In the ever-evolving landscape of technology sectors, GovTech stands out as an interesting/ unique case study. While it captured investor imagination during the dotcom bubble and again a few years ago, recent times have seen a notable quiet period—fewer funding announcements, only a handful of promising European startups making headlines, and a general absence of major breakthroughs. Yet, we're witnessing what appears to be a renaissance in the government technology space: The World Economic Forum's projection is nothing short of staggering: by 2034, GovTech is expected to unlock USD 9.8tn in public value globally. This isn't just about digitizing paperwork; it represents a fundamental transformation in how governments operate and connect with their citizens. We're talking about a shift that could redefine the relationship between people and their institutions, with the public sector acting as the operating system of society.

The timing couldn't be more critical. Governments worldwide are facing a perfect storm of challenges: legacy systems creaking under the weight of modern demands, public services stretched beyond capacity, and a citizenry increasingly expecting the same seamless digital experience from government that they receive from Amazon or Apple. A widening gap now separates public expectations from governmental capabilities.

Against this backdrop, startups are positioning themselves as crucial bridges. With innovative approaches unencumbered by bureaucratic inertia, these companies are offering solutions that traditional government IT providers simply cannot match in terms of agility and user-centricity. Yet, adoption remains challenging. Regulatory hurdles, established procurement processes, and caution towards unproven vendors often limit startup participation, with public tenders often favoring established players.

Fortunately, the policy environment is simultaneously undergoing a remarkable evolution. The Draghi Report on European Competitiveness, published last year, clearly highlighted the need for a Single Market and the removal of regulatory hurdles to foster innovation. Now, the newly announced strategy from the EU Commission places reducing bureaucracy at the top of its priorities. The recent coalition agreement in Germany, setting the stage for governance, also places significant emphasis on the digital transformation of public services.

All of which raises a compelling point for entrepreneurs and investors alike: now is the time to build in GovTech. The confluence of technological readiness, government willingness, and citizen demand creates a unique moment of opportunity. Let’s take a closer look at why this momentum may be unlike any other.

Germany’s Watershed Moment

“Germany: digital, connected, and resilient. Our guiding vision: a forward-looking, interconnected, high-performance, and user-centered administration—progressively application-free, oriented towards life events, and ‘digital only’ with targeted support services.” – Coalition Agreement 2025

The newly published coalition agreement from the CDU/CSU and SPD marks a real turning point for Germany’s public sector digitalization. With strong structural reforms and serious financial backing, the government is now showing urgency after years of slow progress. We conducted a deeper analysis of the potential implications for the GovTech market and the startups working within it.

A particularly compelling promise is the creation of the Federal Ministry for Digital Affairs.. It’s a clear signal that the government is now treating digital transformation as a central issue, not a side topic. Germany has been behind in public digital services for a long time, while countries like Estonia have pushed digital government, and the UK has simplified procurement through G-Cloud. Though Germany has made efforts in recent years to advance digital government. 

The Online Access Act (OZG) and the German Administration Cloud (DVC) have been important building blocks. Now, the coalition agreement promises even more. Germany aims to go fully “digital only” with plans to use AI to handle 80% of routine citizen inquiries by 2027. The “Once-Only Principle” will remove redundant paperwork, letting citizens and businesses submit data just once, which will then be securely shared between agencies. This is a major shift away from siloed, manual processes toward a more seamless and data-efficient model.

Germany is also planning a national digital ID aligned with the EU’s EUDI Wallet. This would integrate everything from tax filing and healthcare to private sector use cases like banking. With biometrics and cross-border compatibility, digital identity is positioned to become a key component of Europe’s digital infrastructure. And through the Open Data Mandate, governments will be required to publish usable, machine-readable datasets, enabling civic developers and startups to build new tools and services on top of public infrastructure, backed by new incentives like a EUR 50m Civic Innovation Fund. Some other priorities include automated permit approvals, and predictive tools to detect fraud. EUR 300m is already earmarked for upgrading outdated systems that would otherwise block these efforts.

Regulation as Market Creator 

These regulatory reforms aren’t just policy milestones; they actively shape the market. In GovTech, regulation doesn't merely influence the playing field, it defines it. When laws require digital processes, APIs, or identity solutions, they effectively create demand overnight. Startups that move early to meet these mandates often find themselves with built-in market pull, faster adoption, and a clearer value proposition. The European Commission has announced further omnibus laws to reduce administrative burdens as part of its new single market strategy. In the Digital Omnibus, the Commission plans targeted amendments to existing EU regulations. This includes adapting horizontal product rules under the New Legislative Framework, such as digitizing declarations of conformity and optionally providing user manuals in digital form. Beyond simplifying procurement for public tenders, these regulatory reforms lay the groundwork for startups that specialize in reducing bureaucratic complexity.

The Global GovTech Wave

Beyond these regulatory shifts, we're also seeing a broader wave of transformation across the public sector. A combination of evolving technologies, shifting citizen expectations, and global pressure to modernize is accelerating the pace of change. The result is a GovTech landscape that's not only growing quickly but fundamentally changing in how solutions are developed, adopted, and scaled.

Across the world, public institutions are under pressure to modernize. As of 2024, the global GovTech market is valued at USD 606 bn and is expected to grow to USD 1.42tn by 2034. Governments are no longer debating if digital transformation is necessary; they're figuring out how to make it work at scale.

One key enabler is the shift to cloud infrastructure. Legacy on-premise systems, which have long slowed down agility and security upgrades, are being replaced by cloud-based platforms that allow for flexible scaling, better resilience, and faster deployment cycles. In Europe, this is supported by initiatives like Gaia-X, which aim to ensure sovereignty and interoperability in public sector cloud environments. Furthermore, startups such as Decentriq, which focus on building confidential cloud solutions, might also become relevant players in this field. As Decentriq developed a platform which offers data clean rooms for companies (i.e., protected virtual environments based on confidential computing technology, in which sensitive data is encrypted and cleaned so that it can be used for data analyses across organisations), it might add another piece of the public infrastructure puzzle.

At the same time, procurement is getting a long-overdue overhaul. Outdated and opaque systems are being replaced by digital-first procurement frameworks. These are designed to improve vendor discovery, increase transparency, and lower the barrier for startups to win public contracts. We've seen the success of the UK's G-Cloud model, and similar efforts are now gaining traction across the EU.

Governance, Trust, and Sovereignty in the Age of AI

Another important shift is in how governments use data. What started as basic digitization is now evolving into data-driven governance. With access to better analytics and integrated data sources, agencies can make more informed decisions, predict needs, and allocate resources more efficiently. AI is also playing a growing role; tools like ChatGPT Gov allow agencies to work with internal data securely, unlocking new potential in process automation and policy support.

But this also introduces challenges. Many European governments are adopting "Trust-First" AI frameworks that prioritize transparency, bias mitigation, and regulatory oversight. Baden-Württemberg's rollout of Aleph Alpha's F13 AI system for public services is a first step in what we expect to become a broader wave of responsible AI experimentation in the public sector. Companies like Calvin Risk and LatticeFlow, within our portfolio, are developing innovative solutions to support these trust-driven approaches. Calvin Risk, a pioneer in assessment-first governance software built on research from ETH Zurich, provides a standardized and automated AI Risk Management solution. This software empowers users to systematically evaluate AI systems through API endpoints or model uploads, automatically generate ground truth test data using contextual information, and leverage a comprehensive library of over 50 metrics to assess system quality across critical dimensions like bias, hallucinations, and vulnerability to attacks. Complementing this, LatticeFlow's AI Assessments platform bridges the gap between AI Governance and the technical expertise needed to ensure the development and deployment of safe, compliant, and ultimately trustworthy AI solutions. 

Meanwhile, geopolitical tensions and digital dependency concerns are pushing the conversation around digital sovereignty to the top of the agenda. The EU is drawing a clear line: future public infrastructure must be secure, interoperable, and ideally developed within Europe. This is where national strategies, like the German coalition agreement, align tightly with EU-level ambitions. Programs like Horizon Europe and the Digital Europe Programme are pouring funding into areas like digital identity, AI, and smart cities, while initiatives such as GovTech4All are building cross-border, citizen-focused solutions in collaboration with startups and local governments.

Together, these global trends—cloud migration, AI adoption, data-driven governance, procurement reform, and strategic digital sovereignty—are creating a huge opportunity. This shift is transforming the relationship between technology providers and public institutions. . And for startups capable of navigating  this environment, the timing couldn't be better.

Our View as Investors

We see a fundamental opportunity emerging from this political momentum and a clearer path for startups to build valuable, defensible companies in GovTech. For us, the most underserved and impactful opportunity lies at the operational core of government: the digitalization of fundamental administrative workflows.

Despite rapid progress in the private sector, much of public administration still runs on fragmented systems, manual processes, and outdated interfaces. These systems are slow, error-prone, and costly to maintain—not because better solutions don't exist, but because the barriers to change have historically been too high. However, we are now witnessing a shift in this landscape.

We're particularly interested in startups that help public institutions digitize high-volume, document-heavy, multi-stakeholder processes—whether it's application workflows, document handling, or eligibility determinations. What excites us is not single-use tools for isolated departments, but platforms that tackle cross-cutting challenges common across ministries, agencies, and municipalities. End-to-end capabilities, those that turn paperwork into structured data and automate decision-making, are where we see real potential. 

While we recognize that achieving these end-to-end solutions is a complex and often lengthy undertaking, typically involving multi-year projects led by large IT consultancies, we believe startups can play a vital role in accelerating this transformation: To succeed, startups should identify an appealing niche within the sector that provides a strategic entry point and allows for future expansion. This involves addressing fundamental administrative patterns common across multiple government functions, such as application processing, document management, or eligibility determination, rather than focusing on isolated solutions for single agencies or departments. This approach enables a "land and expand" strategy, allowing startups to demonstrate value, build trust, and gradually expand their footprint within the public sector.

Digital identity and access management is another area where we see strong tailwinds. The rollout of BundID and the EUDI Wallet creates an urgent need for secure, user-friendly infrastructure that can support both government and commercial use cases. Startups that can deliver simplicity without compromising compliance will play a central role in shaping how the public accesses services in the years ahead.

As the demand for AI-powered solutions continues to rise, the potential of fully integrated, end-to-end AI systems becomes increasingly evident. However, most organizations are still not equipped to handle such a profound transformation.. Instead, the immediate value lies in targeted AI tools designed to address specific pain points or tasks. Governments are not ready for advanced AI deployments at scale, but they are under pressure to improve speed and responsiveness. That's where well-scoped, narrowly focused AI tools can have an immediate impact. As readiness for broader adoption grows, these incremental successes will pave the way for more comprehensive, fully AI-driven solutions in the future.

Startups are actively innovating across these areas, driving new solutions and services in the GovTech sector. To illustrate this momentum, we have compiled a market map highlighting key players who are dedicated to revolutionizing governance operations.

Navigating the Complexity

For startups, one of the most persistent challenges in Germany’s GovTech landscape is the structure of the public sector itself. The system is highly decentralized, with different rules, priorities, and budgets across federal, state, and local levels. This creates a complex environment where success isn’t just about building good technology, it’s about understanding the administrative context, navigating varied procurement pathways, and building trust with public stakeholders. Selling into government still requires patience, persistence, and a long-term view. Because of this, traditional growth signals like fast revenue aren’t the most useful indicators. What matters more is early adoption within real workflows, strong feedback from initial deployments, and a pipeline of similar use cases across jurisdictions. Once a solution is embedded, public sector customers are unlikely to switch, leading to high customer lifetime value and low churn. The path to scale is slower, but it’s also more defensible once you’re in.

That’s why we look for teams that combine technical depth with domain fluency. Typically, these are founders who have worked inside the public sector or spent years building in adjacent spaces. They understand how to navigate institutional resistance, compete in the intense public tender system, align decision-makers, and support implementation in environments that don’t move fast or tolerate risk easily. In this space, credibility and context often matter more than speed or features. Procurement itself is another category we believe is ready for a major shift. Germany awards more than EUR 500bn in public contracts each year, yet only a small share goes to startups. The coalition agreement acknowledges this gap and includes reforms aimed at making tenders more accessible, raising contract thresholds for young tech companies, and expanding digital access rights. Startups like Stotles are already helping companies win public tenders and are taking advantage of this momentum. While implementation will take time, these changes could significantly lower the barrier for startups and create a much larger role for innovation in public spending.

Conclusion

The promises laid out in the coalition agreement won’t be fulfilled overnight, but they mark a clear shift in both mindset and momentum. For the first time in years, there’s real political will to make Germany’s government truly digital. And with it comes a unique opportunity for startups to build essential infrastructure for the next generation of public services. We believe this convergence of regulation, funding, and policy creates a rare moment for GovTech. The market is still complex and challenging, but the potential impact, both commercially and societally, is enormous. 

What's striking, however, is that despite these favorable conditions, we still see relatively few founders venturing into this space. The opportunity is vast, but the entrepreneurial attention remains limited. We're convinced that GovTech deserves more builder talent, more innovative approaches, and more ambitious visions.

For those willing to navigate its complexities, GovTech offers something increasingly rare in today's startup landscape: the chance to build meaningful, defensible businesses that genuinely improve how society functions. The window is open—now is the time for visionary founders to step through it.

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