As VC Funding For Startups Falls, How Can CIOs And Software Developers Hedge Against Risk?

John Boruvka

With funding for venture capital (VC)-funded startups falling sharply at the fourth quarter, enterprise CIOs may be rethinking partnering with startup companies. The recent Wall Street Journal article, CIOs May Reconsider Startup Strategy as VC Funding Falls Sharply, outlines risks that CIOs take when they rely on startups for innovative solutions. Yet, there are ways to mitigate these risks so that CIOs can still tap into innovative new technology solutions from startups.

Currently roughly 25% of CIOs work with startups, according to a 2015 Gartner survey of 2,900 CIOs. If enterprise CIOs are working with startup software developers, they are at risk of those developers not being able to secure the funding they need for their business, and in turn not being able to support the software they sell.

Another risk stated in the article is if the startup that choses to “pivot” or shift their roadmap as they evaluate their business. This may leave enterprise customers stuck without product support for their mission-critical applications. Yet, these risks come at a time where enterprise companies are actively investing in innovation to get access to new technologies that will boost their business.

One of the strategies highlighted in The Wall Street Journal article is to use technology escrow to hedge against the risks inherent with startup software developers. Technology escrow, sometimes called software escrow, is a way of mitigating risk – for both the developer and the licensee – when negotiating a software or technology license. CIOs like this solution because it gives them the rights to the software in case the startup folds, or otherwise fails to support their software product.

With a technology escrow contract, the developer’s software source code is placed in a secure escrow account held by Iron Mountain – a neutral, trusted independent, designated third party. Therefore, if the developer is unable to support the product in the future for reasons specified in the escrow agreement—such as bankruptcy, obsolescence, merger or acquisition—the enterprise CIO will still have access to the source code they need to keep their mission-critical applications up and running.

There are benefits for the startup software developer as well. When selling their software solutions, developers need to put customers at ease and gain their confidence. By proactively offering technology escrow, startup developers can foster confidence and build trust because their customers are assured they are a safe choice. If something does happen to the startup, the customer knows they will still have the safety net of accessing the software source code via the pre-arranged escrow agreement.

Technology escrow also plays a role in helping startup software developers protect their intellectual property (IP) and stay competitive in the marketplace. A specific type of escrow agreement, called an Intellectual Property Development Protection Agreement (IPDPA), lets startups document their IP development with a date and time-stamped record that creates a genealogy of product development and is securely held by Iron Mountain. This audit trail can strengthen the startup’s position in the event of an IP dispute with a business partner or during a merger or acquisition.

In the delicate balance between accessing innovative solutions and managing risks, we encourage CIOs to explore technology escrow as one way to mitigate risk. At the same time, startup software developers would be wise to acknowledge that they can be seen as a risky bet, and take proactive steps to offer technology escrow as a value-added component of their software solutions.

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