Negotiating with Startups – When There’s No Market Data…

Updated: Aug 14, 2020

Techceleration -- the pace of change in IT which is approaching light speed velocity -- has thrown open the flood gates of innovation, resulting in a deluge of disruptive unicorn vendors. Legacy suppliers are under daily threat from upstarts cracking the old IT model with new SaaS solutions. But what do you do when you have to negotiate with a startup?

This situation prompts clients to call us for pricing and validation. Given the exponential number of emerging IT solutions from unicorn suppliers entering the market, it is not unusual for a client to ask about the value of something unknown to everyone. Us. Them. Even the new startup vendors don’t know how the market will react to their pricing. Clients bring us a product no one has heard of, and a pricing structure that is new, and request a price check for a product on which there is no market data available.

In these (increasingly common) instances, we look to answer the following questions:

1. How long has the company been in business?

2. Is there a well-known investment company backing it, and what’s the valuation?

3. Where is it in the funding cycle?

4. Who’s doing business with this company?

5. What does this product compete against and how is it priced in comparison?

6. Is the product disrupting existing pricing or functionality in the market?

When we can supply satisfactory answers to these questions, we encourage the client to take advantage of the opportunity to work with the startup, because these companies are hungry for business and eager to please. New customers can often deal directly with the CEO and dictate many of the terms of the deal. Early customers from Fortune 1000 enterprises can drive the metrics and help set the agenda at these upstarts; they can ask for price concessions for becoming a reference, or for letting the start-up use its company logo on the website.

Case in Point

One of our clients was recently contacted by Cloudpay, a startup in the HR/Payroll market segment. The company was launched in the late 1990s and offers a SaaS-based managed global payroll solution. It lists a few well-known customers on its website and boasts $82.5M in Series C (late stage) funding.

Cloudpay was offering a comprehensive A-to-Z managed global payroll system that manages everything from RFP to implementation to managed services and compliance, spanning different countries and their respective regulatory requirements. This is a SaaS licensed solution (the new flexible model), as opposed to on-premise (the old staid model) like much of the competition.

Because the HR/Payroll market is well-established and saturated with such products, it was fairly simple to evaluate Cloudpay’s solution. If the new company can’t beat the incumbent’s price, there’s little incentive to move to a new solution. The client was currently spending $20M on its solution -- a figure that represents almost a quarter of the startup’s funding. This deal would be a significant win.

To determine if and how the client might consider using the startup, we focus on the Leverage Management Maturity Model (LM3), and three specific areas in particular to drive them to offer their best possible deal:

  • Supplier Knowledge – This is a young company that is highly motivated to land such a big deal.

  • Deal Option Development – There is an incumbent solution that already handles these tasks, and the client does not necessarily wish to manage another relationship, another contract, and learn another new system.

  • Message Development for use by the client – “We have an incumbent solution provider with an established price. There are several other service providers out there that have the scale to provide comprehensive functionality. We’re not sure we want to take the time and risk to work with a new unproven supplier.”

We like to remind our clients that upstarts compete with many of their most entrenched incumbents, and as an IT deal leader, it behooves them to look at Slack when approaching a Microsoft Teams renewal, at Anaplan before an Oracle Hyperion renewal, and at Moogsoft before an IBM Tivoli engagement. Nine times out of ten, the upstart is offers better functionality and lower costs, and there’s real opportunity here to reduce the run rate with the legacy suppliers.

In the Cloudpay example, we urged the client to use the vetted startup as leverage in negotiations with incumbents, and in so doing, elevate their role in the organization by changing the dynamic in these longstanding vendor relationships. Not only do startups serve as game-changers in technology, they also provide fresh opportunity for deal makers to break the cycle of incumbency, free up legacy spending, and move from the old IT model to the new.

During the pre-IPO stage, the customer is king. Once the start-up gains traction, the company establishes credibility from Wall Street investors and bigger, acquisition-minded vendors, and will become less beholden to the customer.

Sean Sweeney is a Managing Director and Eugene Cho is a Senior Analyst at ClearEdge. They share a passion for disruptive technology.

This blog post was inspired by the webinar Maximizing Value with Startups & Niche Vendors. You can access the full recording to this webinar below. To learn more about this subject, download our whitepaper or contact your ClearEdge representative.