The rise of public-purpose start-ups

StateUp’s Rachel Osnos on the move from traditional govtech suppliers to the rise of PPT start-ups

Posted 19 May 2022 by Christine Horton

There is a growing expectation for governments to work with innovators to co-develop or adopt public-purpose technology – technology that serves a major public need, and the public policies, organisations, cultures, investments, and business models around it.

In 2016 the government made a commitment to channel a third of its public sector tech spend through small and medium sized enterprises (SMEs) by 2022, creating a new procurement framework to do so. However, there remains a huge gulf in knowledge and understanding between policy decision makers and technology developers.

Start-ups in the govtech space are providing many efficiencies that larger providers cannot: they are more flexible, agile and scalable. Globally, thousands of start-ups are developing high-quality, secure products and services to help address the challenges that government’s face. But awareness amongst the sector is still low.

What do public sector organisations need to look for in a start-up to ensure it can provide the best solution? Through our recent paper StateUp 21, we found that the most promising public-purpose tech start-ups show evidence of the following distinct qualities.

Tackling long-term problems

To survive, public sector tech often needs to address problems for which there are customers today, and they may be subject to investor pressure to meet a return on investment within a short timeframe. However, high-quality public-purpose tech start-ups are led by founders with a capacity for long-term thinking and an appetite to act for the long-term.

In different ways, public-purpose tech start-up leaders each think about, and often act at the system-of-systems level required to address these greater needs. In this way, they defy the “now” centricity of other start-ups.

Mature and active relationship with government and policy

Many public-purpose tech start-ups sell directly to public sector organisations, including transit authorities; even as many of them also have B2B, B2C, or B2B2G business models. At its best, knowledgeable technology procurement strengthens vendor offerings and enables them to contribute to local economies, ultimately benefiting citizens.

Even those start-ups who do not sell directly to the public sector actively seek out opportunities to engage with public servants and understand that technology can be at its most powerful when working in tandem with policy levers (where they exist) to address big societal and infrastructural needs.

Thriving through close links to university ecosystems

Public needs require multiple disciplines, pairing technical skills with deep appreciation of societal needs and cultural contexts. Universities are natural launchpads for these kinds of start-ups, providing access to specialist and emergent talent from across different fields despite departmental silos. Start-ups connected to universities may also be particularly well placed to prioritise and build for trustworthiness, which is requisite for technology with which citizens are expected to interact.

Benefitting from investments, IPOs, and acquisitions

Despite venture capital’s (VC) historical aversion to investment in highly-regulated markets, public purpose tech start-ups benefitted from the broader rise in VC investment in 2021. This is particularly true in areas now broadly considered to be mission-critical to government, the economy, and society, like green technology. A number of high-profile acquisitions in the past two years is likely to continue to move the needle in terms of venture capital investment. These acquisitions signal the beginning of consolidation in some highly fragmented spaces like digital engagement and data-driven decision making.

At the centre of debate about investment and ownership model

There is an emergent discussion about whether the conventional VC model provides the most appropriate kind of financing for companies seeking to effectuate big public change. We have already seen start-ups pivot away from addressing public needs towards more conventional B2B plays (for example, pivoting from tackling misinformation to focus on advertising and brand reputation) in an effort to win VC investment. There may be a more proactive role for states to play in their capacities as procurers to encourage a shift towards business with a public purpose.

Next steps – encouraging collaboration

As public-purpose tech continues to grow as a market, so too will the expectation on governments at central and local levels to collaborate with innovative start-ups looking to affect positive public change.

It’s crucial now that we create an ecosphere that connects both parties with trusted intelligence and networking connections, that will enable this co-working – otherwise opportunities to improve society will be missed.

Rachel Osnos is the strategic marketing lead for StateUp.