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Astella Investimentos is a leading venture capital firm in Brazil. Here, venture investor Guilherme Lima discusses their decision to add 2 GovTech startups—Gove and Aprova Digital—to their portfolio over the past few months.

We recently invested in two GovTech startups: Aprova Digital and Gove. The decision to invest was based on extensive analysis and research into the government technology market, to better understand its potential. We ultimately found it to represent a unique opportunity in a market that’s undergoing transformation, is still little penetrated, and has the potential both to offer good returns for the fund and transform the country.

On GovTech

GovTech is an ecosystem that unlocks and develops technology to support and enable efficiency and transformation of public services. Governments are often associated with using antiquated or legacy systems, and contracting models misaligned with public needs. Startup founders are contributing to transforming this landscape.

We studied the sector over the course of 2019 and 2020. We mapped available solutions for the market in detail, and spoke with multiple stakeholders in Brazil, including politicians, public agents, development banks and academics.

In our investment thesis, we believe that the market is extremely large, and that we are at an inflection point between government officials, public managers and even citizens, from the perspective of increasing demand for more digitalization and greater productivity in public services. In the same way as our lives as consumers have already been positively impacted and transformed through digital disruption, public services are still lagging behind in terms of user experience, for example.

In Venture Capital, GovTech startups always face some challenges from investors due mainly to the purchasing model and the traditional slowness of government management, which brings uncertainty about growth.

But, when analysing the area, we demystified and clarified some beliefs, and, once again, found that there are great opportunities within this market.

A Large and Fragmented Market

According to Gartner, global government spending on information technology totals $ 438 billion. The company also notes that the total IT market is expected to reach US $ 2.7 trillion in 2020, of which US $ 438 billion is in the governmental sphere, showing the relevance of this sector, which represents almost 16% of the global market.

However, technology penetration in government spending is still very low, which we believe brings a great opportunity for growth. For example, US military spending alone was about $ 732 billion in 2019, trumping the global market for government technology solutions.

Brazil has 5,560 municipalities, with 97% of the population being in 3,600 of those cities. Technology purchases by governments move approximately R $ 25 billion per year, of which only R $ 5 billion is made by the federal government.

It is still a poorly supplied market. Major global and traditional software players, such as SAP and Oracle, and service providers, such as Accenture or KPMG, are the main suppliers of these solutions to governments. Yet, lacking innovation, with long deployments and absent deep and unique specialism in solutions for the government. For example, in the United States, only 56% of states reported that 10% of their systems are in the cloud.

In the startup ecosystem, of the more than 12, 000 startups based in Brazil according to ABStartups, only 40 of them are GovTechs. However, in our analysis we found several factors that indicate many investment opportunities in GovTech, such as:

1) Governments understand the need for digitalisation 

We believe that the government’s digital journey in Brazil is beginning.

The Brazilian government has already shown that it can be a reference point for the adoption of technologies, with cases that are global examples, such as e-voting or the income tax declaration system.

In 2019, the Ministry of Economy, through the Department of Debureaucratization, Management and Digital Government, announced a project that aims to digitalise 80% of public services provided to the population with the aim of reducing the need for paperwork and simplifying access to platforms for the population.

The pandemic has also accelerated several initiatives to digitalise public services, improving the efficiency of several of them.

2) Sales cycles are similar to that of enterprise processes

As mentioned, there’s a common perception that one of the major obstacles to the development of GovTechs in Brazil is go-to-market strategy, due to the difficulty in building the solution with the client and the bids. However, the average sales cycle is actually similar to that of enterprise sales.

Although acquisition costs may be higher than the average B2B and B2C business, the retention rate is high and churn is very low. Once you’re in, it’s hard to get out. Also, governments are known as stable customers in times of turbulence at the macroeconomic level, unlike other sectors.

In terms of regulations, we are also seeing prospects improve. For example, the recent Marco de Startups Bill provides for a form of bidding via a special modality to solve public challenges through innovative solutions. In addition, there is an ongoing effort to modernize the Bidding Law of 1993, focused on engineering tenders and large infrastructure projects, to contract technology and innovation by governments.

3) More connected and demanding citizens

More connected citizens are increasingly demanding about the efficiency and transparency of their leaders. Schools, hospitals and municipal public spaces still function as they did twenty or thirty years ago, when compared to the digital consumer revolution.

In management, unlike most medium or large companies that use technology such as Cloud, AI / Machine Learning and Big Data for decision making, information in government agencies is still decentralized and decisions are often not based on data and evidence. Government officials are beginning to understand the need to pursue this efficiency.

4) Demography is favourable

Demographic changes among the country’s politicians should bring a new generation of younger politicians and civil servants who have higher tech capacity, or bring experience from hi-tech markets to the secretariats.

5) Tightening of public accounts

The continued tightening of the budget is forcing public agencies to rethink how to make better use of public resources, and the technology is emerging to bring solutions to improve the efficiency, agility and scalability of government operations.

According to a study by FIRJAN, more than 80% of the municipalities have difficult or critical financial issues. In addition, about 70% of Brazilian municipalities today depend on more than 80% of funds that come from sources external to their collection.

This is because financial management is old and costly. There is no area or use of data analysis or intelligence systems to assist in better decision making regarding, for example, return on an investment or analysis of purchases by the municipality. GovTechs can help governments make better decisions, at much lower costs.

In addition, inflation, cost cutting and increased revenue are difficult to adjust or manage, and the best way always ends up being to increase productivity.

About the investee companies

After a broad market analysis, the two new investees proved to have impressive characteristics that influenced our investment decision, such as: (i) entrepreneurial founding team with great domain and experience in this market, (ii) a product 10X better than any current alternative on the market and (iii) a hypothesis for an efficient and scalable sales model.

Gove (https://www.gove.digital/)

Gove aims to transform the public sector through technologies that simplify the public manager’s daily life and improve the decision-making process. Municipal leaders can use the Gove platform to increase the efficiency of public administrations and improve the quality of public services offered to citizens.

Gove’s product integrates city hall management systems, and monitors and analyzes data in order to improve efficiency and manage opportunities. In addition, its platform provides real-time information for resource management and decision making by finance secretaries.

Aprova Digital (https://www.aprovadigital.com.br/)

Aprova Digital (“Aprova”) aims to develop city halls and secretariats so that they are more efficient, transparent and agile, saving public resources and reducing process release times by up to 90%. The team’s very strong motivation for building the solution was based on the pain of their previous experience as entrepreneurs attempting to obtainconstruction permits.

Today, Aprova offers a Workplace for the secretariats and internal communication of public agencies. The modules bring better alignment and agility to the teams, and greater transparency to the communication processes of the departments.

This is the first time that a Brazilian institutional Venture Capital fund has invested in two GovTechs in the country. We believe that there is a great opportunity in building and commercializing solutions for governments, and that governments can and should be much more efficient. Above all, we believe that the founding teams from Aprova Digital and Gove have the full capacity to create and deliver solutions for this, and to build highly relevant companies that transform governments and bring good returns. As citizens, we also believe that they can improve our lives and the country’s economic competitiveness.

External contributions do not necessarily reflect our own views.

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Gove is a StateUp 21 ‘One to Watch’.