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CEO Letter: CIOs See Risks and Rewards in Startup Mania

Are we in a tech bubble? Pundits and market-watchers have been batting that idea around lately, focusing on the poor stock performance of once-dazzling social-media innovators like Facebook, Zynga and Groupon.

Yet while some venture capitalists are growing wary of the tech sector and the unsustainable valuations of certain consumer-focused startups, others, like Marc Andreessen, dismiss those concerns as more of a "tech depression" than a bubble. At an investor conference in mid-December, Andreessen castigated his fellow pundits for their gloomy predictions about longtime enterprise tech leaders (such as HP, where Andreessen serves on the board). Well, good for him. Enterprise tech will never be as glamorous or sexy as consumer tech, but it still makes a pile of money for this industry. In fact, IDC (our sister company) predicts a 5 percent to 7 percent increase in overall tech spending this year.

And Wall Street always follows the money. Witness the venture capital flowing into enterprise-focused startups. Companies like Splunk and Fusion-io have had very successful IPOs for their data indexing and software-defined storage solutions, respectively. Others, like Box, IO, Nimble, GitHub, MapR, Delphix and Cloudera, are raising millions in capital to bring enterprise-class solutions to the CIO market. Most of these companies are focused on the hottest areas of technology--mobile security, data analytics, cloud applications or virtual data centers and networks--and their biggest selling points are based on saving money within IT capital budgets or driving new revenue.

Investing in these cutting-edge technologies could lead to incredible rewards, but they come with incredible risks for CIOs. Your reputation is on the line every time a new product is rolled out to the enterprise.

So how can CIOs take advantage of startup mania without ending up in survival mode? The smartest ones I talk to look deeply into the new company's financial position (of course) but also investigate what percentage of the its revenue goes toward R&D. They talk firsthand to the big reference customers and check into the experience and reputations of the founders. They also inquire about what might happen if one of the industry giants acquires this bright, shiny startup.

I'd love to hear more about how you're working with startups these days. Drop me a line anytime.

Michael Friedenberg is the president and CEO ofCIO magazine's parent company, IDG Enterprise. Email him at mfriedenberg@cio.com.

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