Revisiting the wisdom of doing business with startups

In the Summer of 2012 I wrote a post on another blog about doing business with startups as beneficial for a services company, assuming our ability to manage the risk. Two+ years later, these risks look uglier from the rear view mirror. The benefits still shine, in that working with startups is the only way to truly infuse the business with the most competitive techniques for innovation and design. Below is the 2012 post with some real experiences that unfolded over the next year, noted where applicable.

10 Reasons WE do business with startups
Posted: June 29, 2012 | Author: Mobile Ronin | Filed under: Uncategorized |Leave a comment
A good friend forwarded this post from Kickoff Labs stating the reasons that it is silly, dangerous, and maddening to do business with quote-unquote startups. This was distinguished in the post from those starting and running a Real Business. It’s a great post, and I’ll repost it right here. It inspired me to consider 10 reasons WE DO business with startups.

1. You are what you eat
If you work with clients who face as much bureaucracy and politics as they do business challenges, you can help them, but you are, by definition, involved in those issues as part of what you are solving, or at least living with. If you work with bold, intelligent, and creative people who are taking great risk to make a difference in their lives and our world, guess what happens for you. You are inspired to maximize within constraints, to be more authentic with your clients, to take an interest in the success of their product. And you look, act, and feel the urgency and focus they exude.

2. The workout is not the event 
If you experience the resource-constrained, ever-pivoting, world of startups, you see a lot of painful machinations. You experience risk with Accounts Receivable that just isn’t there when building software for the Fortune 1000. When you are training for a triathlon, it has it’s merits, but sometimes its a pain. The reason you are doing it is to feel strong, and maybe to have a good race event. No, a software development company does not become a large player by working with startups, but startup engagement prepares us for the very real performance of innovative product design and efficient development.

Note looking back from 2015: This has absolutely turned out to be true, but I would add that some startups grow to become funded by more than a couple $M.  These then allow you to grow with them, addressing challenges of scalability and complexity that don’t exist at the Angel-level startup. 

3. Because we can (manage the risks)
Many small software development shops are not experienced with establishing the terms of engagement, contracting, and collecting. They don’t see the glaring traps that are inherent in doing business with clients that may not have the liquidity to pay, or may eventually try to escape paying due to the latest pivot in priorities. No one seeks to harm the other party in startup outsourcing. Inexperienced software business managers cannot allow their software company to engage with risky startups, and should not.

Note looking back from 2015:  This was easier to say than to practice.   And not always true when it comes to startup behaviors.  In 2013 we had startup Cobrain, Inc. (www.cobrain.com) abandon a design phase at the finish line and fail to pay its outstanding invoices.  After they ignored our communications for about a year we , filed a collections suit in the Montgomery County Circuit Court, and last month the judge found in favor of Apollo Matrix and awarded payment of the outstanding invoices plus our legal fees.  In retrospect I can say that since startup priorities change so rapidly, leaders often wish to change approach after having signed a fixed price contract, and in some cases are prepared to stiff their providers with the objective to get more done, faster, without the same regard for obligations that an ongoing concern would typically have.  A startup is a risky place, but when combined with leaders who do not have a complete sense of responsibility for their actions in the marketplace, the startup becomes downright dangerous.

4. Appreciate the Koolaid, but don’t guzzle it
All clients want their software developer to identify with what the mission, and give it the extra effort. There is a fine line between establishing this as a healthy relationship, and allowing it to erode into a hemorrhaging account by under-invoicing. That is not good for either party.

Note looking back from 2015:  This turned out to be SO true.   Don’t take equity.  Don’t ask your services firm to take equity. Find the mutual win, and that is not found by making your vendor into an investor.

5. Context for mobile innovation
Certain technologies are tied to innovation. And startups are the ones who are on the point of innovation in mobile. Many enterprise clients have expressed, “we’ve found an iOS programmer, so we are now good to go with mobile.” I don’t think so. 80% of mobile applications development is in the product strategy, design and supporting server engineering. A raw and disruptive technology such as mobile cannot be exploited simply by having the programmers who know it. There is a context for mobile innovation that entails product strategy, UX design, creative visual design and backend server engineering. We thrive on startup engagement so that we accumulate those bona fides going forward.

Note looking back from 2015:   We continue to stay with native mobile product and LAMP stack for the rest.   

6. Startups are great?
We want to have the best personnel possible. Quality workers often seek interesting and exciting work. They like what is new, what is changing, and they want to be part of the exciting stories that startups are living. With our share of startups in the portfolio, every professional gets their fix of innovation, and they give it back over and over as they work with more traditional clients in our portfolio. Startups are great for the professional development of our staff.

Note looking back from 2015:  Big caveat here in retrospect.  Startup leaders can be unkind or unrealistic — to the point of offensive — in their dealings with your employees.  Startup leaders are often inexperienced, incorrect about the efficacy of an idea, and underfunded.   If I had to list 10 misbehaviors by clients that put uncool stresses on my employees, 9.5 of them would be from startups.

7. Refreshing opportunity 
Same reason you should spend a year abroad in school. Homogeny is a real problem for DC-area tech workers and businesses. There is a security-seeking career conservatism that has developed as a result of our huge government-fueled IT services market. We wonder why we cannot hatch innovation at the rate of New York or San Fransisco. We engage Apollo Matrix with the excitement and healthy discomfort of venture-funded, personally leveraged, startups. By doing so in the DC area, we offer a a very large and qualified IT workforce a refreshing opportunity. Our model specifically works in DC because of this factor of a large IT workforce combined with a shortage of ‘startup culture.’

Note looking back from 2015:  More true than ever.  

8. Skills developed serving startups 
Arbitrage. Skills, platforms, techniques learned by doing business with the innovators in mobile and web software are valuable in large client engagement. And they are not so easily developed simply serving large clients. As a third party software product developer, we actually achieve a portfolio affect as it pertains to skills. The skills developed serving startups contribute to our value proposition with larger clients.

Note looking back from 2015:  This skills transfer has not happened for us yet.  Most skills developed serving startups are helping us serve the Small to Mid-sized businesses.  

9. We think small to think big.
We want to grow Apollo Matrix into a company of significant and lasting value. The obvious is to go direct to the Fortune 1000 or large government accounts, dispensing with the smaller clients. While that thinking resonates as it pertains to small, non-growth, businesses, the startups are not here to to run a ma-n-pa business, and in most cases they’d ramped some significant businesses in their pasts. So yes, we’re thinking big, by thinking small.

10. Startup engagement 
Idea Flow. By building the initial platform for the company on startup engagement, we are getting a huge flow of ideas, skills, techniques, technology choices, and rising stars for third party integrations. This can’t be done anywhere else.

Note looking back from 2015:  This is one of the most important reasons to include startups in the portfolio.

It’s a valuable but risky sector to serve. No doubt about it.

Note looking back from 2015:  In summary, the benefits have been plenty when it comes to innovation, technical skills, understanding how products bootstrap and much more.  However, the startup client is pressured by financial tradeoffs and exaggerated competitive forces, while it is ridiculously over-characterized by the personality of its leader.  This makes for a very tough customer indeed, but one that remains worthwhile including.  If you don’t let it kill you, yes it will make you stronger;)