5 pitfalls to avoid when partnering with startups

Enterprise expertise leaders are actively partnering with startups to assist make their organizations extra modern and agile. Co-creating with startups can help kickstart innovation, present CIOs with entry to hard-to-find expertise in rising applied sciences, and round out digital transformational strategies. Their distinctive focus and approaches to innovation could make startups a extremely advantageous companion in delivering enterprise worth in methods conventional distributors can’t supply.

“Startups typically construct new services and products utilizing much less price. By working intently with them, IT leaders can develop into extra dynamic, proactive, self-determining, self-regulated, versatile, sturdy, strong, and resilient,” says Dr Suresh A Shan, a expertise advisor with Mumbai-based rural non-banking monetary firm Mahindra & Mahindra Monetary Companies. Previous to working as a advisor with the corporate, Shan served as its head of digital innovation for over a decade.

However IT leaders should do greater than merely embrace the innovation edge startups can supply; they need to additionally guarantee enterprise continuity and sound operations. The push to companion with startups may end up in relationships that aren’t aligned to each events’ pursuits, resulting in vital business-technology dangers for a CIO.

Listed here are some widespread traps IT leaders fall into when partnering with startups and how you can keep away from them.

Deciding on startups primarily based on expertise alone

Figuring out the fitting startup to companion with will be difficult. There are such a lot of startups vying for IT leaders’ consideration that it may be tough to filter by means of the litter. Within the Indian market alone, startups have elevated 90-fold over the previous 5 years, from 726 in FY 2016-17 to 65,861 in FY 2021-22, in line with Indian Commerce and Trade Minister Piyush Goyal. The US startup market can also be booming, with greater than 70,000 energetic startups. Partnering with startups is an choice for CIOs throughout the globe.

With startups proliferating throughout IT companies, finance expertise, expertise {hardware}, enterprise software program, and synthetic intelligence, amongst different domains, realizing the place to focus your seek for an innovation companion will be overwhelming.

In keeping with Sushant Rabra, companion for administration consulting at KPMG, “A superb multistage diligence course of involving the startup’s founders, clients, platform, amongst others, is a should whereas shortlisting a startup. Enterprises set up hackathons to pick startups primarily based on a technical answer. Whereas such initiatives assist in evaluating the maturity of the platform, they fall brief on different areas. Within the absence of a multistage due diligence course of, an enterprise might face third-party dangers. There could possibly be instances of IP infringement or pending claims towards a startup, which may encounter an enterprise additionally because it makes use of the identical IP. Equally, digital knowledge legal guidelines are stringent; if an enterprise companions with a startup that isn’t compliant, it too could possibly be answerable for penalty.”

This diligence doesn’t finish at choice, Rabra provides.

“Even after a venture has been awarded to a startup after all of the checks, the due diligence course of ought to proceed in parallel,” he says. “There have been cases of startup founders and staff going through authorized instances and regulatory actions. An enterprise can run into reputational and affiliation threat if it companions with such a startup.”

Overlooking the potential volatility in startup partnerships

Startups also can introduce extra volatility into your partnership portfolio. For instance, a startup might operate easily for one or two years earlier than folding up, owing to numerous causes. The founders might pivot to a brand new enterprise mannequin or new traders might are available with a special focus for the corporate. Additionally, the startup panorama is extraordinarily aggressive and when one firm turns into profitable in a selected space, numerous different gamers are available. In such a scenario, if the startup doesn’t purchase clients aggressively, there could possibly be viability points. Any of those situations might end in a CIO shedding capex and risking enterprise continuity.

To hedge towards such dangers, CIOs ought to maximize their group’s model energy to their benefit. “Startups want large logos on their resumes, however it’s dangerous for any IT chief to interact with them as they aren’t identified out there and don’t carry spectacular credentials. One of the best ways, which serves properly for each events, could be to work with startups on an analysis foundation with none business settlement,” says Mayank Bedi, assistant government director of IT at Dalmia Bharat Group, an Indian conglomerate with pursuits in cement, sugar, and energy.

Recalling his engagement with a startup when he was led IT at agriculture tools producer VST Tillers Tractors, Bedi says, “We received the startup to work on attendance automation and customer administration. There was nothing to lose as we weren’t commercially liable to the startup and even when it left halfway, there could be no affect on enterprise as these have been non-business-critical initiatives. In the meantime, the startup needed to show itself else it could lose an enormous model like VST Tillers Tractors. It labored laborious and delivered the venture.”

As soon as the startup passes the analysis course of, IT leaders ought to nonetheless take measures to protect towards assuming an excessive amount of continuity threat, he says.

“For enhancements and enhancements to the answer, a CIO can then pay the startup primarily based on mutual understanding. Nonetheless, it is going to nonetheless be prudent to carry 10% to fifteen% of the cost lest the startup fails to ship the advanced change requirement. Additionally, IT leaders ought to have entry to the supply code in order that they’ll deploy the venture by means of one other competent companion,” Bedi says.

Taking startup expertise as a right

Enterprise expertise leaders anticipate full and correct circulation, planning, and execution of a venture. “Typically startups make tall claims to bag an enterprise account. They showcase their income, buyer references, and huge groups. Nonetheless, the true image emerges solely as soon as the work begins,” says Bedi.

And that’s the place hidden expertise elements can play an outsize position when partnering with lean startups.

“Startups are sometimes depending on just a few star performers who could possibly be in gross sales or expertise. If these few people depart, then there’s a expertise threat for the startup, which might affect its operations,” says Rabra.

For Bedi, it got here as a impolite shock when he discovered a startup he was working with on a venture didn’t have an inside improvement group and as a substitute relied on a 3rd occasion for its deliverables. “We had partnered with a startup on a buyer onboarding venture. A delay of 15 to twenty days is appropriate however alarm bells ring when there’s a vital overrun of timelines. In our case, there was a delay of greater than two months,” says Bedi. “Not solely an absence of bandwidth but in addition the transient that the startup receives from the enterprise and passes to the third occasion will get misplaced in translation. It doesn’t assist that the startup didn’t learn the detailed enterprise necessities doc.”

Sadly, it’s powerful to chop this threat altogether, Mattress says. “There are few IT leaders who confirm the credentials of a startup to the extent of asking the CVs of their group members. Even when some achieve this, some startups resort to ‘physique buying,’” he says, referring to the apply of recruiting employees to contract their companies out on a tactical short- to mid-term foundation.

So, what’s the best way out? The very best strategy is to open a transparent line of communication with the startup and guarantee transparency. “In my case, I requested the startup what the problem was holding up the venture. As soon as I understood the issue, I received the startup, its prolonged arm, and my inside group to all come to the desk and focus on the venture and means to finish it on time. This fashion one can overcome the scope creep, disintegrated strategy, and delayed timelines,” says Bedi.

Assuming cybersecurity

One of many largest dangers in partnering with any group stems from cybersecurity. Extra so partnering with startups, which have gotten prime targets for organized crime as they’re perceived as missing strong defenses towards hackers. In a related world, this might put their shoppers in danger. 

In keeping with the State of Startup Safety 2022 report introduced out by Vanta, solely 27% of startups have a devoted safety group or particular person, and 75% of respondents thought they need to enhance their safety. The examine included over 500 expertise leaders from startups.

“Whereas there’s lot of progress taking place round cybersecurity, there isn’t a finish to it. On the finish of the day, it’s all about placing a steadiness between threat and management. For a big enterprise in a regulated trade, resembling a financial institution, the chance urge for food may be very low, whereas a startup has a reasonable threat urge for food because it prioritizes nimbleness and innovation. So, it’s as much as CIOs to see whether or not their enterprises’ threat urge for food matches with that of the startup they need to companion,” Rabra says.

“To make sure safety, most CIOs undertake a compartmentalized strategy whereby the startup works in a single compartment and the opposite business-critical infrastructure is in one other compartment and no person is allowed to the touch this core. This fashion, even when a cyberattack does occur, there’s minimal injury to the enterprise,” he says.

Shortchanging cultural challenges

This entice has extra to do with the enterprise than the startup. Enterprises tradition will be powerful to alter. And when introducing a startup strategy or mentality into the equation, initiatives or transformations can simply be derailed by cultures resistant to alter. 

“For a corporation that has been round for greater than twenty years, accepting one thing coming from a startup just isn’t straightforward. Individuals in giant organizations, primarily based on the final mile, are resistant to alter. Then there’s a distinction within the working types. A big enterprise strikes at its personal tempo whereas a startup works nimbly,” says Shan, who has labored extensively with startups in rural India.

Right here, enterprise expectations will also be an issue, Shan says.

“With regards to the degrees of customization in a venture, enterprises have unrealistic expectations from their startups. For example, in a multilingual venture it’s powerful to carry greater than 60% language readability for any companion. Nonetheless, I’ve seen corporates flexing their muscle groups and pushing startups to get it to 90%, which is subsequent to unimaginable and results in friction. Some corporates even threaten startups of a takeover,” he says.

To advertise acceptability of latest expertise within the enterprise, Shan leverage dwell use instances. “We showcase case research on how expertise can allow work extra effectively. We additionally incentivize customers, by giving them presents, to undertake new expertise,” he says.

“Enterprises ought to have a transparent concept about its course of, coverage, procedures, and the aim of the outsourcing to the startup, supported by documentation, individuals and processes. The readability of dos and don’ts from the company’s aspect offers extra energy to the startup to know, construct, plan, and execute the venture with full confidence,” Shan provides.

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