In a recent LinkedIn post, Lee McCabe highlights a significant, yet often overlooked, investment opportunity within the government technology (GovTech) sector, specifically focusing on the modernization of municipal services software. McCabe points out that many local governments are still reliant on outdated software systems, a situation he describes as:
“Most local governments still run on software that looks like it came free with Windows XP. Procurement, permits, inspections, citizen support portals……held together by outdated code, clunky interfaces, and people who’ve been ‘restarting the server’ since 2004.”
Despite the archaic nature of these systems, McCabe emphasizes their critical role and the immense transaction volumes they handle, stating, “Yet these systems handle billions in transactions and touch nearly every citizen. That’s the absurdity. And the opportunity.” This paradox, he argues, presents a substantial market gap.
The GovTech Market: A Sticky Recurring Revenue Play
McCabe draws a parallel to Tyler Technologies, a company that successfully capitalized on this market by building a substantial valuation. He explains the underlying economic advantage of municipal software contracts:
“Government contracts are slow to win but almost impossible to lose. Average municipal software contracts run 7-10 years with 95%+ renewal rates. And they trade at 6-8x revenue while traditional SaaS fights for 3-4x.”
This inherent stickiness and high renewal rate make GovTech a highly attractive sector for recurring revenue, far exceeding typical Software-as-a-Service (SaaS) multiples. McCabe elaborates on the fragmented nature of the current market, noting that numerous small vendors specialize in single functions like permit management or inspection scheduling, with little to no integration between them.
The Consolidation and Modernization Strategy
McCabe outlines a clear strategy for capitalizing on this fragmentation: acquisition and consolidation. The proposed approach involves:
- Acquiring niche vendors in the municipal software space.
- Consolidating these disparate systems into a unified software stack.
- Modernizing the platform to be cloud-based and mobile-first.
- Integrating essential functions such as payments and automating workflows.
- Enabling citizens to complete tasks online, eliminating the need for in-person visits and paper forms.
He underscores the increasing pressure on cities and counties to digitize services, further fueled by federal infrastructure funding and a general willingness among government bodies to modernize. However, McCabe points out a critical bottleneck: the lack of internal capacity to execute these digital transformations.
Long-Term Value and Predictable Returns
The enduring appeal of this strategy, according to McCabe, lies in the extremely high switching costs associated with municipal software. While the initial sales cycle can be lengthy, often extending to 18 months, the customer lifetime is measured in decades. This leads to what he describes as:
“The definition of boring, predictable, compounding returns.”
McCabe concludes by suggesting that the next major billion-dollar exits may not emerge from hyped sectors like AI or cryptocurrency, but rather from the fundamental, albeit less glamorous, task of improving essential public services, such as those typically managed by a Department of Motor Vehicles (DMV).
📝 About This Content
This article is based on insights shared by Lee McCabe on LinkedIn.
📅 Originally posted on November 20, 2025 | View original post on LinkedIn →