Although we’re in a period of economic uncertainty, I come bearing good news: All signs point to IT spending going up in 2023. By all rights, that should be outstanding tidings for startups. It’s not all rosy, however, because in times of turbulence, startups really have to prove their worth.
Companies recognize that they must keep one eye on the future and that innovation tends to happen at new companies, not those supposedly trusty older ones. Sure, the tried and true may have solid balance sheets, but they also perhaps stagnated in the idea department sometime around 2012.
CIOs need to balance established players with startups as they set their IT budgets for next year. Startups building essential services in an innovative way should have fewer worries.
“Lots of strategic CIOs have used the combination of remote work and the downturn to modernize their stack and replace legacy systems with more modern solutions.” Casey Aylward, partner, Accel
Execs clearly want to invest in your startup’s innovation, but they are wary, especially in times like these, of putting all their eggs in your startup basket. It’s understandable, so you have to show that you’re in it to win it.
We spoke to a number of CIOs, venture capitalists and analysts to get their perspective on what’s coming for enterprise startups in 2023.
What CIOs are saying
Companies are still looking to technology to help solve their problems in the new year, said Rick Villars, an analyst at IDC. But they need speedy solutions, not those that pay dividends over a several-year cycle. Quick time to value tends to favor startups.
“CIOs will continue to invest in technology as a service, upgrading systems and improving security, but they want to make those investments so that they show a return next year. They need to help them maybe accelerate and upgrade their systems. They have to help meet their cybersecurity requirements, or they help reduce an operating cost or get more value out of their data in 2023 — not in 2024 or 2025,” he said.
That said, CIOs tend to get more conservative amid challenging economic periods when investing in startup products, even though they recognize their value. That means they may avoid utilizing a startup in a critical area while continuing to mix them in when the perceived risk is lower.
Sharon Mandell, CIO at Juniper Networks, likes to work with startups, but in a precarious economy, she said she’s more careful. “While you may shift your strategy because you have this economic uncertainty, for me, with startups, it’s always about how you make sure that while [continuing] to try to use them, you haven’t placed them in a critical function that if they go away, you can’t operate anymore,” she said.
She said having relationships with venture capital firms helps, too, because she can have a conversation about how the startup is doing and what to expect in terms of its financial steadiness.
Josh Goode, CIO at Scan Health Plan, a fast-growing Medicare health insurer, said he is a big supporter of the startup ecosystem, participating on boards of directors and encouraging startups through his work. Still, he remains wary about investing too heavily in startup tech if there is a reasonable alternative with an established company.
“I look at their capabilities and functions and [see] if I can get that from another vendor that may be more stable with similar or comparable capabilities. I’ve been doing that for years, and we’ve been able to keep [early-stage companies] out of our core, really critical business for the most part,” Goode said.
That isn’t always possible if the startup has come up with a unique way of dealing with a core piece of functionality. Finding a new solution to a critical part of the tech stack can be a way to make your business more attractive when the economy has buyers asking tough questions.
Jonathan Lehr, general partner at Work-Bench, an early-stage venture firm in New York City, said that all signs point toward a difficult environment for IT-focused startups. “At a high level, it’s tough out there no matter who you are. We’re starting to see companies miss quarters and sales cycles get drawn out. This is a tough macro economic environment and people are bracing for it to last for 18 to 36 months, depending on who you ask,” Lehr told TechCrunch.
But he also said that not every startup is alike, and their potential success today depends on their products. “I think the key to this discussion, though, will be the relative pain felt by enterprise startups. What I mean by this is that the ‘yet another SaaS productivity tool’ companies are going to get whacked. Most operate in crowded markets (tough to differentiate) and sell to other startups,” he said.
He believes that companies with more essential or highly differentiated services will still get the attention of CIOs and other enterprise buyers in 2023. “While budgets are feeling pressure across the board, from public tech companies to large Wall Street firms, funding is still being allocated to the ‘must have’ projects for the year,” he said.
“The tricky part is understanding for each company what is on that must-have list, since everything else is not going to have a shot at budget. And I’d say that while the list this year is smaller than last year across different tech areas, there’s still meaningful budgets for companies to get after.”
Casey Aylward, a partner at Accel, agreed, saying that if you build the right product, you’ll be part of the budget mix. “There’s still plenty of demand for software infrastructure in areas like developer productivity and security,” she said.
“Lots of strategic CIOs have used the combination of remote work and the downturn to modernize their stack and replace legacy systems with more modern solutions. The two main behaviors we see shifting are consolidation of functionality within existing vendors (versus any significant decrease in spend … yet) and then more propensity to buy versus build since there isn’t as much excess engineering capacity in orgs anymore. These behaviors tend to benefit high-growth startups.”
As Operator Collective founder and CEO Mallun Yen told us earlier this year, it all depends on whether you’re building a “painkiller” or a “vitamin.”
“Companies building painkillers rather than vitamins, especially solutions that are technically hard or tricky to develop, or anticipate fundamental but yet-to-be-mainstream shifts in an industry, are particularly well positioned to weather the macro conditions that are out of their control. Painkillers include products that increase revenue or significantly lower costs in a tangible way,” Yen told me.
How well you do, especially in the first half of 2023, could have a lot to do with what your company does. Startups with differentiated products are going to have a better shot than those that are simply another player in a crowded market.
But the good news is that if you are in the former category, chances are you will get through next year, no matter how the economy turns, and still have decent prospects whenever the economy starts to emerge from the doldrums.