Investing in start-ups can be a harrowing experience for any would be venture capitalist but for the ultra-conservative, risk averse, publicly listed corporation it is fraught with the added danger of potential losses and shareholder backlash.
I was reminded of the agony the start-ups also have to go through. Great ideas are one thing, but getting them to market, quite another. This was highlighted in a recent episode of “Dragon’s Den,” a UK TV show that introduces entrepreneurs to successful people with money that have the first option of investing if they feel so inclined.
The candidates are subjected to a mind-boggling array of questions about size of markets, competitors, revenue and profit forecasts, etc. etc., as you would expect, but viewers must have been dumbfounded when a particularly impressive lady with a unique product, healthy frozen treats for dogs, was lambasted that she had not provided a competitive market analysis to determine potential volumes. She calmly replied, “there are no competitors to compare with, it’s a completely new product!”
And here lies the dilemma for CSPs looking at investing in digital service start-ups, many of their ideas have never seen seen before. There exists a culture of being risk-averse and only wanting to make absolutely safe choices. Likewise, in vendor relationships that have been in place for years, size matters. CSPs like the comfort of dealing with big, established players. This may work well for traditional IT and network supply chains, but in the digital world, things are very different. It’s a relatively new space and there are lots of smaller players vying for space and attention. This is a foreign environment for many CSPs.
Rob Duchscher, CIO of Starkey Industries, the largest hearing-aid manufacturer in the US, when discussing his policy of investing in smaller start-ups said, “Safe choices lead to a culture of status quo. And status quo, especially today, can make it hard to survive and remain profitable.” In the same article in CIO.com, Mark Settle, CIO of $2.2 billion BMC Software said, “Small, start-up companies are the primary drivers of innovation within the IT industry.”
The same article goes on to state that, “working with start-up vendors is complicated. They lack the processes and customer support frameworks of their more-established counterparts. Their rollouts and updates require extra oversight. And the CIOs that partner with them have to do a lot of hand-holding throughout the relationship.” So what will make these new relationships work?
Investing in or acquiring start-ups can be the ‘kiss of death’ for some, especially where CSPs try and absorb the entity into the fold or try to impose a stifling set of restrictions cultivated internally for years. Start-ups just don’t think that way. Their very essence of creativity depends on not being corralled, but they need big customers and partners at some stage to grow, or even survive. One of the biggest issues for IT leaders, in particular, who bring in these niche suppliers, is integration, both with the technology and the culture.
Many CSPs are realizing the need to navigate the previously uncharted waters of partnering with start-ups and many are not finding it easy going. The normal vendor relationships with their financial commitments, restrictive penalty clauses and SLAs can be daunting for small players and equally daunting for CSPs procurement departments that have them indelibly attached to every contract. CIOs always talk about vendor engagements as partnerships, but that’s often just lip service. When working with start-ups, partnerships are a requirement.
We are seeing the beginnings of dramatic mindset changes from both sides of the equation. For example, Telefónica has set up an arm’s length entity managed by thought leaders and non-traditional CSP staff with a budget and mandate to go forth and discover, invest in and nurture new digitals products and service start-ups. Others are acquiring, some are looking at exclusive partnering arrangements, others investing for percentages of equity and a place on the board to offer direction and expertise.
The current environment is being compered to the dotcom boom at the turn of the century, but the players are different. Venture capitalists are not dominating the space and the start-ups are cautious at letting them in. Perhaps the image of a fatherly CSP offers the comfort and security they are looking for. Maybe that’s the image CSPs should be trying to project, after all, both sides could certainly benefit from ‘mutual monetization.’
First published at TM Forum as The Insider, 15 October, 2012