Unlocking the future: why GovTech investment is essential for public value and innovation

Over the past years, GovTech has evolved from a niche interest into a critical sector underpinning the digital transformation of governments worldwide. In an era marked by declining trust in institutions, aging infrastructure, and increasing demands for transparency and efficiency, governments face unprecedented pressure to adapt. GovTech – defined by the European Commission broadly as startups and technologies improving how governments operate and deliver services – offers not just digital upgrades, but a paradigm shift in how the public sector can become more citizen-centric, data-informed, and resilient.

The scale of the opportunity is massive. The World Economic Forum estimates that effective adoption of GovTech solutions could unlock up to $9.8 trillion in global economic value by 2034.

In the EU alone, annual public procurement expenditures exceed €2 trillion, with digital government services forming an ever-larger portion of that pie. Yet the investment flowing into this space remains disproportionately small.

Where some investors see bureaucracy and complexity, we see untapped markets with steady demand and high stickiness. Most governments do not experiment for experimentation's sake – they procure to solve real, recurring problems. The public sector is the world’s largest single buyer, and it is increasingly open to digital innovation, especially in areas like digital identity, AI for public services, procurement automation, climate tech for cities, and notably, in light of the recent substantial rise in defence spending across European countries.

The opportunity is not just about replacing outdated legacy systems. It's about enabling entirely new capabilities: cross-border services, predictive policy models, smarter infrastructure. It’s about making the state more proactive, not just reactive.

What sets GovTech apart from other verticals is its dual bottom line. Financial returns matter, but so does measurable public impact. Smart investments in GovTech can make public services more accessible, fair, and efficient.

Take digital identity as an example. In countries where e-ID is widely adopted, access to banking, healthcare, voting, and business registration has improved dramatically. Similarly, AI-powered analytics have helped cities anticipate infrastructure needs, improve emergency response, and even reduce energy consumption in public buildings.

These solutions build not only economic value but trust. Citizens are more likely to engage with governments that feel modern, transparent, and competent. Trust, in turn, reinforces compliance, participation, and long-term social cohesion. Especially in democracies, where institutional legitimacy is under strain, GovTech can be a quiet but powerful force for renewal.

So why isn’t everyone investing in GovTech already?

There are well-known structural challenges:

• Long and opaque procurement cycles make sales pipelines unpredictable. Public sector buyers tend to be conservative, and risk aversion is often baked into legal frameworks. Additionally, interoperability and legacy IT landscapes pose both technical and political barriers to innovation. 

  From an investor's standpoint, these frictions are real. But they are also overstated. The most successful GovTech founders I know have learned to navigate public procurement with the same diligence that others navigate enterprise sales. And today, more governments are creating innovation units, adopting agile procurement frameworks, and exploring outcome-based contracts. The tide is slowly turning – but targeted support is needed.

• Traditional VC logic – rapid scale, short exits, massive Total Addressable Market (TAM) – needs calibration in GovTech. The market is deep, but you often scale through adjacent sectors or geographies, not just speed. That requires patient capital, strategic navigation, and domain fluency. GovTech indeed needs “smart money”, investors understanding the market dynamics and the particular features of dealing with government entities, especially regarding new technologies and innovation.

Here is where the investor voice matters most.

We need to evolve both the capital and policy frameworks that shape the GovTech landscape. My experience tells me there are four major levers:

1. Blended Finance Mechanisms: Public-private co-investment models can de-risk early-stage innovation while attracting institutional capital. Development banks, philanthropic funds, and public sector innovation programs should be catalysing private investment with smart matching tools and outcome-linked funding. Openness to public fund-of-fund programs for supporting GovTech investment strategies and emerging VC funds will benefit the ecosystem. This vertical is uniquely suited to grow through both public funding and private capital investment.

2. Regulatory Sandboxes & Exchange Hubs: These controlled environments allow new GovTech solutions to be tested without falling afoul of outdated regulations. They create breathing room for experimentation and generate valuable policy learning. The UK’s FCA sandbox for fintech is a benchmark, but similar efforts in digital identity or AI governance are needed across Europe. The same principle applies to the GovTech Hubs (e.g. German GovTech Campus), which bring together the tech community and public administration to exchange, learn from each other, and initiate projects.

3. Strengthening Interoperability in Europe: Interoperability is not just a technical issue - it’s a strategic necessity. Without common standards, GovTech solutions remain trapped in national silos. The Interoperable Europe Act is a step in the right direction, but we need more aggressive alignment on data models and standards, service architectures including secure cloud environments, digital identity frameworks, and procurement regimes. This is how we enable a true Digital Single Market for public services.

4. Enabling Scaling Pathways: The biggest challenge for startups is not building a good product but scaling it across jurisdictions. Europe, in particular, must stop thinking in pilot programs and start thinking in platforms. GovTech startups should have access to pre-approved frameworks, reusable procurement templates, and structured entry points to large-scale tenders. A startup shouldn’t have to start from scratch every time it crosses a border. Governments should ideally act as informed buyers of innovative technologies, rather than mere benevolent grant-givers.

This is exactly where investors can also help. By backing teams with public sector fluency, investing across adjacent verticals (e.g. HealthTech, CivicTech, IT infrastructure), and pushing for multi-market traction, we can turn today's pilots into tomorrow's platforms.

GovTech is not just a bet on digital tools. It’s a bet on smarter institutions, more agile governance, and more resilient democracies. And while I speak from the perspective of an investor and advisor, I also speak as someone who has seen what works – and what doesn’t – public institutions.

There is no shortage of technical talent or innovative ideas in Europe. What we need are the right enabling environments: aligned standards, open digital infrastructures, supportive capital, and public administration willing to co-create with tech communities. In these times of geopolitical dynamics, European (digital) sovereignty – defined as having a broad vendor ecosystem enabling choice for government buyers and fostering resilience among countries – is more important than ever.

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