Thursday, November 10, 2011

Be careful when you partner with startups

There are so many startups launching new products and services every day that it's incredibly tempting to work with them. In many cases, they offer their services for free or at a very low cost in order to get customer feedback and build a user base. In the past, the big problem with startups has been the risk of their going out of business, but that was usually visible long before the companies actually failed--for example, they couldn't find financing, their reference accounts were weak, or they were asking for investments at the same time they were trying to make the sale. Today, however, there's a new trend that magnifies the risk that successful startups will go under, and if you're not careful, they could take your business with them.

In the last two days, "talent acquisitions" have resulted in the closure of two well-regarded web startups. Talent acquisitions happen when startups are acquired, not for their products but for their people. The acquirers tend to be industry giants, such as Google, Facebook, Microsoft or Apple. On Tuesday, Facebook acquired the talent running Strobe, a startup that had built a cross-platform app development system based on HTML5. Facebook didn't acquire the Strobe platform itself, and Strobe (or what was left of it) said that its service would remain available indefinitely in beta. However, with no one working on it, bugs aren't going to be fixed and new features won't be added. In other words, that parrot is definitely dead. There's still a possibility that the Strobe team may sell the software to someone else, but it's very unlikely given that the entire development team is gone. If you were developing your apps using Strobe, you're now faced with finding another development platform, and likely, rewriting your apps to work with that platform.

Today, Google acquired Apture, which offered a plug-in for browsers that enabled pop-up searches for almost every word on webpages, and a JavaScript add-on that allowed multimedia content from many sites, including Wikipedia, Google and YouTube, to be integrated into pop-up windows on blogs. Apture had customers using its service including The Economist, the Financial Times, Reuters, Scientific American and Scribd. Unlike the Facebook-Strobe deal, Google acquired all of Apture, but Google has decided to discontinue the Apture services within the next month, according to TechCrunch. The Apture development team with join the Chrome browser project.

The lesson is that you can no longer use the funding or success of a startup as an indicator that the startup will remain in business. A "successful" startup can be acquired and its services can be shut down or left in limbo by the acquirer. So, what can you do to protect yourself?
  • Be very cautious about building your product or service on top of an API offered by a startup. If anything happens to the startup or API, you may have to go into crisis mode to replace it.
  • Make sure that you have a way to export any data that you don't already have copies of, and keep a local backup.
  • Closely review the terms of service for any startup that you work with. If necessary, you should propose a revision or addendum that gives your company non-exclusive rights to continue using the service or software if the startup, or its acquirer or investors, decide to discontinue it. That may require you to host the service yourself or take possession of the software and source code from an escrow account.
  • If the startup is providing hardware that's essential for your business, you should buy sufficient additional units and/or replacement parts to meet your needs long enough to transition to other hardware.
I'm not suggesting that you shouldn't do business with startups, but you should exercise caution. A good "Plan B" is an essential insurance policy.

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