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The Enterprise Strikes Back

There is a resurgence in enterprise purchases of IT products from start-ups.  The WSJ has an article today (subscription required) that describes this.  For those of you without a subscription, here are a couple of highlights:

Big businesses and institutions have always been somewhat hesitant to buy substantial amounts of tech gear from small companies. But they grew even more averse after the dot-com implosion: Many enterprises got left in the lurch after they purchased from small equipment makers such as Caspian Networks Inc. and Procket Networks Inc., onetime successes that went bust in the downturn. As a result, many businesses began shying away from tech start-ups and instead turned to stable suppliers such as Cisco and Alcatel-Lucent.

Now corporate tech managers are once again starting to buy equipment from small networking businesses with little-known names such as Riverbed, Aruba Networks Inc., Isilon Systems Inc. and BigBand Networks Inc. Many of these small firms make products that solve new corporate-technology problems, such as how to most efficiently store new corporate data like video, or how to best improve the transmission of information across networks that have been weighed down by multimedia applications.

While some of the big tech firms also offer similar technology to deal with such issues, tech managers are finding that the start-ups often have more cutting-edge products that are cheaper than the big suppliers' offerings. "The old guard equipment guys are having to think about more than just equipment [and] they're having to think about software and video," says Joe Skorupa, a research analyst with Gartner Inc. "They aren't used to thinking in those terms."

The upshot: a surge in business for many small tech companies, which is contributing to an overall boom in the tech-networking industry. Riverbed, which makes products to speed up corporate networks, saw its 2006 revenue more than triple to $90 million from a year earlier. BigBand Networks, a Redwood City, Calif., firm that increases corporate-network bandwidth, nearly doubled its revenue last year to $176 million. Many of these start-ups have recently staged successful initial public offerings, with Riverbed's stock jumping more than 50% on its first day of trading in September, while Isilon's rose 77% on its debut in December.

Businesses and institutions aren't over all their start-up fears, however. Many are putting their new small suppliers through a far more rigorous inspection process than in the past before deciding whether to buy from them. Among other things, they are consulting industry research firms to vet the start-up's financials and are talking with other customers to see how the start-up responds to problems.

There have been several IPOs of tech companies that made it through the bubble and sell to the enterprise.  With enterprise IT spending on the rise and a general dearth of innovation from many of the big vendors, there certainly are some start-up opportunities.  But, start-ups have to be smart to build trust with enterprise customers and develop cost-effective sales channels.  This usually begins with some sort of OEM partnership with a bigger vendor to get initial sales and establish credibility.

In addition to the types of networking and storage gear that is mentioned in this article, I think that enterprise infrastructure to roll-out and manage wireless applications across a wide area network should become a hot area.  With enterprise profitability strong and ROI from IT roll-outs easier to measure, spending in many of these segments should remain strong.

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