14 Reasons Why Start-Up Advisor Technology May or May Not Be Worth the Risk

By Amy McIIwain, President, Financial Social Media on Tuesday, February 28th, 2012

When buying new technology, advisors have the option of buying straight from entrepreneurial start-ups and bypassing what the mature tech conglomerates have to offer.

Some advisors love the innovation and the ability to challenge the status quo. Do you?

With all the acquisitions taking place in the advisor technology field, you may be wondering whether it matters whether you take the risk of dealing with a scrappy start-up or simply go with an established, capital-flush vendor.

After all, in a world where Advent can buy Black Diamond and Envestnet can swallow Tamarac, today's scrappy start-up can become part of a stolid franchise overnight.

And all established companies started out as a twinkle in their creators' eyes.

For example, Advent was a revolutionary idea to investment managers in 1983, when portfolio accounting and performance was a very manual process. Early adopters gained dramatic efficiencies from purchasing this software before competitors.

Any time you make a technology purchase, know who you are dealing with. Here are a few notes to help you vet your vendor:

The Start-Up: Young, hungry, innovative and entrepreneurial. Start-ups usually create the newest, most innovative products, but being at the cutting edge has its cost.

Cutting-edge technology: Buying software from a start-up means you can often be right at the frontier of technology and financial theory.

Pricing: Pricing is often lower here because entrepreneurs need to entice new users to take on some risk of adopting a relatively unknown product. Cash-crunched advisory firms may be able to fully outfit their office with the latest software at a fraction of the cost.

Product Input: Early adopters of new technology often have a “hand” in the business and ultimate shaping of the software. Early adopters are crucial for success of a new piece of software as a start-up needs customer input on what works and what doesn’t.

Upgrades: Start-ups usually have a very flat business structure, meaning there are fewer links in the chain of command to satisfy when adding new features or functionality to a product. This allows for faster and more frequent software updates.

Talent: A start-up can very often acquire top talent due to pie in the sky stock options and other incentives. On the downside, the firm may not be able to offer the salaries and incentives to keep top talent.

Funding: Start-ups usually carry significant capital risk, whether venture-backed or not. Most start-ups take years to become profitable and often relay on multiple rounds of funding. Since many tech companies in the advisory space are started by advisors, the company is often bootstrapped. Always ask how a venture is backed. Are you comfortable knowing a piece of software your paying thousands of dollars for is staying alive on a shoestring budget?

Leadership: Technology start-ups in the RIA world are often led by a frustrated investment or planning practitioner who thinks new software is a better mouse trap. Being a great financial planner or investment manager does not necessarily translate to being able to steer the ship of a technology enterprise. This can often cause high employee turnover, bad business decisions and a bumpy ride for new customers. Find out if the top executives have experience running a business venture.

Acquisition: It is every tech executive’s dream and every client's nightmare to be bought out for tens (or hundreds) of millions by a larger player in the market. This can often lead to product changes or even worse, product discontinuance. A well known case is when Advent bought Techfi and almost immediately stopped supporting the software and ultimately, its users.

Mature company: Stable, cash-flow-positive and tested. Even though going with a major player is often a good decision, there are downfalls.

Stability: Buying software from a mature company means you are buying stable software. You won’t have to mess with the bugs and kinks that often plague start-up software. The software is also most likely to have industry-best features and functionality.

Capital: A mature company will not carry the same capital risk as a start-up. You are less likely to have to worry about someone buying the software and potentially dumping or changing it as well.

Talent: Mature companies are usually flush with talent because they can support high salaries. Support and bug troubleshooting are often down to a science, meaning quicker responses to your problems.

Upgrades: More mature software often has less frequent release cycles. To be fair, this is often because less bugs need to be fixed, but more mature companies also tend to have a hierarchal structure which slows down the pace of releases.

Input: While user input is always important to a company, mature software is less likely to be shaped and molded by a new client’s thoughts and suggestions.

Price: Software that dominates a market usually costs a premium due to perceived superiority. Depending on the size of your firm, you may or may not be able to negotiate a price that is more satisfactory to your liking.

Ultimately, the best type of technology is the one that fits best into your business model most efficiently.

A company with a start-up business model should be vetted more closely, but you might end up with a great new innovative company that turns into a stable, mature one -- and get in on the ground floor.

Josh is the CEO of AdvisorTechTools.com, a leading technology resource for investment advisors. In addition, he is also the Chief Technology Officer of Investor Solutions, an RIA located in Miami, FL.

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