Thoughts from a recent CIO dinner

One of our advisors for our fund hosted a New York CIO dinner last night.  It was a gathering of 30-40 of some of New York’s leading technology buyers, mostly from the financial services industry.  As a VC, it was quite interesting to hear about the state of technology spending and what is top of mind for many of these players.  Repeatedly I heard about grid computing, security, and service oriented architectures.  It seems to me that all of the Gartner hype put into these technologies years ago are slowly becoming a reality.  As for startups, not many were mentioned, and most of the technology buyers said your best bet was coming in through a larger partner whether it be a Sun, Cisco, HP, or IBM.  In addition, it was quite clear that this was a small community, and like any small community, they all talk with each other and want to know what technologies their peers are using.  So lesson #1 is while it is always hard to land your first financial services customer, remember not to screw it up because if you do everyone will know.  On the other hand if you deliver on your promises and have a great base of early reference customers, it will pay huge dividends. 

During dinner, one of the CIOs reminded me of the difficulty of startups selling into his organization.  First, when you think of IT budgets, you have to remember that about 60% is spent on people, 20% on hardware, and 20% on software.  In the software bucket, much of this money is spent on software maintenance and relationships with existing vendors.  While the remaining small % of spend leaves room for new license spending, only a fraction of that will be even available for early stage companies.  Lesson #2 is that it is important to understand the culture of each financial institution with respect to their reputation of being an early adopter, fast follower, or mainstream player.  For example, someone from Citi told me that if he were a startup he wouldn’t even bother selling into Citi as it takes an incredibly long time and you could die trying.  Ditto on Bank of New York as their business is about settling the trillions of dollars of cash transactions daily.  Nothing innovative they really need to do here except scale and reliability.  BONY gets no points for taking on sexy technology or more risk.  On the other hand, investment banking and trading heavy financial services companies will take a look at new technology to get a leg up on the competition.

Lesson #3, if you sell into a large financial services player, either be well networked, come in through a partner, enter from the bottom up, or go to revenue generating groups with money and buying power.  On the top down approach it is all about having credibility.  No one wants to be the first, especially if your technology doesn’t work.  On the well networked side, get a reputable CIO to believe in you and your service, get them your board or advisory board, and have them make a few calls their technology friends to open up some doors. With respect to working with partners this can be many times more difficult than landing a large customer.  I would not waste your time with a partner unless you have a number of solid customers and can show the partner how they are going to make money and lots of it.  Finally, entering from the bottom up means staying away from the CIO’s office, offering free downloads, for example, where the actual workers can bring software into the enterprise from the worker-bee level.  This takes time but can be doable.  Finally, if you have the right product and reach the right person in the revenue generating departments, not IT, and show them how they are going to differentiate themselves from the competition and make more money with your product and service, you can avoid being put in the IT bucket all together.  What does this mean for me?  I wouldn’t bet the farm on selling to these guys unless you have a team that knows the space cold, is well networked with peers who have budget authority to get the early customers and traction, and unless you are well prepared for long sales cycles.  It is damn hard to break into the clique, but if you do it can be quite rewarding.