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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.

Another knock against startups: The potential that they won't be around in a few years. Laping disdains that notion. "In the new paradigm, [most software] implementations are so much shorter, you don't have to think about that risk. You're not talking about three years and $20 million. You're talking about 75 days and $50,000. You implement little modules and get big wins along the way." (See Making it work for suggestions on how to protect yourself against their failure.)

Besides, he argues, there are related risks to bigger vendors. "We worked with one startup that got acquired because they represented innovation to the bigger company. They had been a small company with rapid product cycles, but the next four release cycles were nothing but integrating their software with the big company. That gave me no benefit."

"It's a huge risk to go with a startup," acknowledges Arthur Lozinski, CEO of Oomnitza, a Mountain View, Calif.-based developer of asset-tracking software founded in 2012. "But startups can give enterprises attention to detail and fast turnaround times. We're not doing anything else" except thinking about our product, he says.

"There's a lot more intensity and energy at a startup," agrees Brian Gardner, executive director of the mobility center of excellence at Oakland, Calif.-based healthcare provider Kaiser Permanente. Kaiser has tested a number of niche startup applications over the last few years, purchased a few and tested some it never pursued, according to Gardner. Startups' focus "is on one product. [In IT] we're working on multiple products at the same time with multiple stakeholders, and having to balance that through the workweek and quarter. They don't have the distractions that we do."

The rewards

CIOs who've bought from young ventures acknowledge the risks and the rewards and are eager to share best practices in making a startup partership work.

First and foremost, CIOs have to find the value in the new venture. "It's got to be something worth taking the risk," says Jonathan Gardiner, vice president of IT customer solutions for DHL Supply Chain Asia-Pacific in Singapore. He acknowledges that it may be difficult to find that little niche where startups fit, but he also notes that a number of startups originate "from people who were in the corporate world and who understand what an enterprise-level app needs to be" — and not just from the newly minted engineering graduates that come to mind when people think "startup."

For Oliver Binz, an independent management consultant for IT and risk management based in Brisbane, Australia, startups for CIOs aren't any different than startups for investors. "They're always going to have higher risk than an established company, but you invest in one because the return is likely to be greater." But that also means you must apply other safeguards. "To take the analogy further, don't invest in a startup if you can't afford to lose your money or live with the consequences if it fails."

 

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