Venture capital is looking into public procurement and that is good

It was only a question of time, but I am glad that in the USA venture capital is finally paying attention to the opportunity of serving the Government market. There is a recent fund investing specifically in startups interested in serving the Government called GovTechFund. I for one, welcome this approach.

Ron Bouganim (Founder and Managing Partner) frames the main issue beautifully on a recent blogpost: the size of the US Government Market is $400 billion dollars and rife with opportunities for technology-enabled companies/products/services to start competing for business. Putting my head above the parapet I would argue that, generally, competition is probably lower in most Government contracts where technology can be applied, than in similar private sector markets. In other words, yes it is probably possible to squeeze rents out of procurement markets.

The GovTechFund post makes a specific point about the potential 10-100x cost differential of technological solutions which is worth highlighting. In some circumstances, new technologies and business models are indeed orders of magnitude cheaper than traditional solutions. Computing power and software are two examples that come to mind. 

It is much easier and cheaper nowadays to just buy/rent computing power on demand from a cloud provider like Amazon AWS or Microsoft Azure than going through the capital expenditure of buying and managing your own infrastructure. This logic applies to the public sector too. Plus, by buying or renting power on demand, the client can ramp up and down capacity as needed. In a traditional self-managed infrastructure the client needs to be very comfortable with whatever demand/capacity forecast it can come up with.

The same logic applies to software, where software as a service (SaaS) provides a potentially cheaper alternative to the traditional owning models of yesteryear. The downside, is that whereas in the past a software license would be eternal, SaaS implies a recurrent cost, moving software expenditure from the capital expenditures heading to the operational one. The jury is probably still out for the alleged cost savings argument of SaaS, especially over a longer period of time but it provides for alternative business models. Plus, it also changes the incentives of the software provider to keep investing on its solutions as those customers are providing recurrent revenue.

In either case, at least on a short time frame (say 1 year), those two models may be cheaper than the previous alternatives, potentially by an order of magnitude or two. In the EU, however, this is a critical element as probably those contracts would fall below the (recently revised) EU thresholds and as such subject mostly to national procurement rules only.

It is a shame that so far, the European Commission has not connected the dots between the potential lower costs of digital products/services and the current public procurement thresholds which are completely disconnected from this reality. As I put it on a conference last year, the EU thresholds were set in a time and world before the internet and associated services were even conceivable. No wonder they reflect values and opinions based on the information available in the 70s and the 80s.

PS: Speaking of the EU, life is particularly difficult for startups to sell to procurement markets on this side of the pond. Only culture change (and incentives) can move that particular needle.