Aly Song/Reuters
- CIOs will allocate more of their budgets to startups in the next 12 months, underscoring the growing importance of entrepreneurial firms in
enterprise IT, according to a study by Sapphire Ventures, formerly SAP's venture arm. - CIOs generally view startups as producing better, innovative products faster than traditional enterprise tech vendors.
- But CIOs generally prefer to work with later-stage, mature startups, particularly those that have already gone through at least a Series D round.
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Here's good news for entrepreneurs: CIOs love startups and are looking to spend bigger chunks of their budgets on them. But here's the catch: CIOs prefer startups that have moved past taking baby steps in their journey, and are already showing signs of being around for a long while to come.
CIOs, or chief information officers, who make key decisions on how to spend corporate IT budgets, plan to allocate more dollars in the next 12 months to startups, Sapphire Ventures said in a report to be released this week.
But CIOs are drawn more to later-stage startups that have achieved some level of scale, and have done at least a Series D round of venture capital funding, the SAP spinout VC firm's study said.
Still, CIOs generally have an upbeat view of the startup world. They see startups doing a better job in developing new technologies that CIOs consider critical in adapting to a fast-changing enterprise tech market, said Shruti Tournatory, Sapphire Ventures' vice president for business development.
Startups are faster and more agile.
"[Startups] have faster pace of product delivery and making good on product delivery promises," Shruti Tournatory, Sapphire Ventures' vice president for business development, told Business Insider.
In other words, Tournatory says, the world sometimes moves too fast for even (or especially) the largest tech providers to keep up. Startups can provide the right tool, at the right time, without any baggage.
"They have more agile product roadmaps. We believe these essentially reflect the CIOs' desire for speed. It's about agility and speed. Very often, some of the larger players really can't provide that agility, so a lot of CIOs who are under pressure from their boards to out-innovate their peers turn to startups."
The study was based on a survey of 72 CIOs or senior IT decision makers at companies with more than 5,000 employees globally. Majority companies had at least 25,000 employees, and about one-third had annual revenue of $50 billion or more.
Most of the CIOs plan to boost spending on startup products and services from 10% to 15% in the coming 12 months, the report found. Most are intensely interested in hot tech trends and concerns, such as by AI and machine learning, cybersecurity, data management, blockchain, augmented reality and the Internet of Things.
In fact, when it comes to newer trends, CIOs appeared to be more impressed with startups than established vendors. One example is artificial intelligence, where 67% of the CIOs said they prefer to invest in a startup than an established vendor.
It's a different story when it comes to more mature technologies where CIOs still generally turn to traditional vendors, the report found.
In public cloud infrastructure, for example - where titans like Amazon Web Services and Microsoft Azure dominate - only 19% were likely to invest in startups, while 50% preferred traditional vendors. In cybersecurity, only 25% were drawn to startups compared to 63% who said they were more likely to invest in traditional vendors.
More than half of CIOs said they prefer later-stage startups
The key is the maturity of the startup, the report found.
Most of the CIOs also "prefer to engage with more established startups," the report said. More than half, or 53%, said they would rather work with startups that had done through at least a Series D venture funding round. Only 7% were open to working with a seed stage or early stage or Series A startup.
Most CIOs are looking for startups that already have achieved a certain level of growth, Shruti said. "It is typically at that later stage that frankly startups can provide global enterprises scale and support."
CIOs pointed to the "lack of global capabilities and ability to scale their technology" as the most serious challenges for any startup, the report said.
Having a meaningful international presence is key, said Sudheesh Nair, CEO of ThoughtSpot, an AI-powered data visualization startup backed by Sapphire Ventures and Lightspeed. "If you're a young company and you are just US-focused, it's going to be very difficult," he told Business Insider.
ThoughtSpot, which has raised $248 million and is now valued at $1.95 billion, gained more momentum by expanding internationally and establishing a solid track record with key customers, he said.
Many Silicon Valley startups "do a good job on the technology differentiation but they don't make the customer understand that you can trust us and we are going to support you like the big companies help them," Nair told Business Insider.
Then there are the typical scenarios a big customer must consider in working with younger startups, he added: "They might run out of money and go out of business, or they get acquired and get killed."
There are exceptions, and some early stage startups manage the draw the attention of CIOs and big corporations, said Rami Branitzky, Sapphire Ventures' managing director. Some major companies are more willing to take risks and work with early stage startups focused on new technologies, especially in critical areas such as cybersecurity.
"A few CIOs have told us, 'Look, when it comes to cybersecurity, I want to see the latest and greatest and I need to be on the cutting edge and I need to be aware of what's out there," he told Business Insider.
The cloud allows CIOs to explore what startups have to offer
In many ways, the cloud made it easier for CIOs to explore new tools and systems, he said. The cloud allowed businesses to set up and run networks on web-based platforms - letting them scale back, if not abandon, private data centers.
"The cloud enabled CIOs to be more daring in terms of exploring different things because the speed by which you can explore is vastly faster," and you can do so at lower cost, Branitzky said. In the past, trying out a startup's offering meant spending weeks at a private data center to implement and test a product.
"Today, you can do it from anywhere in the world and you do it with a click of a button so to speak so you don't need access to the back office or the backbone of the customer," he said. "You can do it in a safe environment. You need some permissioning that they give you and off you go."
Got a tip about Sapphire Ventures, SAP or another tech company? Contact this reporter via email at bpimentel@businessinsider.com, message him on Twitter @benpimentel. You can also contact Business Insider securely via SecureDrop.