Investors Are Rethinking Government Tech as AI Rewrites the Rules  

The stakes are enormous. Government agencies spend billions each year on technology. And the firms that supply it are watching AI’s rise with a mix of excitement and dread.

That tension is front and center in a new analysis published by Government Technology. The piece, written by Jeff Cook, a managing director at investment bank Shea & Co., draws on his firm’s direct experience advising clients in more than 50 government technology deals. Cook’s firm sits at the intersection of founders, operators, private equity firms, and venture funds, giving him a rare view into how the market is actually moving.

The picture he paints is nuanced. AI is already changing how government tech businesses are valued, funded, and evaluated by investors. But the transformation will not happen overnight. Cook notes that just two years ago, only a minority of investors even raised AI during deal reviews. By last year, every single firm was asking about it. This year, the mood has shifted again. The conversation is now equal parts opportunity and threat.

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“AI is not a zero-sum game — it has proven to show its strength by creating and capturing value alongside traditional software, not replacing it,” Cook wrote.

One of Cook’s central arguments is that government technology is not a single market. It’s dozens of smaller markets, each at a different stage of maturity. That matters because it means AI will not hit every corner of the sector at the same speed.

Older, entrenched “system of record” markets are likely to see slower AI adoption. These systems are deeply embedded. Switching costs are high. Governments are cautious buyers, and they tend to stick with vendors that have proven track records. Contrast that with newer, citizen-facing tools such as apps that help residents pay bills, apply for permits, or interact with city services. Those are growing faster and attract more users, which makes them a more natural fit for AI.

Historically, government tech was not the kind of market that attracted big venture capital bets. Returns were decent but not spectacular. AI is changing that math. Companies built around AI from day one, so-called “AI-native” firms, are commanding higher prices and reaching more customers faster. Cook points to public safety technology as an area where this is already happening.

The analysis also flags a wave of deal-making on the horizon. Many of the biggest players in government tech are backed by private equity or are publicly traded. Some of these incumbents are seen as having lost a step on innovation. As AI-native startups emerge, Cook expects larger players to go shopping, acquiring younger companies to stay competitive and protect their market position.

Cook draws a distinction that regulators and investors alike should pay attention to. The is a difference between AI tools that make agencies more efficient and those that actually change outcomes for citizens. The analysis argues that the biggest winners in government tech will be companies that do the latter, improving how agencies serve the public, not just cutting internal costs. That framing has direct implications for how AI products in this space should be evaluated, both by investors and by policymakers.

The full white paper from Shea & Co. is expected to offer deeper analysis of specific market segments, performance benchmarks, and what it calls the “Rule of 60,” the idea that AI could raise the bar for what a high-performing government tech company looks like. Cook also argues that types of businesses previously dismissed by tech investors are becoming attractive again because AI can ultimately deliver software-level profit margins from them.