What Should You Consider When Investing In “Smart City” Technology?

In this blogpost, Technology and Public Purpose Fellows Liz Sisson and Rebecca Williams team up to propose how governments and investors alike can consider public purpose in their “smart city” technology investments. In counting “smart cities” final days, City Monitor summarizes the term quite well:  

“Smart cities surfaced as a concept more than 20 years ago and served as an umbrella term to describe a large and varied set of emerging technologies that seemed destined to help metros operate more efficiently. The internet of things for municipalities has to date included everything from simple sensors that allow transportation engineers to track cycle lane usage to full-blown smart-city operations centres that brought to mind scenes from Minority Report.” 

Rather than addressing “smart city” product risks to serving the overall public good, this post will cover “smart city” business risks to serving the overall public good. Specifically this post outlines how governments and investors can approach “smart city” procurement, business models, and long-term value creation with public purpose in mind. For as long as the term still exists, anyway.

Procurement Considerations 

For Government  

There are many considerations governments must face when procuring goods or services to fulfill government missions and varied policies and procedures to maintain ethical standards and achieve performance goals. Below are a few key “smart city” related considerations that are not meant to be exhaustive nor replace outcome-based contracting, human-centered design, or other participatory purchasing best practices. 

Listen to the Public For Procurement Priorities Not Salespeople. The public should never be surprised by their governments use of novel technologies. In addition to consistent proactive public consultation to set government priorities, including related procurement decisions, governments can stave off surprises by rejecting unsolicited “smarty city” sales pitches, the so-called “solutions in search for a problem.” The Boston Smart City Playbook affirms this sentiment in Play 1: Stop sending sales people. Governments must ensure they are in the driver seat leading with desired outcomes demanded by the public going into any procurement, technology or otherwise. Government-led efforts do not preclude innovation as demonstrated by NASA’s intentional efforts in 2005 to strategically incentivise a commercial space market.  

Key Questions  

• What outcome has the public demanded? Has the public weighed in how technology should be a part of achieving that outcome or not?
• Does the solicitation reflect those desired outcomes and dictate discrete ways commercial technology may support those outcomes?

<>Foster Procurement Transparency and Engagement. Public consultation should not end after outcome determination but continue throughout procurement and implementation. This is democractic, achievable, and many governments are already doing it. Procurement transparency facilitates accountability and enables engagement. Governments should employ best practices, such as Sunlight Foundation's Policy Guidelines for Municipal Contracting and standards provided by the Open Contracting Partnership. Transparent processes can also help city council members, executive leadership, and counterpart agencies be better aware of collective benefits and risks arising from disperse procurements. To the extent possible, governments should work to extend these transparency efforts to the subcontractor level which are of particular interest relating to data privacy policies and technology performance. Governments should go beyond posting procurement information and data online, but ensure the public can observe what range of responses governments are considering. Examples of this include Boston’s New Urban Mechanics’ Beta Blocks program which posted a broad “Smart City” Request for Information (RFI) in 2017 and publicly posted the 100+ responses online and the U.S. Department of Transportation’s 2015 call for “Smart City '' grantee proposals and publicly posted the 78 responses online. Beyond broadcasting proposal responses and procurement activity, governments should provide context and facilitate feedback loops related to novel technologies as Amsterdam and Helsinki have done for AI, and Seattle has done for “surveillance technologies.” 

Key Questions 

• Is our procurement process legible to the public? 
• Do we know what other agencies are procuring? Do we understand the subcontractor services being utilized here?  
• Can the public provide feedback on novel technology use before, during, and after procurement?  
• Can the public engage with implementation through user testing and other feedback mechanisms? 

For Investors  

Depending on the patience of the VC, the word procurement can be seen as an opportunity or a risk. There is standard advice for startups selling to the government: if possible, avoid RFP processes; if applicable, price slightly under procurement thresholds so decision-making can be sped up; consider being a subcontractor; or offer free pilots to illustrate value-add while waiting on a full contract. These pieces of advice can lead to sales, but “cutting corners” might be harmful to the public.  

Assess Team Experience. When a startup (or venture-backed vendor) plans to sell to the government, the VC should assess the team to make sure there are people at the company who understand the intricacies of selling to the government. To be successful in selling to the government, the process takes experience, time, and money. Because government sales mean tax dollars will be directly or indirectly used to procure, the sales or business development team needs to have a deep understanding of the relationship building that goes into B2G and respect the processes in place. In addition to business development and sales, VCs should also assess the team to ensure there are product, policy or engineering people at the startup that have experience making government-related or public-facing technology.;

Key Questions 

• Have members of the startups’ team sold to the government before? 
• Have members of the startups’ team developed B2G products before?  

Carry Out Fair and Equitable Processes. For VCs who want to center public purpose in their startup investments, instead of encouraging startups to avoid procurement altogether or overemphasize free pilots, startups should prioritize contracts with governments who have fair, transparent and equitable processes. In theory, free pilots allow the government to test the effectiveness of a planned solution on a smaller scale but are not always sustainable for startups and do not always require the needed process to reduce harms. Sometimes it is worth startups pursuing sales in smaller-sized cities, instead of devoting countless hours to agencies with big names but tortuous processes. Responding to arduous RFPs or navigating procurement rules takes time, but those processes are in place to ensure public purpose. Those processes also prevent time-wasting activity, where one startup can spend years piloting technology and adjusting the product to fit the pilots’ criteria but never actually securing a contract.  

• How can the startup ensure procurement corners don’t have to be cut to sell successfully? 
• How can the startup make sure they are bringing experienced and patient B2G investors on to their cap table? 

   

Conduct Stakeholder Analysis. Often the decision-maker in the government is not the same person as the user or the public who is ultimately impacted by the technology. Startups should ensure they have engaged with all stakeholders, not just government customers, in their product development and sales. It will help prevent public pushback and will build a better business. VCs should encourage their startups to engage with people and communities outside of their customers and users. There are groups like NYC’s The Grid who will facilitate conversations between startups and members of the community.  

Key Questions 

• How is the startup getting feedback from all stakeholders, not just those with buying power? 
• Which members of the public actually benefit or have access to the product/service?  

   

Business Model Considerations 

For Government  

Governments struggle to get things done on limited budgets, budget cycle constraints, and time consuming procurement processes, but this is no excuse for accepting business relationships  that do not have public purpose in mind. To serve public purpose, governments must remain resolute and ensure they purchase from or partner with entities that do not have a hidden business agenda that may not serve the public’s best interest.  

Examine Public-Private Partnerships and “Free” Products for Hidden Agendas. Public-private partnerships can be executed with public purpose in mind, but too often governments engage in public-private partnerships without public input or public risks in mind. Much like the adage about social media platforms, "if you're not paying for the product, you are the product” governments must consider if they are not paying for the service, is the public the product? When governments are offered unsolicited “free” services from vendors or groups, they should be examined and tailored to meet outcomes demanded by the public. Governments should avoid taking any PPP or “free” service without substantively negotiating terms (just because it is free doesn’t mean you have to take it) and analyzing how this affects immediate outcomes and long-term financing. Moreover, since partnership relationships often bypass traditional procurement accountability processes, extra care should be taken by governments to ensure ethical standards are maintained and conflicts of interest are proactively disclosed. 

Key Questions 

• Has the public demanded a specific outcome related with this public-private partnership or “free” service?  
• Is the public meaningfully insulated from risk resulting from this partnership? Can the government and public hold this partner accountable? 
• Does accepting this “free” product have long-term costs? If a service is provided as a “freemium”, can the government afford the full price of the offer after the free period has expired?) 
• Are there conflicts with accepting this partnership? Does this company or organization have legislative interests in play? 

   

Evaluate Enterprise “Add Ons” With More Scrutiny. There are situations where a vendor a government already procures from develops additional services that are of use to achieve outcomes demanded by the public. However, vendors also actively try to “up-sell” governments into enterprise services, add-ons, and complementary features. These additional items can often be included without a new procurement process and are often presented at offered at a discount or “bundle” rate. Because of the psychological bias associated with these sales tactics and the lack of procurement review governments should approach these additions with heightened scrutiny. Telecom and utility companies in particular have made efforts to add  “smart city” software offerings to their traditional hardware offerings with mixed performance results (see Cisco’s recent retreat from the “smart city” market) and should not be assumed to be a better deal on their face. Lastly, with technology add-ons, governments may be adding more and more expensive (and risky) technology to solve problems that could have been addressed with other means. 

Key Questions 

• Does this enterprise expansion, add-on, or complementary feature solve a problem articulated as priority by the public? 
• Does this enterprise expansion, add-on, or complementary feature make you more beholden to one company going forward? 
• Has the public asked for a  technological service to address this problem?
• Would we procure this if it was not a “deal” or easy to add under an existing contract

Protect Public Data Rights. Many of the product risks posed by “smart city” technology derive from exploiting personal data collection. At a minimum, governments must have procurement staff and attorneys on hand who are well-versed in data licensing, governance, technical standards, and privacy negotiation. Governments should retain data rights in contracts firmly to consider subcontractors and third-party relationships as well. In this vein, governments should be wary of subscription services that only provide public data under a temporary license. In this growing data-driven world, governments should also aim to have full-time staff and governance bodies dedicated to these issues such as Privacy Officials, Commissions, and Advisory Bodies. Vendors of “smart city” technology should not be collecting personal data of the public for their secondary commercial means (such as big data analytics, adtech, or data sales), but rather should be explicit in any secondary data uses (if any) and primarily focus on providing outcome-tailored hardware or software services to government’. 

Key Questions 

• Do you have a standard privacy policy in place for technology purchases that minimizes personal data collection? Do you have a policy to minimize storage and abstain from intergovernmental data sharing without a warrant? 
• Does the company retain data rights? Does the technology use an open standard so data can be easily ported to future vendors? (See more below).

   

For Investors  

Will this startup make money? It’s always the golden question from an investor. From a public purpose perspective, there are some models more than others that reduce harms and allows for sustainable business growth. 

Avoid Free Pilots: As stated earlier, free pilots are not a sustainable way to build a business or to preserve public purpose. Sometimes proving traction to investors and other customers from free pilots is considered a “decent” signal, but VCs should consider what free actually means.  Often, when something is free, it does not follow a complete process. There is not always an understanding of data ownership, public input, or time for the government to properly assess the implications of the technology. That could be detrimental to the company’s reputation and bottom line in the long run. 

Key Questions 

• Is the startup relying on unpaid pilots to indicate traction?  
• How high are the customer acquisition costs or public risk factors when using free pilots? 

Probe Any Data Licensing or Selling: Any exchange of data or advertising for revenue is tricky, but especially in a B2G sales context. There are plenty of companies who make money off of selling user data, but when you have access to the general publics’ data (identifiable or not), a startup has the responsibility to make the public aware of their data being sold and if they should have access to the rewards of monetizing it. 

“Monetizing user data was the model suggested to us frequently by many VCs—selling user data or email addresses—but we decided against it and prioritized user privacy and user control of their own data, which is why we ended up pursuing an enterprise model.”

Key Questions 

• How much of the startup’s business model relies on selling the public’s data? 
• Does the public know their data is being used or being monetized?  

Ensure the Public Benefits from Corporate Partnerships: With B2G startups, it could be inappropriate to bring in corporate interests. The corporations are most likely sponsoring for brand awareness or access to data, so who really benefits: corporate shareholders or the general public? There’s massive reputational risk and possible confusion from the public, like in the cases of Starbucks involved in voting or Google involved in building a city in Toronto. 

Key Questions 

• Do the startup and corporation have the same definition of success? 
• Are there other aspects of the corporation that undermine/contradict the impact of their current efforts or partnerships?  

Examine the B2B Parallels: Startups recognizing the lag that could happen with B2G sales will develop a B2B business model or product parallel. This is smart for revenue and traction purposes but startups and VCs should ensure they are careful to not assume what works in B2B will work in B2G. Selling to businesses versus selling to any level of government means different considerations for data ownership, user feedback and stakeholder awareness. A startup selling to the Department of Defense versus Disney cannot treat a B2B and B2G offering as one in the same.  

Key Questions 

• What is the startups’ revenue split between B2G and B2B?  
• How are the startups key offerings different depending on their customers (government or business)? 

Long-term Value Creation Considerations 

For Government  

Vendors will come and go, but governments have a much longer timeline. Government stewards must consider long-term effects of their “smart city” investments. Does this choice set us up for better choices? Borrowing from indigenous design principles, governments must embrace a “seven generations view” meaning “look seven generations forward and seven generations back, while being rooted in our present generation.” 

First, Do No Harm; Facilitate Safe “Pilots”. Because emerging technologies are novel and risks are inherently unknown, governments should not jump into using technologies that have not been proven. As governments embark on novel use of emerging technologies, governments should design pilots that examine efficacy, public appreciation, and safety. Extra care must be taken to protect and get feedback from vulnerable people in these endeavors.  

Key Questions 

• Are we deploying this pilot with consent? Are we deploying this pilot equitably? 
• If this pilot does not work for our most vulnerable people, are we prepared to walk away? 
• What are the known pros and cons of this technology? How has it worked and not worked elsewhere? 
• What long-term financial decisions will be made because of this investment?

Use Open Standards. To ensure long-term value for your government, you will not want to beholden to one “smart city” technology provider. During any purchase or partnership ensure that the related data (if any) that is portable to future investments.. Similar to the Protect Public Data Rights recommendation above, which focuses on legal access to information, open standards help ensure long-term technical access to information. Additionally, open standards often provide opportunities to be in dialogue with other public purpose focused entities that help your government understand a wider spectrum of data uses, and risks.  

Key Questions 

• Can we leave this contract and still access this data? Can we port this data into a new service easily? 
• Am I in dialogue with other public purpose communities on the best technical standards for managing this data? 

   

For Investors  

Long term value creation for smart city technology is not just about pure profitability but also ensuring a startup is solving a real problem experienced in cities in exchange for money.  

Create long term value for the public and for business. Companies are IPOing and raising millions from VCs without turning a profit or signaling sustainable growth indicated by consumers, businesses or governments paying for their product or service at full price. For public purpose, this also means evaluating value and problem-solving in the long term (>10 years) and in an equitable way. VCs should compare startups to existing solutions in the market to understand if the technology provides incremental (small dent in problem), fundamental (problem mostly solved) or transformative change (problem eliminated or a brand new movement) and assess how that level of change will impact the public-- jobs, the economy, the environment, human rights, security, and privacy. 

Key Questions 

• How long will it take for this company to be profitable? 
• Are they subsidizing the real cost of their services to beat out competition?  

For more on Venture Capital and Public Purpose, follow Liz’s research. For more on threats to civil liberties posed by "smart city" technologies follow Rebecca’s research.  

Special thanks to Kevin Webb for his input on this blogpost.