Having lived the early-stage startup life, I‘ve always wondered how CIOs approach these risky, yet rewarding opportunities. Speaking as someone who’s personally created the “3 people and a dog” type startup multiple times, I’ve been curious on how to attract top tech talent.
Why might CIOs prefer a startup over a large established company? To be clear, only a small number of firms get the opportunity to transition from innovator to early adopter, and then early majority markets. In these transitions, according to Geoffrey Moore, features get filled in, creating what Theodore Levitt called a ‘whole product.’
So, what should VC be looking for in startups? What do startups need to succeed with CIOs? (To be clear, I am focused here upon seed funding to Series B or Series C.) CIOs say there are six qualities they look for in startups they work with. Let’s look at each.
1) Fills a Gap
CIOs don’t often turn to a new startup to rip and replace something that they spent years building. They are looking early on for something that fills a gap in what they are doing today.
Healthcare CIO David Chou says, “I do like the startup agility, but they must fill the gap in understanding deeply how the industry operates with the details.”
2) Something Entirely New
CIOs are not going to spend time with a startup that simply rehashes an existing set of ideas. They want to see something new: something VCs say represents ‘a pain pill’ rather than a ‘nice to have’.
Higher Education CIO Milos Topic says, “there is no solid rule overall. However, we need something entirely new, something we haven’t seen before. Startup bootstrapping and grittiness can help a lot but without something unique, it isn’t enough.”
Financial Services CIO Pedro Martinez Puig adds, “I bet on start-ups on initiatives that goes to uncharted territory ideas that require combining three or more specialized teams. For example, you need to mix top UX, with algorithm design, development and hardware.”
3) Non-archaic perspective
CIOs these days have moved from back-office efficiency to front-office transformation. They look for organizations that solve business problems, and this means they bring new approaches to support business transformation.
For example, they reach new, often younger audiences. Foundation CIO Paige Francis says that she looks for startups “when the project is striving to engage a fresher crowd with a non-archaic perspective. Also, when the solution doesn’t require integration with a clunky, billion-year-old system/infrastructure.”
Clearly, many problems require integration. Where this is the case, the startup has the extra chore of figuring out how to integrate with system and infrastructure.
4) Enables Business Differentiation + Innovation
CIOs are without question on the front line of business transformation these days. This means that startups need to enable or support an organization’s ability to transform itself into a nimble digital competitor. An organization that can produce increasingly digital offerings and products.
Higher Education CIO Carrie Shumaker says she looks for a startup that enables her to deliver “a business process that is a differentiator or innovation, not a system of record process (think Gartner categorization).”
5) Low Risk
CIOs want startups that do not add to their business risk. Shumaker wants organizations “you can trust.” She would prefer if “they’re not about to get sold or go public.”
Former CIO Tim McBreen adds, it is important to “feel a sense of partnership and trust. It is important that a new vendor has enough clients and not be release 0/1 unless joint venture to build from scratch.” Meanwhile, CIO Cathleen Curley says that she is looking for “low risk and medium to high impact. Trust and strong product roadmap that you can help shape is important as well.”
CIO Jim Russell is candid, however, that “in some ways with all the VC money today even long-term vendors have uncertain futures. Startups are good still for low-risk new ventures. It can be good to start a long term relationship with graduated risk/reward. Bigger projects give me pause. The risks are higher and the reward margin lower. ERP, LMS, CMS, other tools currently need more risk mitigation and thoughtful adoption.”
6) Experienced Team
I remember many years ago, seasoned VC Jack Carsten told me that he would always bet on an A team with a B idea versus a B team with an A idea.
There are lots of reason for this. An A team knows when to pivot, but it also has to do with the business abilities. An experienced team knows how to enable an established organization to contract with their startup. Former CIO Theresa Rowe says it is important for startups to have “readiness and capabilities of their user community. This includes the ability to help with a security risk assessment or a data and identity integration assessment.”
There you have it: CIOs look for startups that fill a gap, offer fresh approaches, provide different perspectives, enable the business to win, are low risk, and have the experience to make it easy to work with.
Simple enough ideas, but clearly it takes work to make it through the VC gauntlet. I remember a VC telling me once that they read 100 executive summaries a week and invite 10 to come in for an hour meeting. One or two of those make it to a partner meeting after some initial due diligence. And then a few of those make it to funding. Clearly, the ones that meet the first four criteria should have an opportunity at funding.