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Taking A Chance On Startups

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 environment.

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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