Taking A Chance On Startups

Taking A Chance On Startups

Posted by Andrew Conry-Murray,
Aug 15, 2007 10:20 AM

In case you haven’t noticed, startups are back. And not just the Web
2.0 kind that appeal to hyper-connected youth. Today, new companies
aiming to solve complex enterprise problems are sprouting up as if the
dot-com bust never happened.

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. Startups have yet to build a
sustainable revenue stream, which means customers are essentially
placing bets on the company’s future existence.

To make sure you aren’t making a sucker bet, look closely at the
funding structure. Who has invested in the company, and what is 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 taken into account when
assessing risks. How experienced is the founder and the executive team?
Who is sitting 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 make the difference between a successful launch
and a flame-out.

A startup’s immaturity also will be reflected in the quality and the
capabilities of its product. As you would when considering an
established vendor, conduct technical due diligence. Just because a
product has launched doesn’t mean it’s ready for a production

Also be prepared for bumps in implementation and support. A new
company is still training its own 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
piloting 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.

Of course, startups aren’t just about risk. Companies look to
startups because they promise to solve problems faster, better, or
cheaper (sometimes all three!). But there are other benefits, too. Beta
partners and early customers have considerable influence on product
development; they can use that leverage to get their needs met and help
direct the evolution of the product. First-comers also may get
preferential treatment, which can take the form of favorable pricing,
extended support, direct access to executives, and so on.

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


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