So, today, while the post dot-com hangover may be all but over, CIOs have learned some important lessons in the last three years that weigh heavily on how they view and purchase start-up technology. CIOs are still gun-shy to accept another 'revolutionary' system on face value, and thus one of the overwhelming messages we heard from CIOs at Foundation Capital's recent CEO and CIO Summit in May, is they are looking for technologies that fit into the bigger business picture.
"We don't buy from start-ups unless we can't get the technology anywhere else," said Shuler. "What I want to hear from the start-up is what technology doesn't exist that I will need in the next two- to five-years?"
Nor are CIOs looking for start-ups to solve their most urgent problems. Verkler says he won't buy from a start-up to resolve an immediate pain. Shuler adds that he will not buy from start-ups unless his team cannot get the solution from anywhere else. It is therefore critical for companies to thoroughly understand exactly what pain points they do relieve and quantify their results.
"Companies must be able to clearly demonstrate their value proposition," said Mercedes De Luca, vice president of Information Technology for Interwoven. "For example, we were looking at spam blocking software from three vendors. The company that won our business was able to clearly show how much spam their technology was blocking."
A number of CIOs said one of their biggest challenges is often a question of change management: the time and expense of changing business processes, integrating with legacy investments, and mitigating the effects of the learning curve. They must also consider a start-up's long-term viability. What happens if the company goes bankrupt? Who will provide long-term care and feeding of the product? What's the risk and how can it be mitigated?
"When I meet startups the first thought I have is 'I don't want to buy from you'," said Patrick Flynn, vice president and CIO of PACCAR, Inc. "If I do buy something, 'What is the risk if you go out of business? What will be my cost to rip out your product and put something else in? How much change management do I need to anticipate? Will you be there?' Come in with an understanding not just of your product and how to install it but the business case around supporting it for the long haul."
"When I do buy from a company I don't want to know just the software costs. What are the total costs including services and other add-on costs?" said Qualcomm's Vice President of Information Technology, Tom Fisher. "I need the hard numbers and don't think of them as final. I will drill down even further before I present to our steering committee for consideration."
That is not to say CIOs are uninterested in start-ups. Louie Gasparini, Wells Fargo's senior vice president of Internet Transaction Systems, sees startups and smaller companies as an important source for new ideas and knowledge transfer.
"I value working with small companies as a great source for transfer of knowledge," he said. "Wells Fargo was an early adopter of using the Web and we are always looking for ways to optimize our processes. Smaller companies sometimes come in with innovative ideas and can bring an invaluable outside, fresh perspective."
But even if the latest 'whiz-bang' start-up does have a great idea and a great product it seems technology buyers will be more cautious this time around in terms of adopting new technologies. Tough times tend to breed better companies. So, the market may have weeded out the weaker companies, and laid the foundation for the tech industry to rebuild. Silicon Valley has been declared dead more than once in the past decades, yet every time it has rebounded with new ideas that change the world.
Paul Holland is a General Partner at Foundation Capital, a Silicon Valley technology start-up venture capital firm.