As markets go down, government tech spending stays steady: How can investors tap in?

Written for TechCrunch
by Josh Mendelsohn and Mike Ference

Despite current market conditions, investors have a record amount of capital – an estimated $230 billion of dry powder — stocked away. They just have to find the right place to deploy it.

Despite the gloom, doom and scramble for yield, one sector is too often overlooked by investors, where backing technology will produce returns no matter the state of the economy: government spending in tech.

What’s more, much of government spending is focused on areas critical to society, such as climate science, disaster response, healthcare, national security and education.

The United States is currently in its most significant financing sprint since WWII. It’s a spending program the size of the Marshall Plan for domestic tech innovation, and most investors aren’t paying attention. In fact, the total amount of government spending, when adjusted for inflation, exceeds the entire amount America spent fighting World War II by 130%.

For decades, however, sector-focused investors have either ignored or been mystified by the public sector, unable to match their innovation to its needs. The lack of product-market fit combined with a lack of understanding of the inner workings of government has inhibited true innovation and left billions of dollars in opportunity walled off.

The key to unlocking these resources is understanding what the priorities for investment are and how to access them.

The biggest mistake investors make is focusing so much on the federal government that they can’t see that the bulk of federal spending flows through states. For instance, the response to the COVID-19 pandemic and the Infrastructure Investment and Jobs Act together amount to trillions of dollars.

Federal grants to states increased 37% between FY2019 and FY2020, nearing $1 trillion, after averaging 4% increases over the preceding five fiscal years. Notably, the $350 billion Coronavirus State and Local Fiscal Recovery Funds program requires states to obligate funds only by December 31, 2024 and to expend them by December 31, 2026.

And in the roughly six months since the infrastructure bill was enacted into law, over $110 billion in funding through formula and competitive grant programs has been announced for over 4,300 projects in all 50 states.

As a result, there is more capital available to invest in critical public needs than ever before. But two things need to happen: Private-sector innovators must develop practical customer-focused solutions to critical problems, and public officials must be aggressive and smart enough to spend the money quickly.

Our strategy at Hangar is focused on using private-sector innovation to solve public-sector problems. Put plainly, a majority of our companies service industries that have received this spending, including government services, healthcare, education and defense. The current government spending, much of which will only begin moving in the states as they complete their legislative sessions this summer, means that companies have a once-in-a-decade (or more) chance to enter a funded marketplace looking for new ideas.

States are looking, and in some cases required, to broaden their perspective and find solutions to the problems the previous generation failed to solve. Mayors can use near real-time data to inform how they manage large and small cities alike. Wildfires fought with paper maps now have a chance at using science at scale. And these are just a few ways investing in technology can help improve society as a whole.

We have always believed that the best way to bring scalable impact to the public sector is by providing them with tools and services that they can leverage. Given the flow of approved federal dollars and ongoing deployment by governments, startups have a significant opportunity to push innovative tools and services at scale. And for investors, it’s an incredible opportunity to back the next wave of innovation