How to get digitization into administration

In Germany alone, the Govmind data service recently counted 300 “Govtechs”. The acronym stands for companies that sell technology to the government or have a strong influence on public life. Examples range from Civical, which offers software for social media communication by political actors, to e-scooter providers such as Tier, whose electric scooters have to be integrated into city traffic.

For Europe, Govmind founder Manuel Kilian comes up with almost 1,500 Govtechs that have been founded since 2010. At the same time, around $20.7 billion in venture capital flowed into the European govtech universe, he says. For comparison: According to the management consultancy EY, the entire German start-up scene collected 17.4 billion euros in the past record year. So the potential in the market is huge – once you get into it. New govtech companies can learn from the experiences of the pioneers.

In the beginning it takes patience and financial leeway

The former architect Marc Hodapp once again needed patience when entering the new business. After his experience with administration led him to found the start-up Urbanistic in 2020, he wanted to bring his solutions for modern urban development to the municipalities as quickly as possible. One of the products is a digital twin that can be used to model whether and where heat islands form in a building.

And indeed: With Kirchheim in Bavaria, he quickly found a municipality that was enthusiastic about the offer. Then the disillusionment: “At the beginning we thought we could start in a month,” says Hodapp. But even in this case, the start should be delayed for another year and a half. The municipality first had to set up a lengthy tendering process in order to be able to award the start-up the contract. That’s what public procurement law wants.

The number of govtechs could probably be significantly higher if the public procurement procedures in Germany were structured differently. So far, tenders have often been confusing, difficult to find and not tailored to young companies.

In a survey conducted by the digital association Bitkom two years ago, only every third of the 206 start-ups surveyed stated that they had already applied for a public tender. The most frequently mentioned reasons: lengthy award processes, lack of time to read through tenders, too many required documents and evidence.

The problem has been recognized, says Markus Richter, State Secretary and Chief IT Officer of the Federal Government: “Great ideas come quickly,” he said recently at the Handelsblatt Govtech summit. But if start-ups are then left alone with the forms, they are quickly overwhelmed.

And: Not every start-up has the financial buffer to wait a year and a half for the first sales.

But it can also happen very quickly. Tobias Fischer founded his govtech start-up Roadia after a “near-death experience”, as he says himself. After he was narrowly overtaken by a car on his bicycle in Berlin, he began to think about how to make traffic safer. In 2021 he founded Roadia with two colleagues. In the same year, they launched their first product for traffic data acquisition, with which they received an order for traffic counting in Schleswig-Holstein.

When it comes to procurement procedures, founders should think like an administration

The trick? Roadia co-founder Mykhaylo Filipenko advises other founders to think carefully about what interests the administration might have in a cooperation. “For companies, the goals are usually economically oriented,” he says. For administrations, on the other hand, other points are important: making the streets safer, improving the infrastructure or simplifying citizen services. In other words, start-ups are not allowed to pitch their profit maximization story in the office, with which they otherwise try to convince their venture capital investors. This tends to trigger defensive reactions.

In the meantime, Roadia has also taken part in public tenders outside of Germany – somewhere in Europe, Filipenko does not want to reveal exactly where. But: “The award procedure was much more transparent there,” says the founder. The example also shows that most govtechs are by no means tied to a single country.

According to the World Bank, goods and services worth $85 trillion were produced worldwide in 2020, around 14 percent of which was ordered and paid for by governments: “The business-to-government market is the $12 trillion backbone of the global economy” , says John Witt. With his London-based company, Stotles, he has developed a platform to make it easier for companies to do business with the public sector.

In Germany alone, according to the Federal Procurement Office, the volume of public contracts in 2021 was seven billion euros. Almost three quarters of the expenditure was accounted for by digital services and information technology. The procurement office does not collect information on how many of the orders ultimately go to start-ups.

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From the point of view of Stotles CEO John Witt, the more there are, the better. For example, Stotles can be used to control the sale of materials such as staple guns, hole punches and office chairs. However, it also provides workers and software services. Christian Miele, investor and CEO of the start-up association, calls it “Stepstone for digital administration”. His venture capital firm, Headline, along with other investment companies, recently invested $6.5 million in the company. Overall, the company has been able to collect around nine million US dollars since its inception.

Unlike classic online procurement platforms, Stotles individualizes the search for each company. For this purpose, the interests and preferences of the customers are automatically queried. Software compares this information with the available tenders and uses it to generate a continuous list of hits, a “personalized feed,” says co-founder Taj Kamranpour. Customers include established corporations such as Vodafone, Nokia and the Boston Consulting Group (BCG), but also younger tech companies such as UiPath and Freshworks.

The business model can be easily scaled, i.e. it can be offered to many customers at the same time with relatively little effort. Companies pay an annual fee for using the platform, which depends on the number of employee accesses. The decisive factor for success is the increasing product expansion towards the “central public procurement tool”, says investor Miele.

Network first, then sell

The experience of Stotles founder Witt: Not only the start-ups, but also many administrations would have an interest in making existing innovations usable for themselves. However, outdated structures and strict specifications in public procurement law or when hiring make modernization difficult.

This is where Lars Zimmermann comes in, who himself managed a govtech company for three years. He likes to call Germany a “framework treaty state” with principles “from the industrial age”. The federal, state and local governments are finding it increasingly difficult to create the conditions for their own modernization, says Zimmermann.

In March, he therefore founded the “Govtech Campus” in Berlin together with federal ministries and representatives of the federal states. Authorities and technology experts should meet there and work out solutions together. From the point of view of federal CIO Markus Richter, the right approach: It is crucial that the purchasing process is “taken into account from the outset” so that it can take place “smoothly”.

>> Also listen to this podcast on the topic: Public co-founder Zimmermann: “The state is threatened with a credibility crisis”

Some municipalities are already taking a different approach. When the city of Bochum decided to set up a website in 2018, it sought external advice. But the result of the consultation: Bochum needed a general digital overhaul. Without further ado, the city administration founded a start-up itself through the business development agency – Shift Digital.

David Latz is Managing Director of Shift Digital and praises the advantages of the model: “We can offer modern working conditions and attract young and digitally savvy people,” he says. Due to the close connection to the city, future users could be directly involved in the development.

The first project launched was a platform for idea management that was intended to replace a mailbox in the town hall. In the long term, the Bochum home-grown plant also wants to sell its products to other cities. But for Nina Ferreira da Costa, product manager at Shift Digital, it is also clear: “We cannot replace the digital skills within the administration.”
In other words, the transformation can neither be created nor created. Municipalities also have to digitize themselves a bit.

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