Buying from start-ups in the challenging economy - good or bad?

Insightful analysis by consultants Steve Taylor and Jim Metzler, plus links to the latest WAN news headlines

One topic that has received a lot of attention in these economic times is the viability of buying from start-ups in 2009. Sequoia Capital, one of the country's leading venture capital firms, has a presentation that describes the state of the economy and highlights what it all means to start-ups. Sequoia makes a number of recommendations for start-ups, including focusing on quality, lowering risk and reducing debt. It is difficult to argue with those recommendations. The problem is that the presentation contains a number of graphics, including a detailed image of a tombstone with "RIP Good Times" etched to create the impression of impending doom.

Buying products from start-ups is always a high-reward/high-risk activity. The benefit is that start-ups bring new technologies to market long before the mega companies do. The downside is that many start-ups go out of business. This means that unless another vendor acquires the product, any investment a customer makes will quickly dwindle in value.

Buying from start-ups in 2009 will be a little riskier than usual. Venture capitalists will be frugal when it comes to providing additional rounds of funding, putting start-ups at a higher risk of going out of business, or not having the resources they need to fully develop their product.

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One topic that has received a lot of attention in these economic times is the viability of buying from start-ups in 2009. Sequoia Capital, one of the country's leading venture capital firms, has a presentation that describes the state of the economy and highlights what it all means to start-ups. Sequoia makes a number of recommendations for start-ups, including focusing on quality, lowering risk and reducing debt. It is difficult to argue with those recommendations. The problem is that the presentation contains a number of graphics, including a detailed image of a tombstone with "RIP Good Times" etched to create the impression of impending doom.

Buying products from start-ups is always a high-reward/high-risk activity. The benefit is that start-ups bring new technologies to market long before the mega companies do. The downside is that many start-ups go out of business. This means that unless another vendor acquires the product, any investment a customer makes will quickly dwindle in value.

Buying from start-ups in 2009 will be a little riskier than usual. Venture capitalists will be frugal when it comes to providing additional rounds of funding, putting start-ups at a higher risk of going out of business, or not having the resources they need to fully develop their product.

We believe that IT organizations should still consider buying from start-ups, however you should do more due diligence than usual. This includes getting an understanding of the company’s financial health to determine if the start-up has the resources to stay in business for the next 12 to 18 months and to develop their product as promised.

We'll continue the discussion of how current economy will impact IT customers. In the meantime, we would like to hear from you. What type of IT initiatives will be getting the most attention inside of your organization in 2009?

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Steve Taylor is president of Distributed Networking Associates and publisher/editor-in-chief of Webtorials. Jim Metzler is vice president of Ashton, Metzler & Associates.