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Should you buy enterprise applications from a startup?

Howard Baldwin | Sept. 3, 2014
It's risky to buy software from a company that may not be around next year. But IT executives focused on innovation are readily doing so. Here's why.

It may not be so smart to bet on a startup that thinks it's going to dislodge Salesforce as the go-to CRM application, suggests Patrick Sullivan, Managing Director of the Oracle technology practice at Accenture. "But startups can focus on the right gap in enterprise applications. The startups that find niches and innovate have done okay." He cites Kony (a mobile application development tool) and Splunk (which logs machine-generated data) as two examples of startups that found their niche.

The risk-reward ratio

Like Laping, Karl Galbraith believes that the time has come for enterprises to consider startups. Currently a principal at security-and-audit-focused Galbraith and Associates in Ottawa, he was previously a CISO and acting CIO at various enterprises, including the Bank of Canada and the Canada Post. "The number one reason to consider a startup is that the current landscape of Magic Quadrant vendors is not serving a critical need. That's a problem." Especially in security, he says, some of the solutions from traditional security vendors are so unwieldy that "even after months and a lot of money invested, they never worked."

The same concept applies to startups beyond security. Faced with an inability to get what they want without buying extensive solutions from established enterprise vendors, proactive CIOs started looking for tools with a new willingness to take risks, to listen to people who are more aggressive. With startups, Galbraith says, "CIOs get a view of next-generation technology. Whenever there's a paradigm shift, you want a startup to give you feature agility."

Ravi Belani is managing partner at Alchemist Accelerator, a Palo Alto, Calif.-based venture-backed initiative focused on accelerating startups whose revenue comes from enterprises rather than consumers. He says, "The innovation that used to come out of big software houses isn't there anymore, while the pace of innovation in technology is accelerating."

He acknowledges that there has been a longtime concern with startups about the ability of their applications to scale, but given startups' ability to build their software on robust infrastructure platforms using IaaS or PaaS, and then deploy them via SaaS, "scalability isn't as big a deal as it used it be. It costs $50,000 today to do what you needed $50 million to do ten years ago. That means it takes less capital today to create the same innovation. Ten years ago, that was a moat, a barrier to entry, but software vendors don't own that moat anymore."

The confluence of offshore programming, open source technologies and cloud-based infrastructures has significantly lowered the barriers to entry of launching a new venture — not to mention all those newly minted tech millionaires willing to be angel investors.


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