Here is a question frequently asked by end users when deciding on a purchase from a “younger” company, “Is this vendor safe?  Will they be around in five years?”

The answer is never simple, it depends on the end user’s risk tolerance profile.  Here are some musings.

  • Make sure you understand what is the objection.  Some are concerned with support being there 3-5 years from now, others are concerned about the company being a stand along concern 5 years from now, yet others wonder whether the product is mature enough to perform adequately in their environment.

 

  • What are you selling?  Is it software, services, or hardware?  From a functionality perspective, it may be less risky to purchase software and hardware than services.  There are numerous organizations running old versions of software without support.  I am not saying I recommend it, but depending on the criticality of the software or hardware offering, there may be support options.  With services such as anything-as-a-service, this may be more problematic.  If a company shuts its doors, the subscribers may end up without any services very quickly or will be forced to move their business elsewhere in a very short period of time.  This has happened a few times in the industry already.

 

  • Some organizations may be willing to take greater risk if the technology is uniquely positioned to offer them market differentiation.  If there are alternatives that are good enough, the risk of a new vendor may not be worth it.

 

  • At what point is a vendor considered viable?  Of course it depends on the timeline in question.  If you are looking out 3-5 years, the considerations are different than when you are considering a longer time line.  The shorter the time line and the smaller the financial investment, the less risk may be perceived.

 

Considerations for determining viability:

  • How many paying customers the vendor has.  The key stepping stones are 20, 100, 250, 500, and 1000.  The other key metric that goes along with the number of customers is how quickly these customers were acquired.  A newly GA vendor with 20 customers acquired in three months is on a different trajectory than someone who has acquired 20 customers in 12 months.  It is also important to understand a typical sales cycle time line and the expected value of a closed deal.
  • How is the company funded.  Most startups are VC funded.  Knowing what round of funding they are in and how much money they have taken is relevant to how well they may be doing.  A well run company will take money with a clear purpose; a round for development, a round for marketing and sales, a round for growth.  Taking too much money quickly may, not always, signal poor management or lack of focus.
  • If the company is well managed and has money in the bank, the next thing to consider is whether the product is doing well.  Does it have good references?  Does it pass the POC?  What is the support like?  Sometimes you can gleam some of this from the interactions with the sales team.  A competent sales team with resources in the back office to assist is a good sign.
  • What position does the product take in the market.  Is it a true disrupter or is it a me too?  How much competition is in the market?  How early or late is the vendor to market?  If a market is saturated with competition, the product has to stand out and the execution of the firm must be superb.  The other key is whether the competition is other startups or established vendors, the big four in the industry with the majority of the market share.  If the competition is primarily from other startups, there will most likely be a consolidation phase within a few years.  This means the established vendors will look at the startups that have been successful and may purchase them to add them to their overall portfolio.  Remember that innovation often starts with startups.
  • Many established vendors buy other companies when they are still relatively small.  What does this mean for those vendors who have reached the 500 or even 1,000 client mark?  It just implies that they may or may not be acquired but the key is that it will take some time for them to truly fail.   Meaning, a well run startup with 500 plus customers will not disappear from the field in a matter of days (with the exception of there being corruption).  It may take years for the company to spend what they have raised and to disenfranchise their customers.  More commonly, companies like that either continue to grow organically, eventually going public and expanding into other areas of the market, or they are acquired.  With a substantial customer base, there is value in a company even if the product is not super exciting.  The residual value of a company with a customer base is enough to attract industry buyers as well as equity management firms, and other private investors.

To answer the question ” Will this vendor be around?” requires more than just providing financial.  It requires an understanding the basis for the objection and then presenting the case in light of industry trends and market positions.  In the end, not all objections can be addressed to the satisfaction of the sales persons or the vendor they represent.  Sometimes, the perceived risk is too high for an individual or an organization to move forward.  It is always best to ascertain the buyers risk profile as early as possible in the sales process.

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