Protect yourself when working with big data startups

Partnering with a big data startup is a gamble, so choose well

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The big data investment bandwagon is getting crowded. In August another investment group announced it was launching a new fund targeting big data startups. Called Data Collective, these venture capitalists have already invested in 46 big data-oriented companies with earlier funding.

What makes this fund different than others is that it has engaged equity partners who also have day jobs as data scientists. They evaluate a big data entrepreneur's technology before Data Collective makes its investment. The theory is: who better understands big data market needs than big data practitioners?

It's a compelling notion. But we won't know how it works in reality for a number of years when Data Collective separates its successes from its failures for its investors. And, make no mistake, it will lose some money in big data business failures.

I'm not being pessimistic. Rather, I'm simply being a realist. Venture capitalists always bet on a certain number of losers. According to one Harvard Business Review study, more than half of VC investments fail. (Note: different HBR research put the failure rate between 30-40%.) However, some VCs are better (luckier?) than others and claim failure rates as low as 20%. Still, they always back some losers. That's just a fact.

So, if you're a CIO looking for competitive advantage by applying cutting edge technology to your business from a startup, you're taking a gamble that the entrepreneurial company will be around for years to come. Kim Nash at CIO offers some excellent advice on what to look for when evaluating startup offerings—look for competitive barriers to entry, dig deep into the company's financials, and work closely with the startup.

However, given the distinct possibility that your startup partner will go belly up, here's one more bit of advice: get the source code. (Naturally, I'm assuming the entrepreneur in question is a software or cloud-based business. Hardware is another question.) Before you buy into the startup's product or service, make sure there's a clause in the contract that gives you full rights to the software should the company fail. Most contracts include standard clauses that automatically return your data should the business fail, but they are less explicit when it comes to the product itself.

But access to source code is absolutely essential when a company uses third-party software in critical business processes. It's an insurance policy against the chance that you and the VC made a bad bet. The VC is prepared to lose a certain percentage of his money, but there's no reason a CIO should be forced to play the same percentages. Protect your business. Demand the source.

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