GovTech 2025: Momentum Builds
Since inception, Weatherford Capital has been actively investing in the Government Technology (“GovTech”) sector, building a portfolio of seven platform investments spanning various government technology systems and use cases. Our journey began in 2016 with our initial investment in PayIt, driven by several key themes that made the sector particularly compelling. Today, those same themes not only persist but have grown even stronger.
As 2025 progresses, the GovTech sector is gaining remarkable momentum and appears poised for a potentially record-breaking year. Following the $13 billion surge in deal value in 2021, the market maintained solid footing in 2024, reaching $9 billion in transactions. With deal activity mounting late last year, many within the industry – including ourselves – believe we could test or even surpass 2021 levels.
Several converging factors are fueling this surge in M&A activity and investor interest, but foremost among them are GovTech’s resilient business fundamentals and non-discretionary demand profile. Unlike broader tech sectors that remain vulnerable to economic cycles and enterprise IT budget constraints, GovTech continues to benefit from stable end markets and reliable funding streams.
Key Trends Driving Deal Activity in GovTech
Strong Fundamentals and Mission-Critical Solutions: Many GovTech vendors are solving mission-critical operational problems for public agencies. As a result, they benefit from sticky customer relationships, impressive retention rates, consistent growth, and profitable unit economics – especially when scaled efficiently.
Emerging and Innovative Business Models: Of particular interest are models that create revenue for governments, effectively side-stepping the need for traditional budget appropriations. These self-funded or transaction-fee-driven approaches not only enhance value for constituents but also open new monetization opportunities for both GovTech providers and governments.
Valuation Transparency and Stability: GovTech valuation multiples have proven to be resilient despite market volatility over the past several years. As investor interest rotated towards assets with stable and profitable growth, GovTech multiples expanded beyond broader software indices due to their strong business fundamentals, durable end-markets, and financial performance. Increased M&A volume has created greater valuation transparency with strong correlation to key metrics (growth, retention, margin profile, Rule of 40, etc.) helping to promote future transaction activity that is further aided by strong investor interest.
Modernization Still in Early Innings
Cloud Migration: Just 20% of state and local government systems are currently cloud-based, yet more than 70% of agencies have articulated cloud-first or digital modernization strategies. There is still significant room for growth.
Prioritization of Digital Modernization: An estimated two-thirds of public agencies still rely on custom-built, on-premise systems (many nearly 20 years old) or manual paper-based workflows. In several cases, these systems pose serious operational risks and/or revenue collection disruption due to outdated code and limited support, often requiring immediate modernization to prevent service disruption.
Workforce Challenges Driving Digital Adoption: Governments face both an aging workforce – with a large percentage of public employees being over 60 – and a shortage of government labor. Combined with legacy systems, this dynamic is pushing agencies to adopt scalable SaaS platforms that allow them to "do more with less" with better user interfaces and interoperability.
Citizen Expectations and Satisfaction Gaps: Public satisfaction with government digital services remains among the lowest across many sectors. Many agencies are now prioritizing both user and citizen experience, transparency, and operational efficiency through digital transformation efforts.
DOGE’s Potential Ripple Effects: While still in flux, the federal Department of Government Efficiency (DOGE) initiative could exert downstream pressure on state and local governments. These agencies may accelerate investment in software and AI capabilities as they seek to offset potential funding cuts and uncover alternative revenue streams.
Looking Ahead
As we look to 2025 and beyond, we believe GovTech is still in the early chapters of its digital transformation journey. The foundational tailwinds – cloud migration, efficiency mandates, and heightened citizen and user expectations – will continue to drive demand for scalable, impactful technology solutions. Ultimately, we expect this evolution to benefit all stakeholders, not only the companies and investors building innovative and scalable platforms but also the governments and communities they serve – delivering better outcomes, greater transparency, and even better efficiencies.