5 pitfalls to avoid when partnering with startups

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Enterprise technology leaders are actively partnering with startups to help their organizations become more innovative and agile. Co-creating with startups can help kickstart innovation, give CIOs access to hard-to-find skills in emerging technologies, and fuel digital transformation strategies. Their unique focus and approach to innovation can make them a highly beneficial partner in providing business value to startups in a way traditional vendors cannot offer.

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“Startups often create innovative products and services using low cost. By working closely with them, IT leaders can become more dynamic, proactive, self-determined, self-regulated, resilient, strong, robust and resilient,” Dr. Suresh Says A Shan, a technology consultant with Mumbai-based Rural Non-Banking. Financial company Mahindra & Mahindra Financial Services. Prior to working with the company as a consultant, Shan served as head of digital innovation for over a decade.

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But IT leaders must do more than embrace what innovation-led startups have to offer; They must also ensure business continuity and sound operations. The rush to partner with startups can result in relationships that don’t match the interests of either party, creating significant business-technology risks for CIOs.

Here are some common traps that IT leaders fall into when partnering with startups and how to avoid them.

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Selecting Startups Based on Technology Alone

Identifying the right startups to partner with can be challenging. There are so many startups vying for the attention of IT leaders that it can be difficult to sift through the clutter. In the Indian market alone, startups have grown 90 times in the last five years, from 726 in FY 2016-17 to 65,861 in FY 2021-22, according to Indian Commerce and Industry Minister Piyush Goyal. The US startup market is also booming with over 70,000 active startups. Partnering with startups is an option for CIOs around the world.

With the proliferation of startups in IT services, finance technology, technology hardware, enterprise software and artificial intelligence, among other sectors, knowing where to focus your search for an innovation partner can be overwhelming.

According to Sushant Rabra, Partner, Management Consulting, KPMG, “While shortlisting startups, a good multistage due diligence process involving startup founders, customers, platforms, among others, is essential. Enterprises conduct hackathons to select startups based on technical solutions. While such initiatives help in evaluating the maturity of the platform, they fall short in other areas. In the absence of a multistage due diligence process, an enterprise may be exposed to third party risks. There may be cases of IP infringement or pending claims against startups, which may also hit an enterprise as it uses the same IP. Similarly, digital data laws are stringent; If an enterprise partners with a startup that does not comply, it may also be liable for penalties.

This diligence doesn’t end at selection, says Rabra.

“Even after a project is awarded to a startup after all due diligence, the due diligence process should continue in parallel,” he says. “Instances of startup founders and employees facing legal cases and regulatory actions have come to the fore. Reputation and association may be at risk if any enterprise partners with such startups.

Considering the Potential Volatility in Startup Partnerships

Startups can also bring more volatility to your partnership portfolio. For example, a startup can easily operate for a year or two before shutting down for various reasons. The founders may become the pivot of a new business model or new investors may come with a different focus for the company. Moreover, the startup landscape is extremely competitive and once one company becomes successful in a particular area, many other players join in. In such a situation, if the startup does not acquire customers aggressively, there may be viability issues. Either of these scenarios could result in the CIO losing capex and putting business continuity at risk.

To avoid such risks, CIOs must maximize their organization’s brand power to their advantage. “Startups need big logos on their resumes, but it is risky for any IT leader to associate with them as they are not known in the market and do not have impressive credentials. The best way, which works well for both the parties, would be to work with startups on an assessment basis without any commercial agreement,” says Mayank Bedi, assistant executive director, IT, Dalmia Bharat Group, interested in cement, sugar An Indian group possessing , and Shakti.

Recalling his association with a startup when he was heading IT at farm equipment maker VST Tillers Tractors, Bedi says, “We got the startup to work on attendance automation and visitor management. There was nothing to lose as we were not commercially liable for the startup and if it was abandoned midway, there would be no impact on the business as these were non-business-critical projects. Meanwhile, the startup had to prove itself or else it would lose out to big brands like VST Tillers Tractors. It took hard work and completed the project.

Once a startup has gone through the evaluation process, IT leaders must still take measures to avoid assuming too much continuity risk, he says.

“For enhancement and improvement of the solution, the CIO may pay to the startup based on mutual understanding. However, it would still be prudent to pay 10% to 15%, lest the startup fails to meet the complex transformation requirement Also, IT leaders should have access to the source code so they can deploy the project through another competent partner.” Bedi says.

Underestimating Startup Talent

Enterprise technology leaders expect the complete and proper flow, planning, and execution of a project. “Too often startups make tall claims to get an enterprise account. They showcase their revenue, customer references and large teams. However, the real picture emerges only after the work starts.”

And this is where the hidden talent factor can play a big role when partnering with Lean Startups.

“Startups are often dependent on a few star performers who may be in sales or technology. If these few people leave, there is a talent risk for the startup, which can impact its operations.”

For Bedi, when he learned that a startup he was working with on a project did not have an in-house development team and instead relied on a third party for its deliverables, it came as a huge blow. was. “We partnered with a startup on a customer onboarding project. A delay of 15 to 20 days is acceptable, but alarm bells go off when the time limit increases significantly. In our case, there was a delay of over two months,” says Bedi. “Not only is there a lack of bandwidth but the brief the startup receives from the enterprise and passes to third parties gets lost in translation. It doesn’t help that the startup didn’t read the detailed business requirements document.

Unfortunately, it’s hard to completely reduce this risk, says Bede. “There are few IT leaders who go to the extent of asking for CVs of their team members to verify the credentials of a startup. Even if some do, some startups resort to ‘body shopping’,” he says, referring to the practice of recruiting employees and contracting their services on a strategic short- to medium-term basis. goes.

So, what’s the way out? The best approach is to open a clear line of communication with the startup and ensure transparency. “In my case, I asked the startup what problem was holding up the project. Once I understood the problem, I got the startup, its extension arm, and my internal team all around the table and discussed the project and Means getting it done on time. This way one can overcome scope creep, disorganized approach and delayed deadlines,” says Bedi.

considering cyber security

One of the biggest risks in partnering with any organization arises from cyber security. Greater involvement with startups, which are becoming top targets for organized crime as they are perceived as lacking robust security against hackers. In a connected world, this could put their customers at risk.

According to the State of Startup Security 2022 report brought to you by Vantaa, only 27% of startups have a dedicated security team or person, and 75% of respondents thought they should improve their security. The study covered over 500 technology leaders from startups.

“While there is a lot of progress being made in the field of cyber security, there is no end in sight. At the end of the day, it is about striking a balance between risk and control. For a large enterprise in a regulated industry, such as a Banks have a very low risk appetite, whereas a startup has a medium risk appetite as it prioritizes agility and innovation. Therefore, it is up to the CIOs to see if their ventures’ risk-taking capability is in line with that of a startup. matches with who they want to partner with,” Rabra says.

“To ensure security, most CIOs adopt a compartmentalized approach in which startup work is in one compartment and other business-critical infrastructure is in another compartment and no one is allowed to touch this core. That way, even if a cyber attack does happen, the damage to the enterprise is minimal,” he says.

Shortchanging Cultural Challenges

This trap has more to do with enterprise than startup. Changing enterprise culture can be difficult. And when introducing a startup approach or mindset into the equation, projects or changes can easily be derailed by cultures resistant to change.

“For an organization that has been around for over two decades, it is not easy to accept something coming from a startup. People in large organizations based on the last mile are resistant to change. Then comes the difference in style of functioning. A large enterprise moves at its own pace, whereas a startup works agile,” says Shaan, who has worked extensively with startups in rural India.

Here, enterprise expectations can also be a problem, says Shan.

“Enterprises have unrealistic expectations from their startups when it comes to the level of customization in a project. For example, it is difficult for any participant in a multilingual project to exceed 60% language clarity. Have seen CEOs flexing their muscles and startups making it up to 90%, which is next to impossible and leads to friction. Some corporates even threaten startups with takeovers.’

To drive the adoption of new technology across the enterprise, Shan leverages live use cases. “We showcase case studies of how technology can enable work to be done more efficiently. We also encourage users to adopt new technology by giving them gifts.”

“Enterprises should have a clear idea about its process, policy, procedures and purpose of outsourcing to startups, supported by documentation, people and processes. More power to know, create, plan and execute the project with,” says Shan.

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