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IoT Startups - 10 Best Practices for Buying from Them

A lot of the innovation around the Internet of Things (IoT) is coming from IoT startups, but are they worth buying from? Or are they too risky?

Startup companies face a number of challenges, many of which can affect you if you buy from them. Startups may go out of business or pivot in a new direction. They may get acquired and abandon their technology. Or they may be too small to scale up to meet your needs.

Despite the risks, there are many good reasons to buy from startups. They might offer a solution that the “big guys” don’t have, or want to offer. They may solve a problem that no one else does. You can get a disruptive solution that creates significant value over existing solutions, giving you a differentiated advantage over your rivals. And finally, they’re often much more responsive and easier to work with.

If you’re considering buying a solution from IoT startups, here are 10 best practices that you need to consider:

1. Define your risk profile

Before you look at IoT startups, define what kind of technical, operational, resource, and financial risk you can tolerate. Which areas of your organization’s operations can afford to take this risk? What are you willing to risk — budget, resources, time, technology? What kind of expected gain do you need in return for taking the risk?

Your goal is to match the solution “risk” profile to your organization’s risk profile. If your tolerance for risk is high in one area of operations and low in another, then focus your “riskier” solutions in those areas. If your overall risk tolerance is low, then buying emerging solutions from IoT startups isn’t for you. No amount of risk management will adequately offset the risk that will likely occur.

2. Buy for today’s needs, not tomorrow’s

In an emerging market, technology standards, use cases, and solutions are continuously evolving. Plan what you need today, and buy a solution which gives you that. Trying to predict the future in a very dynamic environment is difficult. Don’t overthink and over-invest. Don’t expect the solution to fit your evolving vision and don’t base your return on investment (ROI) on a future that may not happen.

3. Keep your options open

In the dynamic IoT market, there are no “one size fits all” solutions, no “tried and true” recipes, and no established market leaders. Don’t lock yourself in to one or two vendors too soon (unless you have no other options). Work with different vendors for different applications. At present, no one vendor will be able to give you everything you need. Expand your use cases and evolve your solution over time.

4. Look beyond ROI and cost

Today’s IoT solutions are still immature point solutions. They offer limited functionality and solve a small set of problems. The real value of buying and implementing IoT projects today is to gain experience through pilots and experimentation. Using traditional metrics like ROI and cost will ensure that IoT projects are at the bottom of the priority list. Use a new set of metrics as learning value and skill building, scalability, performance, problem-solution fit.

5. Vet the people and company behind the solution

When you buy from IoT startups, the real “product” you’re paying for is the people. This is the team that provides the intellectual property that is codified into your solution. Unlike mature companies with established products where the intellectual property is already codified in the solution, when you buy from startups, the intellectual property largely resides in its people.

Interview the key members of the company and examine their backgrounds. Do they have domain expertise in your industry? Are they willing to work with you and can you work with them? Are they responsive? Do they have what it takes to build a company? Who are their partners and can you work with them?

Examine the company. Do you understand their business model and how they make money? Do you believe that it’s sustainable? What are their differentiators over their rivals? Which areas are they vulnerable (solution, team, capabilities, etc.)? What is their financial and funding situation? Understanding this helps you determine what risks you are incurring, how you want to work with them, or if you want to work with them.

6. Treat IoT startups like strategic partnera

Besides money, your active partnership with a startup is one of the most important things you can give. Make a commitment to work with the vendor at a deeper level than you would with other more established vendors.

Give them feedback of what you like to see, report bugs, test out new features, and co-design the solution with them. When they release a new software version, test it immediately and give them feedback. Work with the same sense of urgency they have. Be a customer reference for them for their sales prospects and investors. The more engaged you are, the more likely they are to succeed, and the less risk you are incurring.

7. Pay IoT startups well

Buying from startups is risky, but low-balling isn’t a viable risk management strategy. First, startups are cash constrained. Lowballing them just pushes the financial burden onto them, and increases their cash flow risk and the chance that they will go out of business, or slow down operations to preserve cash.

Second, initial cost is just one small part of your cost. Consider the total costs of any project — purchase, installation, configuration, maintenance, upgrades, and decommission. If you need to reduce your upfront costs, get creative and consider performance based incentives (e.g. split the cost savings enabled by the solution with the vendor).

8. Pay your startup vendors faster

Cash flow is the lifeblood of every startup. It will dictate whether they focus on building the solution, or fund-raising. It dictates how many people work on the solution. Your traditional payment cycles, designed for more established vendors, will not align with the realities of how a startup operates.

Consider alternative arrangements, such as accelerated payment cycles (e.g. 10 days instead of 30 or 60 days), and progress driven (milestone) payment schedules. Split the solution contract into a technology portion and a services portion (if appropriate) with separate payment provisions.

9. Develop a solution continuity plan

Build into your risk management plan the scenario in which the vendor goes out of business, or pivots away from the original solution. Whether you want to take over the solution, or buy time to find an alternate solution, you must have a continuity plan to keep your operations going.

Your plan may include access to the application source code and data extraction (as appropriate), a separate consulting arrangement for support from key members of the IoT startup or a third-party firm, or knowledge transfer to your own in-house teams. Identify what internal resources you need (people, tools, budget).

10. Develop a solution exit plan

There may be legitimate reasons for you to intentionally migrate away from the solution in the future. This may be due to the emergence of open standards, a more disruptive solution, or the solution just doesn’t scale to meet your future needs. Plan for this scenario in your risk management plan. In the contract, specify who owns the data, how it is extracted, and what support is needed. Set up a separate services agreement with the vendor to assist with the migration. Identify what internal resources you need (people, tools, budget).

Originally posted on Strategy of Things

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