How to Evaluate Mobile/Wireless Startups
Wireless & Mobile Summit 2005
John Girard Rachna Ahlawat
11-13 April 2005 Hyatt Regency Grand Cypress Orlando, Florida
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How to Evaluate Mobile/Wireless Startups
Why Should You Buy From a Startup?
Point solution meets specific need e.g., superior vertical application
Imminent problem with clear resolution mobile device security
Incumbent vendors are not ready secure e-mail
Waiting causes damage WLAN IPS
ROI on first use software distribution, SSL VPN
Beta site opportunity VoWLAN
Standards still evolving
Startups offer innovative products and services that solve imminent security problems. But many CIOs and security managers won't consider them because of viability concerns, which can be mitigated by asking these questions. As mobile/wireless usage grows, application and network planners often must address specific, imminent support, connectivity, management and security issues. Established vendors are usually risk-averse because they don't fully understand the challenges of always-on mobile business. They may be discouraged by the time it takes to realize a return on investment for small devices that become obsolete quickly and that sport multiple operating systems. In these cases, the answer may be to buy a product or service from a startup. Startups can offer useful solutions, especially when incumbent vendors aren't ready with their solutions and a problem must be dealt with immediately. You may also benefit from becoming a beta test site; thus, you can influence product development.
© 2005 Gartner, Inc. and/or its affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.
John Girard, Rachna Ahlawat A6, RA8, 4/05, AE
Page 1
How to Evaluate Mobile/Wireless Startups
But, Startups Tend to Fail
Underfunded
Burned out and squeezed out
Inadequate business plan
One idea
Weak management
Failure to anticipate market
Tool vs. infrastructure confusion
Product vs. service confusion
Since the early days of the IT industry, there has been a pattern of proliferation of small startups, followed by market consolidation. The common wisdom that nine out of 10 startups eventually will fail, however, does not automatically apply to mobile and wireless. There are as many different types of problems as there are vendors; many startups can stay in business by redefining themselves as niche providers. The failure issues identified in the list above are the basic indicators on which startup viability should be evaluated.
© 2005 Gartner, Inc. and/or its affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.
John Girard, Rachna Ahlawat A6, RA8, 4/05, AE
Page 2
How to Evaluate Mobile/Wireless Startups Client Issues 1. How do you evaluate startup viability? 2. What are the risks associated with being an early adopter? 3. How do you protect yourself against those risks?
Investments in mobile technologies have been a favorite of investors in recent years. However, it has become more evident that, to reach the scale for success, a vendor must have access to a large pool of resources — namely, funding, technology and distribution. This fact narrows the opportunities for startups but could favor mergers and acquisitions to increase scale. However, the overcapitalized nature of many of the vendors, combined with unrealistic valuations, has stymied this endeavor.
Š 2005 Gartner, Inc. and/or its affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.
John Girard, Rachna Ahlawat A6, RA8, 4/05, AE
Page 3
How to Evaluate Mobile/Wireless Startups
When & Why Do Wireless Startups Start Up? Visibility Riding Public Hype (Copycats)
RiskAverse (Bad Timing)
Me Too! Niche Duplication
Original Inspiration
Technology Trigger
Peak of Inflated Trough of Slope of Expectations Disillusionment Enlightenment
Plateau of Productivity
Maturity
Startup at trigger point: Original concepts. Type of venture capital (VC) investments: Speculative, seed money for a new market idea. Startup on rising hype: Public interest growing and intensive. Type of VC investments: High-risk — lottery for rich people, gambling on reaching the peak. Note: Startup is candidate for a buyout. Startup after the peak of hype: Risk-averse market entry. Type of VC investments: Investing after the peak on the assumption that the market is stabilizing. Startup for long-term market presence: Entry when market has truly stabilized. Type of VC investments: Low risk, stable niche, slow growth.
Š 2005 Gartner, Inc. and/or its affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.
John Girard, Rachna Ahlawat A6, RA8, 4/05, AE
Page 4
How to Evaluate Mobile/Wireless Startups
Funding Challenges Warning Signs:
Failing to follow healthy growth & funding cycles
Down rounds
Sales force downsizing
Impact:
Management turnover
Valuations too high for a sale
What's the vendor's relationship with its VC backers? Understand the vendor's relationship with its financial backers. Danger signs include: The startup avoids talking about its exit strategy. It may be a company that's been created to be sold, rather than built to last. The startup's backers don't understand the vendor or its product. Some investors are willing to gamble with their money in hopes that they will get lucky, but because they have not researched the startup's viability, buyers are at risk if the gamble fails to pay off. Beware of startups that are majority-funded by other vendors with their own investment funds. Some large vendors use their money to fund startups to have visibility into or control over what the startup will do. These vendors will also fund competing startups and pit them against each other to determine which will succeed. Look for signs of funding trouble. A typical startup goes through these funding stages: • Obtain seed funding to develop a prototype. • Produce a version, and get 20 to 50 reference customers. • Build sales and support ability in a major market. • Expand into other markets and achieve profitability with 200 to 500 customers. • Obtain "mezzanine" funding — the last funding phase before the "liquidity" event that allows the venture capitalist to realize a gain or loss on an investment, often in the form of an initial public offering. An early warning sign is if a startup still receives funding but has failed to move into the next funding stage.
© 2005 Gartner, Inc. and/or its affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.
John Girard, Rachna Ahlawat A6, RA8, 4/05, AE
Page 5
How to Evaluate Mobile/Wireless Startups
No Competition = No Market Warning Signs:
New category invented to describe the product or service
Competition stifled by patents
Impact:
Superior to what?
No track record
Picking a product category is a double-edged sword for a startup. If a startup has no competitors, the assumption is that the road to a liquidity event will be swift and sure. Of course, it also means that there is no current budget within the IS department for the product and no demand for the product. Keep in mind that an identified problem looking for a solution does not a market make. Is there a market for the product or service? A danger sign is if the startup has no competition because no competition means no market. It is tempting to assume that if a startup has no competitors, its path to profitability will be smooth. In mobile wireless markets, however, new business opportunities often drive innovative solutions. Although there will be early visionaries, a truly important topic invariably will spawn more than one startup with new solutions.
© 2005 Gartner, Inc. and/or its affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.
John Girard, Rachna Ahlawat A6, RA8, 4/05, AE
Page 6
How to Evaluate Mobile/Wireless Startups
Middleware Warning Signs:
Gap solutions
Increased complexity
Benefit is not compelling
Impact:
If it works, it's invisible
Short life, must have exit plan
There are lots of little gaps between technologies that beg for a solution. Startups perform best when they pursue "gaps" in leading vendors' products and services that can't be easily or profitably solved, rather than competing on common features. By pursuing such gaps, startups increase their chances of being acquired or of getting favorable partnerships and licenses from leaders. But startups may also pick gap problems that really don't bother users enough to justify adding cost and complexity to their mobile investments. Startups may also pick problems that can be fixed in the next major release of the leading vendors. A startup's chances of collapse increase if its primary goal is to compete against a market giant or its financial plan depends on taking business away from established leaders.
© 2005 Gartner, Inc. and/or its affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.
John Girard, Rachna Ahlawat A6, RA8, 4/05, AE
Page 7
How to Evaluate Mobile/Wireless Startups
Go-to-Market Challenges Warning Signs:
Selling ahead of the trigger event
CEO can name every customer
Rule of two (sales per week)
Impact:
High burn rate
"Mind share" shortage
A sign that a startup is still in the early, seed stage is when its CEO is aware of every sale. This indicates that a sales, marketing and business infrastructure has not been built. Signs that a startup is maturing include: • New customers exceed two per week • The CEO has not hired every employee and cannot name them all • Your main company contact isn't the CEO
© 2005 Gartner, Inc. and/or its affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.
John Girard, Rachna Ahlawat A6, RA8, 4/05, AE
Page 8
How to Evaluate Mobile/Wireless Startups
Technology Myopia Warning Signs:
Weak business value proposition
Technology more important than result
Unreasonable complexity
Impact:
Long sales cycle
Vague ROI
Is the startup blinded by technology? A startup's excessive focus on a "cool" idea often dooms its product to niche markets. A vendor that suffers from this syndrome often hasn't done its homework to establish a clear business value proposition. The technology becomes more important than the result, which can lead to unreasonable complexity, a long sales cycle and vague return on investment. Avoid "cool technology" that doesn't solve real-world problems and immediate needs. Startups must prove that they are willing and able to invest in improvements that adapt their products to buyers' circumstances. Have you ever seen the cool piece of technology chasing a product? How about memory metal? How about artificial intelligence? How about voice-activated software? These are often doomed to niche markets. In mobile/wireless products, the important "window dressing" is often left out of v.1.0. These include: • Management console • Interoperability with major vendors • The price/performance chart with the low-cost, low-performance box on the lower left and the carrier-class equipment on the upper right
© 2005 Gartner, Inc. and/or its affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.
John Girard, Rachna Ahlawat A6, RA8, 4/05, AE
Page 9
How to Evaluate Mobile/Wireless Startups
Management Team Challenges Warning Signs:
Technologist in charge
The consumer sales mentality
Common vendor background/spin-out
Impact:
Can't anticipate markets
No "marcom" commitment
Does the startup have a good management team? Avoid these management scenarios: CEOs who were with a large company and are accustomed to having a large office with several assistants, who oversaw long-winded projects, and who are not used to emptying the trash at day's end. CEOs who are programmers or engineers. The product's technology is their "baby," which blinds them to business issues. CEOs with a consumer technology/channel background, such as with cellular phones or online portals. They usually are comfortable only in consumer areas and aren't ready for the "hand-holding" needed for an enterprise sale or to manage a business-to-business relationship. Look for these management scenarios: • Previous successful mobile/wireless company experience • Previous similar executive experience • Previous experience within end-user companies and with end-user business cases
© 2005 Gartner, Inc. and/or its affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.
John Girard, Rachna Ahlawat A6, RA8, 4/05, AE
Page 10
How to Evaluate Mobile/Wireless Startups
Buying Center Confusion Warning Signs:
Sale requires cooperation and funding from multiple business units (networking, security, audit/control, production, support)
Impact:
Long sales cycle
Incomplete installation
Gartner "Analyst 101" training: Look for the buying center! Do not sell: • Host solutions to network security people • Audit solutions to operations people • Network security to system administrators • Antivirus to anyone other than e-mail or desktop people • Mobile management to telecoms people • Application development tools to VPN managers • Mobile IP to end-user computing programmers A startup must have a short sales cycle (45 days) or its survival is in jeopardy. Selling to multiple buying centers requires budget and organizational cooperation that can't be quickly resolved. Many startups find it difficult to decide whether they want to be a product or service vendor, and thus they fail at both markets. Beware of companies that have built tools for consulting engagements and are trying to create "shrink-wrapped" products with big markups. © 2005 Gartner, Inc. and/or its affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.
John Girard, Rachna Ahlawat A6, RA8, 4/05, AE
Page 11
How to Evaluate Mobile/Wireless Startups
'Me Too' Syndrome Warning Signs
Late entrant in a saturated market
Unique value can be easily duplicated
Unique value is arbitrary
Impact:
No compelling reason to attract clients
It is frustrating to stumble across a startup that is addressing an issue that has already been solved by established players or a couple of dozen other startups. There should be a "startup clearinghouse" to vet new ideas before huge investments are made in redundant products. The VC and analyst communities are supposed to do this, but sometimes the startup is in too stealthy a mode.
© 2005 Gartner, Inc. and/or its affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.
John Girard, Rachna Ahlawat A6, RA8, 4/05, AE
Page 12
How to Evaluate Mobile/Wireless Startups
Collapsed Universe Pattern Warning Signs:
Unable to break out of a defined buying center (such as the federal government)
Growth sales are among the installed base
Flat revenue and client base
Impact:
Long-term niche player
Acquisition target
Will the startup eventually sell outside of its defined buying center? Some startups fall into what Gartner calls the "collapsed universe syndrome," which is the inability to gain credibility outside of their original class of buyers. This can create long-term niche providers that can become potential acquisition targets. This scenario is especially common among government vendors.
© 2005 Gartner, Inc. and/or its affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.
John Girard, Rachna Ahlawat A6, RA8, 4/05, AE
Page 13
How to Evaluate Mobile/Wireless Startups
Startup Presentations We Have Known and Hated "We are the first vendor to do X" usually, the latest to try "We are the leading vendor of X" required wording for press releases "Company Y is evaluating us" and everyone else "Operator A is evaluating our solution" Operator A evaluates all such solutions, doesn't pay for them or buy them commercially
Š 2005 Gartner, Inc. and/or its affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.
John Girard, Rachna Ahlawat A6, RA8, 4/05, AE
Page 14
How to Evaluate Mobile/Wireless Startups
Startup Presentations We Have Known and Hated (Continued) "Our buyers are completely satisfied" and the ones you lost are not "Our partner, customer lists include ‌" the same obligatory logos as everyone else "We won this deal away from Vendor Z" but Vendor Z sold to same company's other divisions
Š 2005 Gartner, Inc. and/or its affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.
John Girard, Rachna Ahlawat A6, RA8, 4/05, AE
Page 15
How to Evaluate Mobile/Wireless Startups
Questions to Ask Before You Buy From a Startup
What is the contact information for your reference customers?
Who are your investors?
How much cash do you have?
What is your burn rate?
How long does it take to set up first instance?
What is the most common reason for losing a sale?
Are you working with any partners/established vendors?
© 2005 Gartner, Inc. and/or its affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.
John Girard, Rachna Ahlawat A6, RA8, 4/05, AE
Page 16
How to Evaluate Mobile/Wireless Startups
Evaluation Criteria for Startup Product or Service
Is the vendor difficult to work with?
Is the solution/service difficult to install and maintain?
Ask for a full disclosure of the design. Proprietary or open source?
How well is the product documented?
Participate in the beta program.
Trade public-relations help for special treatment and a chance to influence the design.
Demand a schedule for review and enhancements.
Add contract provisions to cancel without penalty due to acquisition or change in ownership.
Is third-party maintenance available?
Begin with a trial installation. If the vendor is difficult to work with, or its solution is difficult to install, then the effort may be too great, and you should seek an alternative vendor. Trials provide the diligence necessary to determine if the startup will pay attention to users' needs. Estimate the longevity of the design if the startup and its products or services fail or are radically altered — for example, because of an acquisition. Ask for a full disclosure of the design. Is it based on proprietary hardware and exotic software, or is it based on generic hardware and open-source operating systems and software? How well is the product documented? Participate in the beta program. Trade access to your company and a public-relations case study for special treatment and a chance to influence the product's design. Demand a schedule for review and enhancements, even if you are not in the beta program. Require that the vendor can demonstrate progress and strategic thinking. Add contract provisions that allow you to cancel without penalty if the startup is acquired or its ownership changes by more than 25 percent. Encourage the startup to retain third-party companies for maintenance. © 2005 Gartner, Inc. and/or its affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.
John Girard, Rachna Ahlawat A6, RA8, 4/05, AE
Page 17
How to Evaluate Mobile/Wireless Startups
Winning Traits
Strong marketing and sales vs. technology focus
Polished materials
Direct sales staff
Strong partnerships with integrated sales training
Solid process for goal setting and reconciliation of performance against goals
"Skin in the game" contracts
Startups are a good value when they can solve immediate, serious problems faster and more effectively than alternatives. A clever startup will innovate faster than leaders, and it will tell a convincing story of practical value. Buyers will benefit from innovative and timely features that larger, slower-moving vendors ignore or miss. Use our evaluation points to determine whether a startup's viability is good enough to justify doing business with it.
© 2005 Gartner, Inc. and/or its affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.
John Girard, Rachna Ahlawat A6, RA8, 4/05, AE
Page 18
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