Some honest advice for enterprise buyers on engaging with startups

November 30, 2019 Derrick Harris

If there's an exciting thing happening in enterprise technology, you can bet there are at least a few startups waiting in line to capitalize on it—if not driving the trend altogether. And, understandably, there are people within large organizations who see that kind of innovation and want to get a piece of it. The problems, of course, occur in the middle: maturity, legal, procurement, security, support requirements, and any number of other issues can throw a monkey wrench into the process of actually adopting new software.

In this episode of Cloud Native in 15 Minutes, Jessica Lin and Jonathan Lehr—co-founders and general partners of enterprise-focused venture capital firm Work-Bench—offer some frank advice for bridging the gap between, as they call it, "the suits and the hoodies." Among other things, the two explain successful strategies for evaluating and purchasing startup software within enterprises; certain types of engagements that tend to lead to wasted time on both sides; and layers of the IT stack that lend (and don't lend) themselves to startup technology.

Here are a few excerpts from the discussion:

It helps to explore in a safe space

Lehr: "One of the ways that we viewed things internally [in my old role at Morgan Stanley] was across, really, a couple of quadrants—or four quadrants, rather—with these axes of No. 1 is the risk of the startup itself, and No. 2 is the risk of the service internally. At the end of the day, most very-early stage companies, Series A and B, would be in that high-risk category.  But the key is, can you map that to a service or a use case internally where the [answer to the] hypothetical question, 'If they disappear Monday, what happens?' [is] 'You're actually.'

". . . Back in the day, when we were looking at a columnar databases and in-memory databases, when they were kind of a new thing, we had a whole team that was set up cross-functionally, with different expertise, to meet with some of the leading startups at the time. And this was a big undertaking. So what we figured out was what our use case is—whether it was like a fixed-income team, or another small pocket of the firm where, 'Look, we're not going to replace out IBM DB2 databases. We're not going to get rid of Oracle databases. They're not going away and no one's going to touch them. But for these net new capabilities, could we actually generate revenue if we brought in a new analytic database that could compress the data, enable cost savings, and, frankly, just give us faster calculations?'

"So part of it is really just, as a starting point, figuring out where can you actually explore in a safe, so to speak, way."

Your processes might be part of the problem

Lehr: "[T]here needs to be buy-in across legal, procurement, security. Because the worst thing that we've seen is companies that . . . say, 'Hey, we have a use case. We want to share some data that's actually not sensitive, maybe it's support tickets,' and then they get stuck where they'll start engaging the startup community; they've gathered their requirements; and they'll meet with these companies and throw a 50-page POC agreement in front of them. Or they'll put crazy, onerous security architecture reviews, or things . . . like code escrow.

"So one of the things that companies could do best is actually learn from some of these earlier adopters and more sophisticated buyers around, 'What does procurement look like? Can we meet internally with our legal teams and come up with a way abridged version of an early test and then, ultimately, support contract for this particular use case?'"

Lin: "[I]f you're an emerging startup, that's not going to be the best fit. And that's where, quite frankly, we spend all of our time at Work-Bench, is coaching our startups to say, 'Hey, what is actually non-negotiable in a procurement? But what are other things that, quite frankly, you need to give an on, whether it's an MSA or warranty of the product or indemnification?'

"There's a lot of education, I think an opportunity for both the suit and the hoodie to meet in the middle in order to be able to accelerate the procurement process."

Ask smart questions, learn valuable information

Lehr: "Part of my old job was to help with the financial viability assessments of the companies, and . . . what that entailed was getting on the phone with CEOs and CFOs of all of the startups that we did business with . . . and reviewing their [profit and loss].

"But also beyond just the pure numbers—because, again, most of them were early—understanding things like: 'Who are your top 10 customers? What is the concentration risk associated with that revenue? Help us understand the background of your management team. Help us understand your net burn, and then also your VCs, and does it look like they would fund you in the future? How much cash do you have left in the bank?' . . .

"But the things that you would see in terms of some of these high-flying companies and, candidly, how small the revenue was, [is that] a lot of these companies that you see hyped in the news are pretty early. So the trick becomes [figuring out] who actually will get the benefit from that use case that they're pitching so much so that they wouldn't use the AWS offering of it or the Microsoft managed service offering. And when a startup can actually solve a problem and bypass some of these big vendors, you know that you can be onto something huge."

For startups: Target lines of business, not innovation teams

Lin: "How do you find the [enterprise customers] that are much more sophisticated, much more early-adopting? And the reality is that there's also people behind that curve. With those folks, what tends to happen is they have these internal 'innovation teams,' and the challenge is if they're not tied to actual business challenges or [business units], it can suck a lot of time out of startups. They end up in these cycles with them doing demos, showing them their product, and at the end of the day doesn't end to actually anything meaningful, whether it's a POC or pilot.

"And for startups, every day is burn. So that can be really, really painful and actually harmful to the startups. For these large companies who are trying to make their KPIs—[maybe] how many new startups they've met with—they don't realize that it can be really, really hurtful to startups. So we actually advise most companies to stay away from quote-unquote 'innovation teams' and, as soon as possible, get into the line of business."

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About the Author

Derrick Harris

Derrick Harris is a product marketing manager at VMware.

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