Working With Start-Ups

Feb 13, 2004

Allen Bernard

Deciding to work with a new software company can be a daunting decision: Can the company support it's product effectively? Will it be around in 18 months to answer interoperability questions? What about patches and security issues?

Bet on the wrong company and you could end up with a piece of unsupported software that may function well for the moment, but without ongoing support from the vendor, which, by the way, just went out of business, and it's time to retire the product before you ever get close to anything that resembles ROI, or worse.

This is an ongoing dilemma for many CIOs burned by the e-commerce days of the dot-coms and the promise of many ASPs, which disappeared almost as fast. And the situation is expected to get worse as a whole new crop of middleware products designed to exploit the potential of Web services, VoIP, infrastructure visibility, XML and other emerging technologies, find the way to market in the next 24 months.

But, all is not lost. There are ways of deciphering a start-ups potential before you buy.

First Things First

The first step is to understand what it is you are buying, said Sunil Dhaliwal, a senior associate at Battery Ventures, a venture capital (VC) firm specializing in IT start-ups. If the software is a strategic buy, i.e., something that will give you a competitive advantage in the long-run, like an infrastructure visibility tool, then you may want to consider a relative unknown with a good product.

But, if it is a tactical buy, i.e., a piece of software to help run your infrastructure such as a database or a networking product where five-nines and 24/7 support are essential, then a start-up probably is not the company you want to go with, he said.

"Make sure what you're investing in, from an enterprise point-of-view, that if this particular piece fails, 'Does the entire functionality of my business fall down?'," said Dhaliwal. "There's got to be some kind of business driver that says this is important enough to my organization that I have to take a risk. Now, how do I minimize that risk?"

To answer that question, Dhaliwal suggests first looking at the company's reference customers. Since most start-ups will have at least one or two reference customers from the beta-testing phase of the solution, the company should be able to set you up with some face-time with these early customers. If the company doesn't have any reference customers, then it's a roll of the dice if you want to be the first.

Step Two

The next step is look beyond the sales pitch at the people behind the company, said Kevin Fong, managing director of Mayfield Ventures, an IT venture capital firm that has backed such well-known companies as Tibco and webMethods. Find out about the credentials of the management team, the board of directors and the VCs backing the company.

Ask pointed questions of the VCs in particular: What is the current level of investment? How much money is held in reserve for this company going forward? What experience does the VC have in the IT field?

You can even ask to see the business plan, although, because it is a living document, you may not get much in the way of concrete information to base your decision on, said Dhaliwal. Still, if it increases your comfort level to see what the company expects will happen in the future, by all means, ask. Many people are, said Fong, who regularly fields questions from potential customers.

One of the downfalls of many early-stage companies is the reliance on the technology to sell itself, said Tien Tzuo, senior vice president of marketing for, one of the few flourishing ASPs. Too often, a start-up, even one that is spun out of a big company, is made up of 15 technical people, one salesperson (usually gleaned from a established player like an Oracle or Siebel) and one marketing person, if that.

The end result is the company fails to be customer focused and, therefore, fails to understand and alleviate its customers' concerns. The start-up wants to own the sales cycle and therefore may not be open to product demonstrations in a test environment or may want a hefty upfront commitment of cash on the part of its customer, said Fong.

This is a failing of sales, and not necessarily the product. Although, if this is happening, it could be a red flag the start-up may not have confidence in its offering. Or, it could just be bad sales techniques at work. Looking further into the company may get you past this particular stumbling block.

In the case of, Tzuo and company made sure they presented themselves as understanding the risk associated with their product and worked to minimize the perception of that risk to potential customers. By taking this approach, the company has grown to more than 8,000 customers in five years and is an established player in the CRM space.

Technology, First and Last

Lastly, there is the technology itself, but this should be the easy part. Take it for a test drive. Talk to the development team. Get a demo in your environment if possible. Do due-diligence on the product and how it will interface with your infrastructure.

Generally speaking, if the product as made it to your attention, it probably works. The decision to buy isn't so much based on the technology (since you wouldn't even be talking to the company if you didn't see some potential in its offerings), but the company behind the technology. That is the wildcard that could make or break your hand in the long run.

"I'm shocked at how many CIOs don't actually go and check the company out," said Salesforce's Tzuo. "Because you can get a sense of what that company is made of; you're buying into a company, obviously, not a product."


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