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Technology Escrow

Startups Fail. If you buy or sell software, here’s what you can do.

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Not to be negative, but startups fail. So how do you find a balance between wanting the best solutions, but not wanting the risk of investing in a startup?

Not to be negative, but startups fail. And, it happens even more frequently than you might think. However, startups also have some of the best technology capabilities due to their innovative and competitive solutions. So how do you find a balance between wanting the best solutions, but not wanting the risk of investing in a startup?

This article, 111 of the Biggest, Costliest Startup Failures of All Time published by CB Insights, looks at some of the most well-funded startup companies that ultimately failed or had an undesirable exit – many of them are software companies.

As this article will attest, running out of money, the inability to generate sustainable revenue, or a poor product-marketing fit are all common reasons for failure. It’s easy to be dazzled by a software developer that seems to have just the right product for your needs. But, a company needs more than a great product.

How can you protect your investment in software?

If you license software from a startup, what can you do to make sure your investment is protected?

  1. You should thoroughly vet your software developer. This post from MicroVentures list 7 Metrics in Evaluating Startups, which is a good starting point. We also recommend asking for references and making sure you call them.
  2. When you do move forward, you should safeguard your investment with technology escrow and verification services. That way, if something unexpected happens to your developer, you’ve planned ahead and can mitigate the risks of bankruptcy, obsolescence, mergers or acquisitions.

How can software startups prove themselves?

On the other side of the equation, what happens if you are that new software startup? You have a great product, yet customers may be hesitant to buy from you because you haven’t been in business long enough to prove yourself.

This blog post from Quartz on Why Startups Fail analyzed post-mortems from 200 founders. It explains that “software company founders concluded their problems stemmed from focusing too much on the technical aspects of their products and ignoring what customers actually wanted.”

In addition to creating an excellent product at the right price, with the right promotion and distribution, you need to acknowledge that your customers are genuinely worried about your business failing. If your business is small or doesn’t have a proven track record, there will certainly be doubts. How can you assure your customers that you have what it takes, and they can be confident investing in your software?

Be Proactive

Developers should proactively address their customers’ concerns and can do that by proposing Iron Mountain’s technology escrow and verification services as part of their product offering. This gives customers the peace of mind that if something unexpected happens, they’ll still be OK and will be able to keep their business up and running.

Here’s how Stratus – one of our developer customers – assures its customers. In the words of Stratus’ VP and General Counsel:

“The fact that we have an escrow arrangement with Iron Mountain in many cases enables us to do business with some customers that wouldn’t otherwise do business with us [unless] they were assured that we had the means and the capability to protect our software and make it available to them.” (Read the complete Stratus case study)

If you let your customers know that you’ve got their back – it will go a long way.

Conclusion

For both sides – software licensees and software developers – working with Iron Mountain to set up a technology escrow agreement is a good idea. Yes, some startups fail, but that should not be a reason for eliminating a startup’s software solution from consideration. With the right safeguards in place, both the seller and buyer of software can gain benefits, including assurances that the software source code will still be available in the case of unforeseen circumstances.

Want to learn more?

Read our eBook: A Technology Licensee’s Guide to Technology Escrow

Read our eBook: A Technology Developer’s Guide to Intellectual Property Management

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