by Jonathan Hassell

What CIOs Need to Know Before Relying on Startups

Feb 26, 20147 mins
CIOInnovationIT Leadership

It seems there's a startup for everything these days. Sure, there are benefits from introducing new, more efficient systems to your enterprise, but there are also technical, financial and practical considerations before signing on with a startup tech company. Here are the pros and cons.

It’s hard to argue that technology startups aren’t sexy. They get all kinds of media attention, especially when investors give them a vote of confidence; they have the potential to make millionaires of people in one fell swoop, and sound business plans are typically optional (as are, most of the time, profits).

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As a CIO or senior IT leader, you may come across compelling products and services offered by startups. But should you bet any part of your business or operation on them? As it turns out, there are both risks and rewards when it comes to working with small, flexible and disruptive companies. Here are five points to consider before your business turns to a startup.

Pro: Startups Tend to Be Disruptive

The fruit of that disruption can be valuable for businesses. The idea for startups often revolves around taking an existing process or product that’s “broken” and fixing it in a systematic, replicable way — and often in dramatic fashion.

[Related: The Risks and Rewards of Using Startups]

Think of some common business-related startups. Expensify saw a need to reform and recreate the often terrible process of submitted business expense reports for reimbursement. It created a system where employees can take pictures of receipts, have them imported directly into an expense report (even the amounts and descriptions on the receipts are read by optical character recognition technology), and submitted for approval. This saves hours of manually creating spreadsheets or taping paper receipts and mailing them to corporate accounts payable departments.

TripIt started because airlines and travel agencies were terrible about being able to put coherent, cohesive itineraries together for frequent travelers. TripIt makes assembling your confirmations and other travel documents a cinch by letting you email those receipts when you get them. TripIt scans them, puts them into a highly readable, accessible single itinerary and then monitors your plans for changes. It disrupted a very inefficient process.

[ Blog: Best iOS Travel App ‘TripIt’ Just Got Better ]

[ Related: AWS Launches New Package to Help Startups Use its Cloud ]

Amazon started Amazon Web Services because it knew spare computing capacity, available by the hour and scalable as demand warranted, would be highly desirable for all sorts of business. It disrupted the process of buying expensive servers, storing them in expensive data centers and using expensive IT administrators to manage those machines, all by making it as easy as clicking a few buttons and entering a credit card number to access compute resources that otherwise cost hundreds of thousands of dollars to actually own.

[Related: How to Make Your Enterprise as Agile as a Startup]

In other words, startups are often attractive because they find a way to solve complex problems or make inefficient scenarios much more efficient. There may be a significant payoff in using a startup’s product or services in terms of both money saved and efficiency and productivity increased.

Pro: Startups Often Ask ‘How High?’ When You Say ‘Jump’

Often in search of those first dollars, but even after finding its footing and starts working on its own, startups court corporate IT departments and offer any number of service customizations, increased support availability, on-site setup, custom integration services with other line of business applications and more, depending on what makes sense. This flexibility means they tend to bring value to you quickly to boot. Typically, when you purchase software or services from established vendors, such accommodations either aren’t possible or are very hard on your budget.

[ Top Big Data, Cloud, Mobile, Security, SDN and Social Media Startups ]

[ Tips: How To Choose the Right Tech Startup Partner ]

In addition, organizations using startups can suggest features or otherwise influence the direction of the product. For midsize and large businesses, startups often offer direct access to developers and test managers to get to the bottom of problems quickly and understand where certain features and capabilities make sense. Larger, more established vendors generally won’t offer this kind of access to the actual coders behind a product or service; at best, they’ll put your organization on some kind of customer advisory council or similar informal group.

In many respects, working with a startup on these key activities is much like having an application developed in house, specifically for your organization, with a great support staff behind it. The startup becomes a true partner, an extension of your own staff development team.

Con: ‘Always-on’ Risk of Capitalism May Jeopardize Your Vendor’s Existence

Startups, especially IT startups, almost invariably suffer from cash-burn problems from the very beginning. To solve key technical challenges, they hire expensive experts, pay them Silicon Valley wages and grant them numerous options. Increasing headcount is generally seen as the way through problems and progress issues for these startups: “Hire more developers” serves as the mantra, as if just plucking developers from a tree like fruit automatically gives you more juice.

[ Commentary: Why CIOs Should Mentor Startups ]

[ More: 10 Questions to Ask Before Using a Startup ]

The problem is, most of those employees expect to get paid every two weeks — but they’re creating this product or service out of nothing, so there’s no revenue to pay them. Usually there’s some venture capital firm brave (or stupid) enough to give a startup with a decent idea one to two years’ worth of cash burn, accounting for growth.

You see the issue here pretty plainly. Expenses are very high and revenue is almost minimal, making the venture entirely dependent on the ability and appetite for risk that venture capital firms can muster.

Con: A Startup’s Sale May Alter Its Business Plan, Hurting Your Organization

It’s a sad fact that big companies vacuum up startups, sometimes only to shut them down. Perhaps the disruptive startup gets purchased by the incumbent in order to stymie the disruption. Or maybe Google or Yahoo buys the startup to eventually add the startup’s key functionality or unique value proposition to their own software but, through changes in leadership or simply the march of time, lets the startup languish until it dies. Good talent at the startup leaves. The company’s founders vanish. The acquiring company doesn’t make a plan clear for the future of the company.

Such is the world we live in. It’s smart to reflect on the potential “exit” or liquidity strategies of startups that will be key players in your ecosystem and ensure that you have at least considered the downside risk in the event that that type of exit occurs.

Con: Those Unique Customizations Often Become Available for Everyone

In a world where efficiency is a competitive advantage, having all of your added features and customizations put into a startup’s product or service may have the unintentional consequence of allowing your competitors to make use of the same feature. Of course, this risk depends upon your competitors also having some of the same problems you do, and likewise seeking the same solutions you do. In particular, if you now rely upon startup’s offering, competitors may well be able to take advantage of the same efficiencies you’ve just created.

Jonathan Hassell runs 82 Ventures, a consulting firm based out of Charlotte. He’s also an editor with Apress Media LLC. Reach him via email and on Twitter. Follow everything from on Twitter @CIOonline, Facebook, Google + and LinkedIn.