If you’re a brand considering hiring a company that provides social business software or services, you need to ask questions about the vendor’s funding. That advice is what Jeremiah Owyang, an analyst with the Altimeter Group, offers up.
In his blog post, "The State of Funding in Social Business Software", Owyang noted that investors in a software vendor shape the company’s direction “by providing guidance” and access to their network of contacts, among other things. In addition to the features and functions of a vendor’s offering, he said, potential clients need to discern the “root of funding” because it demonstrates the vendor’s financial stability, ability to grow, ongoing strategy and credibility from investors.
How Much? Who?
During the pitch from the vendor, Owyang recommends paying attention “to the slide on funding,” and to ask several questions that will help ascertain the company’s origins -- where it is in its growth and stability and where it’s heading.
One such question -- “how much have you raised and from whom?” Sub-queries in this line of due diligence include asking about other companies in the investors’ portfolio who are related to this vendor’s area. Prospective clients can also follow-up by checking out investors’ websites to determine the success of their track record in enterprise software. If the investors’ background or investing history are in unrelated fields, they may have little or no experience, or connections to offer the vendor in this very competitive field -- thus leaving clients at risk if the company’s quality or lifespan suffers from its bad decisions.
Given that shyness is not a virtue in such vendor interviews, Owyang also suggests that the vendor be queried as to what their most recent round of investment is being used for, how have previous rounds been used, and particularly if the funding has helped the company accelerate its growth at key points. If one doesn't see these “acceleration points,” he said, “raise a red flag,” since it may suggest the funding is being used to support normal operations that should otherwise have been financed out of a regular revenue stream.
Selling the Company?
Other questions could include if the investors advise the company regularly, if the vendor intends to sell the company, and, in the event that not much has been raised, ask why -- is it because investors passed, or because the company had sufficient cash on hand?
Owyang’s posting also looks at the average and total funding amount for the 55 social business companies he surveyed, and some characteristics of the different rounds and terminology used.
The types of vendors he surveyed included ones in social media management systems, social commerce, social integration, gamification, community platforms and social listening.
While Owyang’s advice can be very useful, he makes a large assumption that the company is prepared to accurately reveal all the requested information. In the absence of a legal obligation to do so with a potential client -- even one prepared to make a multimillion dollar commitment -- a social business provider could tailor the facts about their funding to the same degree that they might, for example, tailor the facts in their marketing pitch to make the sale.