The software sales cycle in government has long been characterized as protracted and painful for startups. No wonder that, on a year-over-year basis, venture capital investment to startups selling into the public sector grew just 2% in 2016.
But attention on government technology startups seems to quietly be picking up. Four years ago, Joe Lonsdale and OpenGov’s Zac Bookman published a white paper highlighting the opportunity for startups in government titled “B2G: The Excitement Of An Old-Line Industry.” More recently, Niko Bonatsos of General Catalyst put forth some thoughts on funding the future of urbanization as well as some of the challenges for VC investors seeking out companies that want to sell to municipalities or local governments. And in January, Alex Pack of the AngelList deal team wrote that “government technology is the sector (he’s) most excited for in 2017.”
Sentiment around the notorious sales cycle startups face has also seen some shifting perspectives. Nakul Mandan, a partner at Lightspeed Venture Partners, recently tweeted that government tech is one of three areas he wants to invest behind in 2017 in part because he’s “seeing sales cycles for local government software drop drastically.”
Curious to more thoroughly understand the relationship between startups and local government as buyers, I dug into the board notes of various transit agencies surrounding the purchase of public transit planning software from Remix, a San Francisco-based startup backed by Y Combinator. Remix identified a simple but crucial pain point for planners: that public transit routes with major demographic and economic implications were being determined on paper-based maps and complicated spreadsheets. It streamlined this with a single software platform with fundamentally better UI and design to sketch routes and see neighborhood and cost outcomes.
In looking across the early-stage government tech space today, Remix stands out for its growth into more than 200 government agencies since its public launch of the Remix public transit planning platform in November 2015. For context, APTA data shows that 2,225 transit agencies provided public transportation in the US in 2011. Just 825 were in urbanized areas, which carried >98% of all transit passenger trips that year.
In total, I gathered proposals or action items from the board meeting notes of eight transit agencies in the US. One thing is clear: selling to local government is filled with nuances. Below are some observations from the different Remix contract proposals and board notes:
Is the length of sales cycle really shortening? To purchase software, transit agencies use either informal (purchases under a certain threshold e.g. <$3000), formal (requests for proposals) or sole-source procurements. Formal procurements are dependent on the maximum small purchase thresholds set by state or local law.
In Remix’s case, transit agencies are awarding sole source or non-competitive procurements. Typically, the public sector awards sole source procurements when only one known supplier can fulfill agency requirements or business needs and these deals are typically rationalized by a sense of urgency to get the software up and running. Such procurements are allowed only in certain circumstances: at one agency, sole source procurement expenditures totaled just 8.6% of all procurements.
While sole source contracts are said to be faster in nature, the proposals offer some hints as to what the sales cycle really looks like for startups. A look at the Rochester Public Transit action item breaks the process down something like this:
- Remix proposes a pricing summary on February 9, 2016.
- The request eventually goes to council for approval three months later on May 2, 2016. Remix promises to “maintain the lower quote of $11,000 per year for RPT if an agreement is executed by May 31, 2016.”
Not mentioned though is the length of time from first point of contact to demos/meetings to trial periods prior to the proposal, which is unknown and could last months.
On setting pricing. Because Remix is being awarded sole source procurements for its differentiated solution, transit agencies are not deciding on Remix in comparison to a cheaper transit software on the market. On the topic of first-mover advantages in selling to government, Brian Posner of Bloomberg Government wrote:
“Government agency customers frequently develop comfort and familiarity with an incumbent or existing contractor. This feat alone presents numerous challenges for new vendors looking to wrestle away business from a veteran service provider. New players will often neglect to compete due to this apprehension.”
That’s not to say new players can’t still fundamentally shake up a market. Compare this to a November 2016 story in Government Technology highlighting the strategy OpenGov took when entering the open data market and effectively ending the pricing premium placed on such products. As the story highlighted:
“It also helped that OpenGov was less expensive — proprietary models like Socrata’s tend to cost more, and some local government officials have complained that it’s too much for a city that doesn’t have the resources of New York or San Francisco…The idea isn’t just to sell an open data platform to local governments, but also to build a whole host of services that tie into open data.”
Remix is not in this situation today and scales the pricing of its service based on the size of the system using its software. Pricing can vary considerably between agencies: though annual pricing per transit agency on average was around $39,000 across the action items, prices ranged from $10,000 to $92,000 a year not including set-up costs. Some startups like SmartProcure have emerged to collect historical purchase order data in order to help solve the challenge of price transparency in government buying.
Funding sources for SaaS contracts can be complicated. The board notes highlight that transit agencies are pulling together resources for SaaS contracts from a mix of different funding sources. This applies to both larger and smaller contract sizes and can be complicated to follow.
For example, to pay for its enterprise license the Puget Sound Regional Council requested to apply for a $103,500 grant from the State Transit Coordination Grant program administered by the Washington State Department of Transportation and match the grant with $11,500 of local funds already included in budget. Similarly, 80% of a license for Fargo Moorhead Metro Area Transit was to be sourced from Consolidated Planning Grant funds, with $3,000 coming from the agency itself. Funding for a $10,000 per year contract for the Williamsburg Area Transit Authority in Virginia was sourced from a mix of federal, state and local grant funds.
Social proof really matters in government. In seeking final approval to purchase Remix, Rochester Public Transit referred to a different agency’s use of the product to make its case, writing, “This is why public-sector transit planners, such as the State of Oregon, make wide use of Remix Pro.” Indeed, Remix’s proposal to them included four case studies (below) of demonstrated results.
This is important because many government agencies have only recently been exposed to targeted SaaS products for the first time. So seeing people in the same roles at other well-regarded agencies find value in a software targeting a clearly identifiable item on a city’s agenda can make an outsize difference for prospective buyers. It helps too that agencies with the same roles are not competitive across geographies and share information with each other.
In a similar vein, another interesting factor is the use of conferences as a key marketing and business development enabler in government. Government is a heavily conferenced industry: consider that between 2010 and 2012 alone, for example, IRS officials spent a whopping $49M across 225 conferences. As such, <three-year-old Remix has both established an active presence at transit conferences and already hosted two of its own conferences that bring together transit planners. Depending on who attends, the latter could become an important source of subscription revenue and foster important relationships.
Remix is just one example (and perhaps a unique case), but offers a peek into the many complexities for startups selling software into local government. Another interesting look at the differences in startup-government contracts was made available by KPCC, which aggregated a crop of open data contracts from Socrata, OpenGov, and Junar in 2015. If you’re interested in discussing this topic more, reach out on Twitter or send me an email.
Source links: Link Transit, CATS, Williamsburg Area Transit Authority, BSD, El Paso Mass Transit, Fargo Moorhead Metro Area Transit, RPT, PSRC.