Startups. The word calls up images of smart college dropouts, no doubt wearing black T-shirts, who just might be cooking up the future in their garages or basements...
...and from whom IT professionals run as though pursued by demons.
In these times when every IT budget dollar counts, it's less likely than ever for enterprises to sign off on any kind of risky technology proffered by a startup. The pervasive sentiment seems to be: "The next big innovation can take place without help from us, thanks very much. We'll buy when it goes mainstream."
Still, IT startups continue to make headlines. We continue to want news of them and their activities, if only to watch for trends.
And startups are big news these days. Incubators and accelerators abound, and specialized versions of each have emerged. At least one source thinks startups have become big business in the US. And in countries like Finland, a startup culture has become firmly established as part of the business scene.
What's more, there is much to be gained from new technology, and if a startup gets as far as your office door with an actual product, it may even be that heaven-sent tool that saves you money at a crucial time. And who's to say that the startup you choose won't be the next to score that multimillion-dollar round from a famous partner?
All of which may tempt IT professionals to reconsider their resistance to dealing with startups.
Of course, in some cases, large enterprises never stopped buying from startups. Between advanced technology groups, freebies for beta, and other incentives, some companies continue to interact with a steady stream of startups.
But for the remaining enterprises, it may be worthwhile to review the specific risks involved in buying from a newbie firm.
Stability: One of the biggest risks involving startups is whether they are viable. "If the company fails, you can lose what you've paid, lose your data, incur additional costs, etc.," writes Tom Nolle, president of the CIMI Corp. consultancy, in an email today. "In addition, companies with limited financial resources can't make a meaningful guarantee, because they are too small to cover the cost of legal recourse."
References: Since most startups have few customers, Nolle points out that it may be impossible to get references within your industry sector, which can be an important prerequisite to any IT purchase.
Support: "Startups may be unable to respond to problems with their product or service quickly, or to make changes to meet market demands," says Nolle. "If a problem does occur later on, you may be holding the bag for having picked them!"
Despite the risks, at least one expert thinks that it can pay off to work with IT startups. "There is nothing wrong about buying from a startup if the startup offers a solution that is so innovative that there simply is no equal to it in the marketplace, if the product makes sense for the business, and if IT has a way to warranty continued support and delivery of the function if the startup fails," writes Mary E. Shacklett, president of consultancy Transworld, in an email.
Shacklett offers a few tips IT pros can use to protect their startup investments:
- Put the code in escrow. "[Require] the startup to place the source code of the solution in escrow so that if failure or a change of management control occurs, the corporate IT department purchasing from the startup has the right to the code -- and also to the code's continued use and customization."
- Check the startup's legal status. A startup's ability to protect its product and its status as a going concern may depend on whether a startup lists itself as a corporation, a limited liability company, or a partnership, so check it out.
- Think ahead. Shacklett suggests that if you really like a product, you may consider negotiating up front to purchase it later on, or to hire the company personnel in the event the startup can't make it on its own.
As with anything else in IT, there are no rules that apply across the board when dealing with startups. Every firm must make decisions based on its particular business model and circumstances. But with a bit of planning, it is possible to weigh the risks of dealing with startups against passing on their wares. In the end, you just may find that treasure in the garage.
— Mary Jander , Managing Editor, Internet Evolution