Backing the right horse
As the rate of start-up manufacturers going bust shows no sign of slowing, how can resellers ensure they pick a winner?
With a number of vendors pulling up lame in recent weeks, resellers who fail to back the right horses have never been in more danger of ending up out of pocket.
GrIDsure, Apani Networks and Expand Networks are among those to have seen their investment pulled as the community that backs start-ups becomes less patient and more risk averse.
After GrIDsure failed to meet the growth expectations of its investor, the only humane solution was to appoint a liquidator to put it out of its misery. Its eight patents and trademarks were snapped up by fellow authentication vendor and OEM partner CryptoCard.
Meanwhile, network security vendor Apani was forced to suspend trading last month after its Japanese investor got cold feet. Elsewhere, a court-appointed "special manager" is currently mulling over offers for embattled WAN optimisation vendor Expand Networks after it fell out with its main venture capital backer, Plenus.
And more often than not - just like the punter whose horse falls at the first - it is the resellers and customers who lose out when a vendor hits the financial buffers (scroll down to view our top tips for picking a winner).
James McKee, security manager at GrIDsure partner Qual, said his clients will be forced to foot the bill if they migrate to CryptoCard because GrIDsure's customer base was not included in the deal.
"We put an awful lot of effort into GrIDsure from a marketing point of view," he said.
McKee argued that his recent experiences may prompt his firm to carry out financial due diligence before striking up ties with an emerging vendor.
"It happens to us when we bid for business, so maybe it is something we should do with brand-new vendors," he said.
Jon Busfield, managing director of security VAR Cygnia, said the VAR had been left in the lurch by Apani's problems.
"We had a proof-of-concept that was just about to go ahead and we cannot do it now," he said. "Unfortunately, the product was quite unique so I do not know what we would put in for the customer instead."
Venture capital firms are more likely to leave start-up vendors high and dry in the current climate, said Sandrijn Stead, founder of CView Technologies, which is building a database designed to mitigate the risk in vendor-VAR partnerships.
"They are locking down what they are spending money on and are not so happy to reinvest if the plan has not worked," he said.
"There are multiple variables on which vendors are letting partners down," he said. "They can run out of money or go bust. They can be acquired, and if it is a technology rather than a corporate acquisition, the customer base is not maintained and the reseller loses the time and money they have invested. Or a vendor could decide not to maintain its go-to-market strategy and sell direct or retrench to the US. All have an identical impact [on partners]."
However, Dave Ellis, director of new technology and services at distributor Computerlinks (pictured, right), said recent vendor failures should not discourage resellers from picking up new technologies.
"Now is a great time to go out there with disruptive technologies because there is so much change in the market," he said "It reminds me of the security market 13 or 14 years ago when choosing Check Point was a risk but those that took the risk benefited. It feels like that with cloud now. Yes, there will always be those that go under or get acquired. But those partners who back the right horses and work with a distributor that has a good reputation can de-risk themselves," he said.
Rupert Cook, senior adviser at corporate finance firm Goetz Partners, agreed: "Do not give up on new technologies or else you could miss out on a great opportunity that could make you a great deal of money. It is just about doing your research."
Adam Davison, EMEA vice president of sales at Exinda Networks, urged resellers to invest in emerging technologies that can achieve rapid RoI for customers.
"It is all well and good to have a cool technology that people get excited about," he said.
"What a lot of people miss is understanding the business needs of the customer: what are today's pain points. In today's economic climate, it is really important that any solution that is going to be invested in gives the customer rapid RoI."
Tips to avoid being unseated
1) Do your homework. It is important not only to assess the product, but also the firm's financial credentials, advises Cook at Goetz Partners. "The majority of companies that go bust are run by first-time entrepreneurs," he says. "I have done a lot of commercial due diligence and it is important to ask what funding they have had, what they have left and what they plan to use it for, to get an idea of how long it is before they run out." Stead at CView agrees: "Look at the management team, its financial backing, its business plan and the other partners."
2) Say no to "nice-to-have" products. Forgo whizzy technologies in favour of more mundane ones that can demonstrate RoI, advises Cook. "It is about separating must-have from nice-to-have technology. Ask yourself what IT managers have to buy now and what is not essential if there is a budget squeeze."
3) Let distribution take the strain. VADs can provide a financial buffer between the vendor and the VAR. "Distributors normally have 30-day terms and their own terms extend beyond that so no one gets burned," says Stead. "Distributors also hear about lots of new technologies and will choose the best ones. No one will approach Wick Hill unless they have £100,000 to spend so that mitigates a lot of the financial and stability risks we are seeing with the vendors."
4) Dip your toe in first. Making a huge upfront investment in demo equipment and training is not advisable. Stead says VARs should consider joining the vendor's affiliate or referral programme until the partnership has demonstrated RoI.
5) Focus on the professional services engagement. Chris Batten, managing director of IT recruitment firm Acumin, says: "To mitigate risk, acquire products with a large back-end professional services engagement, such as identity and access management. If there is at least a 50-50 split between product and services, you can replace the technology if the vendor goes bust."