The biggest customer: Germany

Cooperation with authorities and public administration could be a huge opportunity for startups. But so far, only a few founders have dared to enter the complicated thicket of procurement regulations. Why this is about to change.

Start-ups often have a very narrow view of consumerism. The most prominent companies on the scene define themselves as B2C (business-to-consumer) or B2B (business-to-business) companies. What hardly exists so far: B2G (business-to-government). Actually, this is abstruse in view of the fact that the government ratio in Germany was over 51 percent in 2021. In simplified terms, this economic indicator states: In Germany, the state is responsible for a good half of GDP. So there would be enough money for startups to tap into.

For a long time, projects with the state were scorned, but now more and more startups are recognizing the potential and actively approaching public authorities, and venture capitalists suddenly see opportunities in the field. Is a whole new billion-dollar market emerging here?

The Govtech Map, a mini-study conducted by Manuel Killian, founder and CEO of Govtech consultancy Govmind, together with Oliver Schoppe, investor at B2B venture capitalist UVC Partners, shows that there are now hundreds of startups in the govtech space. The mini-study includes companies explicitly targeting the public sector, such as Komuno, a platform that helps municipalities with financing, and Polyteia, which offers demographic data analysis software. But Kilian and Schoppe's map also includes e-scooter providers like Voi and Tier, or tutoring portals like Gostudent. "Govtech is less a separate industry than a way to look at your own product," Schoppe explains. Especially between the B2B and B2G markets, the boundaries are blurring, he says, with the requirements of government agencies on the one hand and large companies like Siemens or Deutsche Bahn on the other being very similar.

VCs are slowly taking notice

This is probably one of the reasons why more and more companies are daring to take the difficult path with the state. After all, dealing with public authorities brings its own unique difficulties that companies have to get involved with, as Manuel Kilian explains. "Processes in public administration are sometimes very complex, and many stakeholders are involved before anything comes to fruition," he says. The strict public procurement law used to put government contracts out to tender has its justification, of course; after all, taxpayers' money is always at stake. "But in detail, the content of public tenders is sometimes designed in such a way that they de facto exclude startups," he complains.

Just some of the problems: Often, a minimum turnover is expected from service providers or a certain number of realized projects. Criteria that young companies find difficult to meet. "In addition, on the part of the administration, there is often a lack of resources, experience and sometimes also the will to first consider what the best way is when solving a problem, instead of directly resorting to traditional products," Kilian adds. Here, the often more flexible approach of startups does not fit with the demands of the state.

For a long time, a focus on the state as a customer was also viewed rather critically by VCs for this reason. "The business with public administration is very regionalized," explains Schoppe: "The challenge of quickly building a European or even global solution is much greater." Accordingly, scaling is also difficult, usually the most important point for many venture capitalists. It helps if companies have the government as an important customer, but not the only one. Schoppe points to the high-security messenger Wire, for example, which counts companies among its customers, but also five of the G7 governments. According to Die Zeit, Messenger was even the tool of choice in coalition negotiations between the SPD, Greens and FDP last year. "In such a case, working with the state is also good PR at the same time, it gives credibility," he says.

How an AI start-up wants to clear the jungle of authorities

One company whose product could easily be of interest to both the government and the private sector is Aleph Alpha. The Heidelberg-based company offers AI programs that can analyze data records and texts and extract information from them. For the state, this is interesting in various places, explains Aleph Alpha manager Lorenz Lehmhaus. "For example, we can revolutionize chat systems for inquiries at citizens' offices," he says. Previous chatbots are often overwhelmed with the complexity of such inquiries, he says. The question of whether a dog should always be leashed, for example, depends on where the dog lives, the breed of the dog and various other factors. "We can map this complexity with our AI," Lehmhaus is certain. He also sees many other application examples. For example, he says, the company successfully completed a pilot project with BWI, the IT systems house of the German armed forces. "There, we worked with huge amounts of data on service regulations." Parliamentary inquiries could also be answered more quickly with the software under certain circumstances.

They also know the difficulties of dealing with public processes at Aleph Alpha. "You have to be a bit of a believer for that," Lehmhaus says. "But it's worth it, because on the one hand, there's also a huge need for new solutions there, and on the other hand, there are a lot of people there who are serious about improving citizens' lives." Manuel Kilian of Govmind also believes several factors are contributing to govtech playing a more important role. "Startups are much more mature today than they were a few years ago, and accordingly they are better able to manage large-scale projects with the administration." Especially when it comes to digitization away from IT processes and European digital sovereignty as a whole, the potential of GovTech is enormous, he said. In Berlin, there is now the Govtech Campus, among others, in which the Federal Ministry of the Interior is also involved.

And once entry into the public sector is a given, a kind of avalanche can start rolling, he said. "Administrative employees who have good experiences with a solution will share that within the administration," Kilian believes. Gradually, a network would emerge.