Startup City: Startup Fundamentals

Startup City: Startup Fundamentals

Buying from a startup requires many of the same risk/reward
calculations as buying from established vendors, but the immaturity of
a new company changes the equation in fundamental ways.

By Andrew Conry-Murray
August 18, 2007 12:00 AM (From the August 20, 2007 issue)

Startups are back. And not just the Web 2.0 kind that appeal to hyperconnected
youth. Today, new companies aiming to solve complex enterprise problems
are sprouting up as if the dot-com bust never happened, which increases
the likelihood CIOs will engage with them. While buying product from a
startup requires many of the same risk/reward calculations as buying
from established vendors, the immaturity of a new company changes the
equation in fundamental ways.

First is financial stability. There’s no question Microsoft and Oracle
will be around next quarter. But, by definition, startups have yet to
build a sustainable revenue stream, which means customers are
essentially placing bets on the company’s future existence.

To ensure that you aren’t making a sucker bet, look closely at the
funding structure. Who has invested in the company, and what’s the exit
strategy? Do the investors have a record of long-term growth, or are
they looking for a quick return via acquisition? If it’s the latter,
investors may push the startup to change its strategy or business model
midstream to capitalize on "hot" trends.



A startup’s pedigree also should be considered when assessing risks.
How experienced are the founder and the executive team? What are their
past accomplishments? Who’s on the board? Experienced founders bring
not just knowledge but contacts. They can recruit capable talent and
tap a Rolodex of investors and potential customers, which can mean the
difference between a successful launch and a flame-out.

Jon Lowell, CIO of the Leukemia & Lymphoma Society, says pedigree
strongly influenced his decision to engage with Workday, a startup that
provides human resources management applications via the Web. Workday
was started by Dave Duffield, the founder of PeopleSoft. "Duffield has
a great track record and has built a great team," says Lowell.

A startup’s immaturity will be reflected in the quality and
capabilities of its product. As you would when considering an
established vendor, a CIO must conduct technical due diligence. Just
because a product has launched doesn’t mean it’s ready for a production
environment. And be prepared for bumps in implementation and support: A
new company is still training its employees on the product at the same
time it’s installing and supporting it in your organization.

You can minimize these risks in several ways. First, do extensive pilot
testing, and start with a small deployment. Second, build flexibility
into your deployment schedule, and have backup plans ready if the
startup fails to meet critical target dates. "We’ve got an aggressive
implementation plan," says Lowell, "but there’s no cliff we fall off if
we don’t get it converted by date X."

Finally, build contractual safeguards into the business relationship
with the startup. For instance, Lowell says that if Workday happens to
go south, his organization has guarantees it will be able to extract
its data.

Companies look to startups because they promise to solve problems
faster, better, or cheaper (sometimes all three!). But there are other
benefits. Beta partners and early customers have considerable influence
on development; they can use that leverage to get their needs met and
help direct the evolution of the product. First-comers may also get
preferential treatment, which can take the form of favorable pricing,
extended support, and direct access to executives.

Startups play an important role in driving technological innovation.
With a careful assessment, CIOs can make sure startups work for them.

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