The $192 Billion Market That Startup Entrepreneurs Shouldn’t Ignore: Government IT

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In Silicon Valley and other tech entrepreneurship hubs, you don’t meet many startup founders who are excitedly building products aimed at the government sector.

But in an on-stage discussion Wednesday night at San Francisco’s Founders Den coworking space, tech entrepreneur, investor, and author Tim O’Reilly and California’s Lieutenant Governor Gavin Newsom both agreed that there absolutely should be more startup activity in the government space — not just out of civic duty, but also because out of financial opportunity.

Speaking in front of an audience of startup founders, O’Reilly cited figures from Newsom’s new book Citizenville that show the surprisingly large amount of money that the US government spends on technology.

“$192 billion gets spent every year on government IT at the federal, state, and local levels,” O’Reilly said. “You compare that to the size of the markets that some of you guys are going after [with your startups]… there are amazing opportunities in this space.”

The IT ‘Cartel’

Of course, one reason why government IT spend is so high is that the companies who regularly provide tech products to the sector often have incredibly high prices.

“Some of these [companies] do act more like cartels, basically as an IT cartel,” Newsom, who served as San Francisco’s mayor for years before taking on the state Lieutenant Governor role, said. “They’re building [unnecessarily] big systems, hiring other people to manage them, requiring five and ten year contracts.” He relayed a story of one government entity paying millions of dollars annually for an email mailing list management service that costs $129/month for typical customers.

Governments do often have higher standards for security and other features than typical IT customers. But a big reason for the price difference is the tech illiteracy of many people in government, Newsom said. “Politicians don’t speak the language, and we don’t understand any of this stuff, so we submit ourselves to quote-unquote ‘experts’ to manage these systems.” They then end up paying top dollar for things that should simply cost much less.

Advice For Startups: Start Local

So how can startups break into this market, which is clearly in need of disruption but is filled with incumbent competitors who are more than happy with the status quo? Newsom recommends starting at the local level, and making products aimed at city governments. “There is a huge opp at the city level, there are so many cases where mayors [need solutions].”

He added that there is less partisan bickering locally than there is in state and federal government. “States are laboratories of democracy, and cities are laboratories of innovation.”

Don’t Be Afraid To Go Rogue

But even at the city level, it might be difficult for a startup to convince the governmental powers that be to try out their product over an incumbent system. Newsom said that governments are typically beholden to a “long procurement process” when evaluating new technologies — it’s such a lengthy ordeal that at the end they often “churn out something that’s not even relevant” anymore. That’s why there’s a case to be made for going around the official government process altogether.

“Think about possible things that governments do that actually you could do better, to compete with government,” O’Reilly said, pointing to parking and transportation as spaces that have already seen some action on this level. Newsom, meanwhile, said that he’s seen local app successes in crime mapping and recycling.

The key thing to keep in mind is that products don’t need to be as glamorous as Uber limousines to be make a big impact — and be lucrative. O’Reilly pointed out that big money could go to a founder who “finds a way innovate the business of food stamps.”

I also had the opportunity to sit down with Newsom this past fall backstage at the Disrupt SF conference, where we discussed technology, government, and startup innovation. You can check that out here: