The pitfalls of being a startup

Online startups are on the rise, springing up around the country despite the credit crunch. With ‘Silicon Roundabout' firmly established in London's Shoreditch, there's more support than ever: the new online Dragon's Den, networks like Smarta and Entrepreneur Country, post-boom micro-funds and virtual incubators such as Betaworks and Reincubate.

The startup CIO must operate differently from a typical CIO, and one of his or her first decisions will be around build versus buy. ‘Buy', or rather outsourcing parts of the platform to an agency or partner, can be very appealing to a startup.

‘Fail to prepare, prepare to fail' is often applied to outsourcing, but startup CIOs should heed another mantra: ‘fail fast'. Uncertainty abounds in their operating environment and CIOs should aim to make failures apparent rapidly, and before too much money has been spent. CIOs should also be wary of Stockholm Syndrome, where they find themselves starting to defend inadequate partners from their own businesses.

Outsourcing the right way requires experience, and all the more so for low-budget, time-critical projects. Typical outsourcing best practices are not well suited to startups, and most of the agencies within reach of a startup are more used to working with established businesses. With untested business models, few staff and little time, how can startups create strong, trusting long-term relationships with outsourced partners reliant on their revenue?

Success with an initial business plan is rare, and with many pre-revenue companies changing strategies or products three or more times before they get to market, it is sensible not to commission a project's fixed scope in entirety from the word go. VCs typically expect a successful exit from 10 per cent of investments, and success on the part of the startup will radically, and often unpredictably, change requirements.

Without terms in the contract to change tack, the agency project manager might step back and let the CIO work directly with agency staff. This can break down methodology and muddle specification ownership. Close communication is key, but CIOs should be wary of the risks of their CEO distracting partners with talk of phase two when phase one is still the objective.