In a saturated vendor market, CIOs can choose from Silicon Valley's behemoths or its startups. And as companies across industries experience different pain points provoked by COVID-19 and the recession, willingness to "fail fast" and experiment is at an all-time high.
Even during the economic contraction of the pandemic, 85% of enterprises are "equally or more likely" to partner with startups, according to venture capital firm Sapphire Venture's survey of more than 100 CIOs and IT leaders.
More than three-quarters of respondents said startups played a role in the transition to remote work, particularly for enterprises with more than 50,000 employees.
The CIO role has been reshaped over the last several years, businesses move to a more digital state. But in 2020, the CIO has been one of the most prominent leaders in the pandemic. Their work is a balance between business continuity and competitive advantage.
"What really is the new CIO? The old one had to go build motherboards," Martin Pichinson, co-president of Sherwood Partners, Inc., told CIO Dive last month. "I do not believe a CIO is a person that just fixes a laptop," said Pichinson.
CIOs recognize the challenges of working with startups. Surveyed CIOs stated limited geographical reach, financial viability and unproven track records as hurdles when working with startups.
Still, about 10% of current IT vendor budgets are spent on startups, and it's expected to reach 15% in the next 12 months, according to the report.
CIOs that are inclined to work with startups in the pandemic and a recession are focused on business strategy and supporting a struggling marketplace. The benefits of investing in a startup staring down empty runways is a major incentive for CIOs.
There's "this sense of the greater ability to influence the startup product roadmap," said Shruti Tournatory, VP of Business Development and go-to-market at Sapphire Ventures. "That's something that we actually see a lot of successful startups pitching to CIOs and IT organizations," where they offer customers the opportunity to help direct the future of the product.
Startups, uninhibited by big tech's massive corporate footprint, can quickly respond to customers' requests or input. CIOs can't afford to "set and forget" and new technology, so startups need an established white glove servicing model.
The startups CIOs partner with now could be the next big AI, cybersecurity or infrastructure company that provides a competitive advantage. "The pandemic has created a very interesting atmosphere — it created a troubadour atmosphere. This is where CIOs can be very creative," said Pichinson.
Two-thirds of CIOs and senior IT decision-makers currently invest in AI and ML startups, according to the report. More than half of respondents are investing in augmented reality and next-generation data management startups.
CIOs expect to increase their spend on AI/ML, containers/microservices, and public cloud infrastructure startups by 50% in the next 12 months. More than half of CIOs, 55%, will increase spend on cybersecurity startups in the same time period.
However, while CIOs lead the direction of digital transformation and innovation, CEOs set the budget for 35% of companies, according to data from Tata Consultancy Services.
"We have seen CEOs getting directly involved in making sure that the company has the right culture of ingesting technology from a startup," said Tournatory.
But preparing a company internally for a startup isn't always a challenge. Department heads, from marketing to HR, will find alternative solutions to department-specific issues startups can address. "It will be the CMO saying, 'There's this fantastic customer data infrastructure platform that can change the way we collect insights on our customers,'" said Tournatory.
The more, the merrier
As big tech develops technology comparable to pure play and smaller vendors, it becomes harder for startups to keep pace. "We have pretty much all of our startups that are in categories where a larger player is to replicate what they're doing. It's pretty rare to see a larger player not trying to replicate that," said Tournatory.
The startups that are upholding their own against larger players "have a radically new approach" to managing various IT components, said Tournatory.
VC firms don't want to see startups get complacent. "Eventually you're going to become a bigger player as well. And then it's really going to be all about how much you say, five to 10 steps ahead of that larger company," she said.
Startups play a unique role in enterprise IT. In some cases, smaller vendors can cater to enterprise needs before the larger players can replicate a specific solution or acquire the startup that mastered it first.
"These sorts of acquisitions in the enterprise technology space can reduce the diversity of offerings available and curtail competition at scale," Blair Hanley Frank, principal analyst at ISG, told CIO Dive last month. The type of consolidation flirts with a marketplace less welcoming to newcomers.
CIOs, despite the all-in-one abilities of big tech, don't have a huge appetite for consolidation. More than three-quarters of CIOs expect to increase or maintain their number of vendors, according to the report.
This isn't to say that CIOs don't favor convenience; there's a reason big tech's bundling models are so successful. Companies appreciate the one-stop-shop advantage of relying on a single provider for a multitude of services. Just as multicloud strategies prevail as dominant and preferred, a diversity of vendors has its own benefits.
But the economics of maintaining a partnership with a startup when big tech can offer a cheaper solution is sometimes hard to beat. "Major technology firms usually have more sophisticated go-to-market operations that can better support enterprises with specific expectations around contract terms, compliance, and so on," said Frank. Those operations aren't something startups can always afford to maintain.