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Evaluating SaaS Startups As Potential Vendors

September 12, 2017
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Today, even the largest enterprises are working with startups. While F500 procurement processes are still a tough go for young businesses, corporations are recognizing that adopting cutting edge technology early—while a potential risk—is a form of innovation in its own right. Inking a good deal with a new best-of-breed vendor years earlier than the competition can go a long way. That is why evaluating SaaS startups as potential vendors is important. “Buy,” moreover, is simply going to make sense more often than “build” in a world where software touches every business function under the sun. Accordingly, enterprise stakeholders are both democratizing the SaaS buying process and finding ways to test early-stage products org-wide in a more agile way.

However, working with early-stage vendors still presents real risks. Security can be some of the most concerning. Luckily, a range of standards and testing procedures have long been in place to gauge vendor security. Corporate lab environments and gradual rollout plans designed to limit initial exposure to things like data loss, improper PII handling, and backdoor system breaches have been commonplace for years. I find that there is another type of risk that is just as common, yet much more nebulous and hard-to-gauge: the general “maturity” of a vendor. Different companies and IT buyers have different ways of measuring it: age of company, financing raised, size of reference customers, or even benchmarks based on financial metrics. While they see startups as a potential source of innovation, more F500 companies than not miss out on opportunities to work with startups because they have outmoded or overly rigid definitions of what constitutes a vendor that is sufficiently “mature” to support their business.

So how should businesses best think about evaluating SaaS startups as potential vendors or partners? I think the question of whether the vendor is solving a big problem is much more important than spending a ton of time probing financial stability. Of course there are baseline questions you might ask, like which or what type of other customers they have. You can do basic research on the stage of the business or whether or not it has institutional backing. But weigh the value of the product to you vs. the effort it will require to put it in place once you give a verbal. A big benefit of SaaS is that it’s relatively easy to adopt. So while larger companies have understandable needs for reliability, I think more companies should view working with early stage SaaS vendors as a more of innovation in itself. If you draw artificial lines like “company must have $10MM in revenue” or pick your vendors exclusively from Gartner Magic Quadrants, you will be systematically years late in taking advantage of best of breed solutions.

Are there specific metrics, measures or vendor characteristics IT buyers should consider closely? Most “SaaS metrics” aren’t relevant from a procurement perspective, even if the startup would share them (which they won’t and shouldn’t). Basic financial metrics will be held equally close to the vest. Some more relevant measures or diligence points will be contract-specific: average length, discounting, pricing dynamics (as an account scales), billing terms, customer success / support resources, and SLA details. For more qualitative vetting, learn about or even talk to other customers.

Finally, IT buyers should remember: the biggest indicator of future success of a startup is the people involved. An even better indicator, of course, would be product-market fit in which the product is defensible, the problem is growing, and the market is big. But you can’t really know you have this until you’re there. Therefore, the best leading indicator is the quality team steering the ship. This rule holds true even when you’re evaluating SaaS startups as potential vendors. Look for trust and skill, not just in the CEO, but also in the people you’ve dealt with throughout the sales cycle. Look for a customer-first culture and an agile product and engineering team. In exchange for not churning, IT buyers in the era of subscription SaaS should look forward to continual product growth and evolution. So look for product momentum and a roadmap that suits your own needs. The very best teams continuously test and iterate to improve outcomes in all parts of the business, and early customers should be the biggest beneficiaries of this rapid growth and innovation.

If you liked “Evaluating SaaS Startups As Potential Vendors” and want to read more content from the Bowery Capital Team, check out other relevant posts from the Bowery Capital Blog.