Generate Significant Value by Contracting With Startups

Procurement's Considerations for contracting with startupsIn 2017, Venture Capital investment in the United States exceeded $70 Billion, injecting cash into innovative, growth-stage companies to build out their engineering, marketing, and sales teams1. These teams are agile in creating incredible new products targeting not only every day consumers, but large-scale enterprises as well.

We take notice as the feisty upstarts begin to grasp market share from the Goliaths of industries; however, with great innovation and swift movement comes risk. While companies seem invincible with record-breaking investment rounds, procurement professionals must examine risks more carefully to avoid negative disruptions. When contracting with startups, three risks should be on your mind: financial risk, cyber security risk, and performance risk.

Financial Risk

Examining the financial risk of a company, whether small or large, is nothing new. We must ensure that suppliers are financially healthy to avoid disadvantageous payment terms, interruption in service/operations, or volatile pricing. But how do we measure the financial health of a private startup? Although we won’t be able to view an income statement, balance sheet, or cash flow statement as we would with a large, publicly-traded company, we can still do our homework to find some clues. By seeking out investment data, utilizing web resources such as Crunchbase or Pitchbook, we can (usually) identify who has invested in the company, and how much has been invested. In addition, sites such as TechCrunch, VentureBeat, and other startup-related news sites consistently release informed, well-written pieces on the performance of startups. By being resourceful and piecing information together, you can form a general understanding of the health of a private company.

Cyber Security Risk

Another key risk to assess as you move forward with a startup is its cyber security measures. You’d be surprised at the risk associated with even large, reputable technology companies, let alone companies that have only been around but a few years. As you should with any technology-related contract, looping in your Cyber Security team early (and often) is the best way to ensure you are not putting company data at risk. If you don’t have access to a dedicated cyber security team, using research tools such as Security Scorecard or BitSight can give you insight into the risks associated with particular companies.

Performance Risk

Startup teams are small and nimble. As they scale, resources are stretched thin and this may result in decreased performance levels. To mitigate performance risks, establish realistic SLAs with the vendor. Work with the company to consistently assess performance and identify actionable improvements to work upon. Ask for transparency and consistent communication surrounding times of anticipated growth. Remember, the startup is constantly learning and iterating based on your feedback; while there may be bumps in the road, they’ll likely fix issues quickly, resulting in a better long-term experience for your organization.

Working with startups can pose significant risk; however, if approached correctly with sophisticated due diligence and transparency, the results may prove to be rewarding. Working on a deal with a growth-stage startup? Contact ProcureAbility to discuss your concerns with one of our professionals today.

Source(s):

1. https://www.cbinsights.com/research/report/venture-capital-q4-2017

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