SAN MATEO (07/17/2000) - You're the CTO of a start-up. You've been given a limited budget to launch the next big thing, so how do you get the market data you need to make sure your product or service is a hit? Should you spend precious development dollars on contracts with research groups and analysts?
Your answer may be critical. Not only will the choice your company makes set the direction of your marketing strategies, IT decisions, and choice of vendor relationships, the cost of working with research groups will likely take a big whack out of your budget.
Whether or not partnerships with such research groups as Gartner Group Inc., in Stamford, Conn., or Forrester Research Inc., in Cambridge, Mass., are worth the money depends on who you talk to. Some entrepreneurs and experts say they're extremely useful, others say they're useful in limited ways, and still others say they barely tapped analysts at all when starting their companies, and don't believe they suffered for it.
The consensus seems to be, however, that anyone who decides to hire research groups should use them strategically. Research groups can help you define your strategic goals early, identify market niches, scope out the competition, and generate a buzz about your company. But this extra layer of support comes at a substantial cost. And some say analysts are no substitute for the homegrown expertise you ought to have about your market.
Laying out the landscape
Research groups can offer start-up entrepreneurs a good look at who the competition may be, says S.P. Kothari, professor of accounting at the Massachusetts Institute of Technology's Sloan School of Management.
"Entrepreneurs generally know at a broad level the lay of the land," Kothari says. "They are not total novices. But they are not quite sure they have accounted for all the big players. From that standpoint, reading some industry reports is helpful."
Taking along a couple of those reports when your company is ready to go hunting for venture capital is also helpful, Kothari says. "What you are doing is buying credibility when you go to a place like Forrester or Gartner Group Inc.
... so they [the venture capitalists] feel comfortable when they are parting with several millions of dollars," he says.
But don't count on those reports to do all the work for you when it comes to raising money. Michael Frank, general partner at high-tech venture capital firm Advanced Technology Ventures, in Waltham, Mass., says data from analysts is hardly the most important factor he uses when evaluating companies with investment potential.
"Those research and marketing firms are a secondary data point," Frank says.
"We spend most of our time talking to the companies and the people that are starting the company that we are backing."
Refining your position
Research groups can do a lot of good for a start-up very early in the game by helping young companies focus on positioning and strategy, Frank says.
That's one of the roles analysts have played in getting SilverBack Technologies Inc. off the ground, says Robert Klotz, CTO of SilverBack Technologies, in Billerica, Mass. An MSP (management service provider) that's little more than a year old, the company delivers network, server, and security information on a subscription basis.
"I specifically in my role use them [research groups] as a kind of futures sounding board: This is where I feel the MSP space is going, and I get feedback from them related to those pitches," Klotz says. "It helps me define the future vision of the corporation from a technology standpoint."
SilverBack allocates about $140,000 per year for analyst services and has contracts with several firms, including Current Analysis Inc., in Sterling, Va.
Randy Newell, vice president of product marketing at NeuVis Inc., an e-business solutions provider based in Shelton, Conn., agreed that analysts have been very useful in helping the company define its niche. (NeuVis is also less than a year old.)"They can help us understand where our product sits, where we sit in terms of competitors and really key buyers, and how we are taking advantage of key trends in the marketplace," Newell says.
Good and bad buzz
But there are also drawbacks to the early involvement of analysts and researchers in the development of young companies, Advanced Technology's Frank says. Research groups can create buzz about a start-up company that isn't necessarily good in the long run.
"Consulting and market research firms are helping these companies define markets and be winners in these markets long before they have a product," Frank says.
Frank believes this has caused some of the high-tech stock market inflation.
"They're creating more hype than reality in some cases, and a lot of these companies have been able to go public off this hype," Frank says.
Paying for objectivity?
Obviously, you want your product or service portrayed in the best possible light. But an objective assessment of how your company fits into the overall market for goods and services has value, even if the news isn't all good. You may also want to use analysts to help you choose vendors and partners, so you will want to be sure the information you get on these other businesses is solid and unbiased.
The question of analysts' objectivity is a thorny one, however. After all, these groups are paid tens of thousands -- sometimes millions -- of dollars by companies that they are then supposed to turn around and evaluate in a fair and objective way.
Bill McDermott, president of Gartner, says his company depends on its reputation for independence, and therefore has its own rules to help protect objectivity.
"Gartner prides itself on understanding clients and client issues and opportunities, and giving independent advice, not selling on behalf of any vendors and not doing any implementation work of any client," McDermott says.
Eric Greenberg, an entrepreneur who worked at Gartner in sales and marketing from 1992 to 1995, says he always thought the company hired objective analysts but that it tended to stress in its marketing strategy a fear of being left out in the cold.
"As a matter of course, the reason people buy the research is so they get coverage," Greenberg says. "When I was in sales we used to sell that as a way to get noticed. It's not a need-based sale; it's a fear-based sale. If you don't buy, you won't get noticed."
McDermott says that's not the norm at Gartner and that "if somebody were to do that, that would be grounds for termination."
Greenberg (who stresses that Gartner treated him well) went on to help found two successful Internet businesses: Scient Corp., a San Francisco-based e-business solutions developer; and Viant, a Boston-based company that helps other companies design and grow digital businesses. Currently he co-chairs 12 Entrepreneuring, a new company that will focus on building entrepreneurial start-ups.
Greenberg says he isn't using research. "I'm in the business of innovating and being an entrepreneur," he says. "By definition, that means I'm ahead of the analysts. They analyze what happens, they don't invent the future."
Doing it on your own
Some start-ups opt to do their own research. Pam Kleier, founder and CEO of Louisville, Ky.-based Construction-Zone.com, which focuses on supply-side e-commerce solutions for the construction industry, comes from a marketing background and therefore felt comfortable doing her own market studies.
"We tend to go out and home-grow our own research because our universe is very narrow," Kleier says. Although Kleier believes her company may have hired an analyst to do one very specific piece of research, "we don't contract with any groups," she says.
Kleier doesn't think this has hurt Construction-Zone.com in any way, although she says that "we are more apt to be included in investment banker reports than in analyst reports, and maybe that's because they are more truly objective."
Do the math
For those uncomfortable doing their own corporate research, there may be tangible benefits to hiring somebody else to do it. The cost of contracting with analysts to do market research may be offset by the opportunity cost to a start-up trying to do the research itself, says MIT's Kothari.
"For most entrepreneurs [the opportunity cost] is what they could be doing otherwise, and that is staggering," Kothari says.
There may be intangible benefits as well, says Geoff Bock, a senior consultant at Patricia Seybold Group, in Boston.
"One of the things I'm struck with as I visit organizations is how much [they] are influenced by their own organizational culture," Bock says, adding that good analysts and reports help companies see beyond their own culture to find direction.
Companies can look into less expensive options that are available for non-clients. Some groups, including Gartner, Forrester, and Meta Group Inc., sell their reports online or offline. Forrester offers "Baseline Packages"which can include several reports on a single vertical industry or issue. And Giga Information Group Inc., in Cambridge, Mass., this week announced "eShop," at which nonclients can buy single items and bundled packages online. But in most cases, these pre-packaged deals don't include access to analysts or personalized service, perks that clients typically receive.
In any case, companies should weigh the decision to use a research group carefully. For example, consider how the research fits with your overall strategy, whether the company is ready for feedback, and whether the cost of research on balance is cheaper than the cost of your time in the critical start-up phase.
Finally, be realistic about what analysts can deliver. "They are extremely helpful in giving to the uninitiated an idea of what the landscape is," Kothari says. "But beyond that, if some entrepreneur is looking to get a business idea from that, I think that is too much to expect."
Send comments to Senior Editor Eve Epstein (firstname.lastname@example.org).
How much will it cost me?
When it comes to the bottom line on pricing analyst services, the options can be confusing.
"It's all over the board," says Randy Newell, vice president of product marketing at NeuVis, in Shelton, Conn., a company that builds e-commerce applications including exchanges. "There's no consistency to the pricing structure."
Although he has used analysts extensively and has found it productive, Newell says the pricing structures can be difficult to understand because companies offer services in many different ways.
InfoWorld asked several analyst groups to provide pricing in different ranges that might suit start-ups: $10,000, $20,000, $40,000, and $100,000. But many said their systems didn't fit that model. Some indicated that pricing tends to be designed for an individual customer's needs and warned that reviewing prices between groups would be an "apples-to-oranges" comparison.
Gartner, in Stamford, Conn., refused to provide any detailed pricing information, beyond indicating that it has contracts with companies from $10,000 to $2 million. "We work one-on-one with our customers, so there's no price list," says Carol Wallace, Gartner's vice president of public relations.