Govtech Ecosystems in Latin America: innovation focused on improving services to citizens

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Govtech ecosystems, defined as ecosystems composed of startups, scale-ups and digital SMEs with solutions developed for public institutions, are already a reality in Latin America and the Caribbean (LAC). These governments need innovation, technology, and new ideas to be able to respond to the expectations of their citizens, an especially urgently need in the current pandemic context. For its part, the entrepreneurial community has increasing interest in the public sector, which possesses capital, needs, and a capacity for massive social impact.

At the IDB we listen, learn and share

With this vision in mind, the IDB Group, through its Cities Network and IDB Lab, together with IE PublicTech Lab, began a collaboration with two objectives in mind at the beginning of 2021: to showcase the potential of govtech in the region and to share the scope of the existing ecosystem. The two entities designed a series of activities which aimed to generate a conversation and dialogue that could disseminate knowledge amongst the participants which were interested in promoting these govtech ecosystems. In the following lines, we address the main dissemination activities carried out:

Blog Serie:

Thus, a series of blogposts (prior to this current post) were published where the basic concepts, impact, methodology and most relevant international govtech examples were discussed.

Web Events on Public Dialogue:

At the same time, training programs were developed, starting with a webinar for the IDB Cities Network. In this webinar, 142 municipalities learned about the experiences of five public institutions working with startups. In addition, the Govtech Bootcamp followed, where 30 startups shared their experience interacting with governments in the region and deepened their knowledge of the public sector market.

In parallel, a startup challenge was launched to find solutions that could help the public sector make better decisions and inform public policy. Around 150 companies applied, of which 5 were chosen to present their proposal at the IDB Govtech Venture Day. The winner was the Brazilian startup Gesuas, which presented a management platform to assist families in vulnerable situations. This series featured 41 panelists and 1,344 participants, including 320 organizations.

We aimed to showcase the govtech ecosystem’s potential and reach in LAC and Iberioamerica. Along the way, we learned a lot. These learnings covered both govtech strategies to generate demand from public institutions as well as the structuring of ecosystems around public sector challenges and their impact on local, regional, and national governments. This process also allowed us to get to know the market much more closely, also known as “govtech’s offering” in the region. We became better acquainted with the business model and strategy of govtech companies that already work with institutions in Latin America and the Caribbean, especially with municipalities.

What characterizes the govtech offer in LAC cities?

We have summarized below some of the lessons from this experience that we hope can help both local administrations and innovation-focused companies interested in approaching the public market in Latin America and the Caribbean:

1. The govtech ecosystem grew during the pandemic, especially in cities. This is especially relevant given that 80% of the LAC population lives in cities. The diversity of sizes, densities, socioeconomic or demographic conditions amongst LAC cities makes it possible to generate various solutions and learnings that can be applicable in similar contexts, satisfying the significant need to provide better services to citizens.
2. Govtech ecosystems are a development tool, with an especially significant impact on smaller populations. The Mexican startup OS City, the Argentine Munidigital or the Venezuelan Vikua have worked with small municipalities such as Huancayo (Peru), Grecia (Costa Rica), or Esmeraldas (Ecuador). These cities are not subject of the commercial strategy of large companies due to their low digitization and their lack of dependence on “legacy systems”, but the potential impact of applying new technologies to improve their efficiency and services to their population is huge. Most of these govtech technologies are simple to integrate and focus their commercial work mainly in small and medium municipalities.
3. Govtech can address a wide range of topics, from providing key services such as health or education, to creating a complete digital infrastructure. Many of these solutions have been applied to other industries such as finance or in the private sector (private schools or hospitals) but we found a genuine interest on the part of many entrepreneurs to apply these solutions to a public context. As we see in other regions, the pandemic has caused many entrepreneurs working in other industries to look to at public sector as a potential client. In fact, many of the companies had not yet collaborated with the public sector, but were interested in delving deeper into the govtech market.
4. There are several public agencies that promote govtech ecosystems and facilitate the rapprochement between public challenges and private companies while promoting innovative public purchasing systems as a means to facilitate access to the public sector for non-traditional providers. For example, we had the opportunity to learn about the work of IdeiaGov from Sao Paulo State, where they have been working on public challenges since 2019. The National Research and Innovation Agency of Uruguay already uses open innovation and design methodologies to identify public problems. and launch challenges to the community of innovators. Some of them dare to develop pilots, others focus on innovative public purchasing, but all are looking for contractual channels to open the public purchasing market to these non-traditional providers. In general, these agencies offer interesting support working with the public administration to refine and identify the problems that can be solved in the govtech innovation ecosystem. This is a clear deficiency that local administrations in general have, especially smaller ones.

What aspects define govtech companies in the region?

1. Specialization as a competitiveness strategy: Most of these small companies play up the specialization of their product and their teams, developing a technical expertise that makes them competitive in hiring processes, even against large companies.
2. Entrepreneurs who work with the public sector see in this space a great opportunity given that the public market has great barriers to entry as well as to exit. Although from conception the great challenge of private companies is to reduce the cost of customer acquisition, there are other types of considerations that come into play when they work with the public sector: a high customer value generated mainly by a high recurrence of contracts (in many cases up to 5 years per tender) and a low loss of clients.
3. Although in the first years the profitability variables sought by investors are not present in a B2G model, the relationship between risk and return over a longer time horizon may be of great interest to them. Financing is a complex problem for companies with a govtech (B2G) business model, especially due to lack of experience in working with government, and the perception of high risk in this type of investment. However, for startups that are clear about what problem they are going to solve, and especially for those that know how to sell to the public sector, there is a promising path.
4. The public sector can be a channel to scale up many of the enterprises with social impact in the region. In addition to the economic / financial return, there is also a social benefit to working with the public sector. This is a relevant factor that most govtech entrepreneurs bring in their narrative. Impact investors are seeing this issue clearly and have become a relevant player at the moment.
5. In most countries the entity that spends the most on technology is the state, this is something that all govtech entrepreneurs should take into account. The LAC region’s public sector is a customer with high spending capacity, an enormous potential for full digitization and that, in addition, has a critical need for investment in new ideas to respond to the crisis brought on by the pandemic.

With this blog post we end our govtech programming that has allowed us to meet many people coming from diverse backgrounds, from local government to innovation-based startups, who share the same goal. This is only the beginning of a collective effort between startups, governments, international institutions, universities, corporations, and investors. Together we will try, improve, and sometimes fail, but will continue seeking and bringing the best ideas to our public institutions so that they can improve LAC citizen’s lives.