The Urbantech Radar is our ongoing effort to understand startups and investors in the urbantech ecosystem. In our most recent update, we added Mattermark data for the 300 companies in the list. In the coming weeks, we’ll use the data to explore some of the common questions we encounter at Urban.Us.
We like to meet teams early enough so that we can explore questions like “Who will benefit from this solution?” and “Who might pay first?” or “What business model might make most sense to test?” Sometimes the answer is easy, but in other cases, it’s worth working through a few options. We dug into the data to try understand business model choices in the urbantech space.
Urbantech business models
B2B and B2C business models dominate the Urbantech landscape, with about 58% of companies pursuing B2B and 56% pursuing B2C. Only 16% of companies opt for B2G models. This might surprise people who instinctively think city government when they think of cities. It could also be the very effective job of the smart city movement, who tend to focus on things that can be sold to governments.
But this isn’t a real surprise. City problems span a range of industries and stakeholders. A look at most of the best performing venture funds will likely reveal a pretty even split between B2B and B2C firms. B2G can be harder to find, though. We’ve taken to explaining this as FOG or fear of government. It’s a normal response many investors have when they hear that companies sell to the government (unless the application relates to security).
But more than 1 in 6 companies selling to the government is higher than we would have expected. This certainly doesn’t look like FOG. Digging a little more, it seems that 40% of the top 50 investors in our dataset had invested in B2G companies! That level of interest just doesn’t seem to fit with our experience, so what’s happening?
What happened to the fear of government?
Surely FOG should show up in the data? I mean, we’ve had so many cautionary conversations with many very successful investors. After some review, it turns out that not all B2G is the same. There are two types of B2G models:
- B2G only; and
- B2G as part of a broader B2B strategy.
When we look at B2G firms that only sell to the government, the number of startups is a little lower than 1 in 10. The number of the top 50 most-active investors who invested exclusively in B2G firms drops to 20%. This suggests that FOG is real, but only when the government is the only customer.
Urbantech business model: B2G Only
Fewer than 9% of companies focus on B2G exclusively.
When B2G is just a part of B2B
It turns out that a lot of B2G isn’t captured, and it’s not Mattermark’s fault. For example, Amazon is mostly associated with B2C and perhaps even B2B. But Amazon sells AWS govCloud, which is most certainly B2G. So maybe B2G is often just a specialized form of B2B?
We’ve noticed this a lot in our portfolio companies. Rachio, for example, has a very visible B2C model, but their site reveals a “Pro” version as well for B2B. And while Rachio does explicitly have a local government program yet, we know local governments are buying Rachio products. The situation is similar for Radiator Labs, Dash, and Blocpower, who all have local government customers, but don’t explicitly call out their focus.
Our analysis suggests that B2G is likely much bigger than we expected. It’s just that it’s usually a subset of a B2B strategy and even then, it doesn’t receive specific focus early on because companies look to multiple customer types to scale.
Urbantech business model: B2B & B2G
Percent of B2B that are also likely engaged in B2G compared with all other business models. A random sample was used to identify companies that were designated as B2B but are also very likely to have government customers.
B2B then B2G
We ask most of our founders to consider B2B and B2C business models first. Why? Only 1 of our 19 portfolio companies is working on a problem that is ONLY relevant to local governments (Mark43 makes law enforcement software). Two other companies chose to sell to local government first though B2B may have worked for both of them.
These companies have something in common, beyond their desire to more explicitly see public benefits from their work. They are able price their offerings in a way that makes local government look a lot like B2B. In part this is because government agencies have thresholds for spending, below which they do not need to solicit competitive bids. Like any business they will seek out multiple quotes, but there isn’t a longer bidding process, typically associated with government sales.
We believe around 50% of all startups in the urbantech space will wind up having B2G in their mix of business models. We expect this will be true of our portfolio companies, too. So please do B2G, but at the seed stage, it’s worth consider B2B and B2C first – if the data is any guide, you’ll likely have a larger universe of investors to work with, but also more talent that has experience with these models.
You can see the Urbantech Radar along with the data we used for the analysis. We’ll be exploring more questions with the help of Mattermark data in the coming weeks.