about a way to solve a government problem, now is the time to start building.

Elle Hempen builds companies, products, strategies and partnerships that respond to the most urgent issues of our times. Prior to her current role as EVP for State & Local Strategy at GovExec, she founded and led a government technology company, worked in philanthropy and served in government. Find her on LinkedIn.