Evaluating Tech Startups: The Risks And Rewards

WHAT'S HATCHING IN THE INCUBATOR
To encourage startups to write software for its expanding ecosystem, Salesforce in April opened a Silicon Valley incubator where entrepreneurs can get office space and business support. In the first seven months of the program, 34 startups have signed up, including Right90, a developer of sales forecasting software for manufacturing. Right90 had only three customers in its first two years of business. Since offering its software on Salesforce's AppExchange online marketplace, Right90 now has 17 customers.

The appeal to startups is obvious: They get to host their apps in Salesforce's data center and have access to its growing customer base. What's in it for IT departments? For one thing, they can spend less time vetting the scalability and security of the startup's on-demand facilities because Salesforce, having spent $100 million on redundant data centers over the past three years, already has passed muster. "You're piggybacking on all the work that we've done," says Ariel Kelman, Salesforce's senior director of platform product marketing.

The result is that big businesses are more likely to give the incubator's startups a chance. Right90 signed electronics company Sharp as a result of its relationship with Salesforce. Now Right90 has an influential reference account when it approaches other potential customers. "It's huge for us," says Paul Connolly, Right90's VP of business development. "You really need an enterprise-scale early adopter."

That's especially true for startups trying to sell big-ticket items. The average selling price for Aveksa's enterprise access software is $300,000, with a sales cycle of six to nine months. "This is a strategic sell to a head of security," says CEO Taneja.

Saeed Amidi, president of PlugandPlayTechCenter .com, a Silicon Valley tech incubator, estimates it can cost an enterprise software startup from $50,000 to $100,000 in sales and marketing costs for each new account it signs. The rule of thumb, he says, is that such companies need $20 million in venture funding to sign up enough customers to sustain themselves.

That's too steep an admission fee for many entrepreneurs, who are tossing the old sales model. Spiceworks, for example, is having success distributing ad-supported help desk software--no licensing fees involved--while Web 2.0 startups such as Ning are trying to appeal to a mass audience. Andreessen's advice to entrepreneurs: "You're much better off starting a company aimed at a market that wants to adopt new technology, such as consumers, or a self-service model for workgroups or small businesses."

Startups like 1-year-old Techrigy in Rochester, N.Y., start with a few tire kickers, then build from there. In October, Techrigy released its first product, software that monitors what employees and outsiders are saying about your company online. It has its foot in the door of two companies--a consulting firm in the United States and a telecommunications company in Italy--but both installations are modest in size. "The first customer is always the hardest," says Techrigy founder Aaron Newman.

IT departments need to pay attention to the fresh ideas coming from companies such as Aveksa, Right90, Techrigy, and Zenoss. "If CIOs don't take a chance on new technologies, they run the risk of missing out on the breakthroughs that can help propel their business," warns Credit Suisse software analyst Jason Maynard.

Worse, if too many IT departments slam the door on startups, it becomes a self-fulfilling prophesy where innovation dries up for everyone. So do your homework, then give a startup a chance.

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