When Haier America’s Deanna Johnston needs to update or fill gaps in the company’s information-technology systems, she looks at products and services offered by startups.
But even after a trial run, she rarely buys them, Ms. Johnston said.
Instead the appliance maker’s chief information officer said she often uses cheaper prices offered by startups as a bargaining chip in price negotiations for similar tools sold by large enterprise IT vendors.
As Haier and other large corporations become increasingly digital, they are spending more time checking out technology offered by small, independent tech firms. Yet startup products and services for enterprises, while more accepted than a few years ago, still face significant resistance on the path toward revenue, CIOs and industry analysts say.
“I won’t take a risk on something that isn’t from a proven enterprise technology company,” especially for key functions, such as sales, human resources, cybersecurity or even office email, said Ms. Johnston. “Some startups are just so cheap or free, you’re nervous to go with it. What if they go out of business?”
Only 23% of 112 large corporations in a recent survey said working with startups was very important, according to MassChallenge, a startup accelerator, and software consulting firm Imaginatik PLC. Respondents included insurers, manufacturers and software firms, among other companies across a range of industries, roughly half of which had at least 10,000 employees and more than $5 billion in annual revenue.
Jonathan Lehr, managing director of Work-Bench Ventures, an accelerator and venture-capital firm for enterprise tech startups, said the problem can be simply “getting in the door and then demonstrating value,” rather than offering lots of free trials that don’t convert into paid licenses.
He said many tech startups, especially those in the software-as-a-service market, can have trouble selling to Fortune 1000 firms if their product doesn’t scale, they don’t have proper security controls in place, or they don’t have a robust sales and support team.
A handful of enterprise IT startups are fetching billion-dollar valuations. In North America, 51 of 94 startups with valuations over $1 billion—known as “unicorns”—sell business technology, according to CB Insights.
Cloud software maker Okta Inc., for instance, raised its valuation over the $1 billion mark in September, following a $75 million funding round with such high-profile investors as Andreessen Horowitz, Greylock Partners and Sequoia Capital. In June, Twilio Inc., which enables developers to build applications that can interact with customers, raised $150 million in an initial public offering that valued the company at $1.2 billion.
Twilio this month reported total revenue of $64.5 million for the second quarter, up 70% from a year ago, and 30,780 active customer accounts, up from 21,226. Okta, which doesn’t disclose revenue, said new paying customers this year include Pitney Bowes Inc. andFlextronics International Ltd., among other large firms, according to a spokeswoman.
But early enthusiasm for an IT startup is no guarantee of widespread adoption or revenue growth down the road, according to Ted Schadler, a principal analyst at Forrester who focuses on application development and delivery.
Adding to the risks for corporate IT buyers: valuations for tech startups are falling as investors get picker, he said. There were at least 53 startups that by August last year had raised capital at a valuation of $1 billion or more for the first time, according to VentureSource. So far this year there are only nine, in part reflecting the challenges of turning investor cash into revenue.
“Investors have bet on revenue and profit growth that may well prove unrealistic if not fantastical,” Mr. Schadler said in a recent research note.
Revenue-generating IT startups can become attractive targets for acquisitions, leaving CIOs to speculate about the fate of fledgling products and services once they are swallowed up by larger vendors, said Jim Ferrato, CIO of call center operator IBEX Global Solutions PLC.
“Some of the more interesting startups get acquired and integrated in ways that take their product road maps in a different direction,” he said.
Though Mr. Ferrato isn’t currently using any startup technology, he said startups can offer an opportunity to address a strategic niche, rather than key enterprise functions, such as handling customer payments, logistics or marketing. He said he has had good experiences in the past deploying startup technology in areas such as speech analytics and customer experience management apps.
Haier’s Ms. Johnston said she agrees that startups are best deployed for functions that aren’t essential to core business operations. For instance, the company is currently using a free employee iPad check-in tool developed by a startup, she said.
“If they go out of business, we’ll just switch over to a paid version with little disruption,” she adds.
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