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The odds are getting longer in the game of high-stakes poker that Anthony Howcroft dealt himself into two years ago, when he teamed up with a former colleague to form web services technology company Conexo. That's because innovative young companies, which rely on glowing customer testimonials to cut into the market share of the established heavyweights, are largely being denied the opportunity to prove their technology in these times of tight budgets and buyer fears.

Howcroft and his fellow players are trying to sell software that might be promising but does not have years of track records recommending it. Their problem centres on the role that early buyers, and pilot and reference sites, play in influencing subsequent CIO purchasing decisions. Web services technology is becoming increasingly influential, yet Howcroft cannot find any pilot sites willing to test out the software and provide a customer testimonial.

"Investors and customers are far more risk adverse than they were two years ago," Howcroft says. "Without reference sites we can't get customers or VC backing, so we're likely to go out of business."

Fledgling innovators have always faced problems overcoming the name recognition and financial viability of industry leaders - but it is getting worse. "Bigger organisations in particular are scared you're going to go bust after you've closed the sale," says an executive at a UK software company, who prefers to remain anonymous. "We were bidding for a contract and quoted seven and a half times less than IBM. But the customer still chose them. The buyer said he didn't know whether we'd be around long enough. He even said the price wasn't important because it wasn't his money."

This supplier ran into a long-standing problem for young companies. "Blue-chip organisations – in the UK or elsewhere – have always wanted to do business with blue-chip suppliers, and that will never change," says Peter Foster, who tracks Europe's IT purchasing market at the market researcher company Ovum.

In a final bid to get Conexo to the product launch stage, Howcroft is putting himself on the line. On the advice of several investment bankers, he is calling former colleagues and contacts and trying to persuade six CIOs to give personal recommendations. He is also asking these executives to form an advisory board to vouch for his skills, credibility and acumen. If successful, he thinks that funding will follow; if not, he will admit defeat and "probably go back to working for a well-established software company".

Reference denied
"Getting reference sites has always been hard, but the downturn has definitely made it harder," says Malcolm Duckett, vice president of marketing at the website analytics start-up Speed-trap.

For many small companies, the failure to get an early sale can prove fatal. Equally, VCs are increasingly judging the success of the start-up management not by technology milestones, but simply by progress on the revenue line.

Philip Lay, managing director at Chasm Group, the Silicon Valley strategy consulting firm, notes in his 'viewsletter' Under the Buzz that the best way for a fledgling to stay alive "is to find a few big company-making deals with visible customers who are willing to take a risk on your technology because they believe it can garner for them a real and dramatic competitive advantage."

He offers the example of Commerce One's deal with General Motors in 1999 to build an online e-procurement marketplace. After this, Commerce One emerged as a leader in the segment.

In Europe, much the same was true of content management software vendor Vignette. Its European business took off after Internet bank Egg became its first big European customer and a flagship reference site, says Dana Cuffe, CIO at Egg.

Finding these customers is, of course, not so easy. Lay says that suppliers should seek out buyer companies that have proved themselves willing to be early adopters. "Visionaries tend to leave a trail – there aren't many of them and they usually have a track record," he says.

Cuffe is among five IT directors nominated by Infoconomist magazine as 'CIO Innovators' at the recent UK Technology Partnering and Investment Forum. The others were: Chris Broe of Unilever; Gary Locke of Royal Sun Alliance, Richard Walje of Scottish Power and Mike Elsom of Baltic Exchange.

Veterans of small companies have a warning, however: Small companies should beware of getting dragged into lengthy, and often very expensive, pilot trials. Buyers that are focused on costs and persist in asking about return on investment (RoI) probably won't buy and, if they do, will tie up resources.

In fact, usually they won't even take the software for free. "The ongoing maintenance and support associated with using early software versions is enough to put a customer off, even if the vendor has decided to give the software away for free," says Duckett of Speed-trap. Cuffe at Egg agrees, "There's no such thing as free software, you have to use your own resources to implement it."

Another IT buyer adds: "All of our software is co-hosted by a management company. So we usually turn down free software if it requires extra hardware or management. There are hidden costs."

Why are buyers so reluctant to experiment? One big reason is that most young companies just don't survive – and that means the software is both unsupported and undeveloped, or it is merged with that of a bigger partner. "Unless a vendor has $100 million in cash on its balance sheet, a customer won't consider talking to them, especially if they are buying infrastructure and they need to buy more a year later," says Mike Lynch, CEO of the knowledge management specialist Autonomy.

Sales staff at the larger software suppliers obviously exploit the issue – sometimes with patchy justification. Recent investigations by the US Securities and Exchange Commission have shown that well-established software companies often present little more than a veneer of financial health.

Many end-user organisations try to protect against small company vulnerability. Egg, for example, includes a clause guaranteeing full access to source code in every contract it signs with a small supplier. This may involve putting the code into an 'Escrow account' held by a stable third party.

"The larger the organisation, the more likely they are to insist that the software they have bought is put into an escrow account, because they're concerned the supplier will shut down," says Howcroft of Conexo.

But escrow accounts only give access to code – not the expertise, the support, the development plan, or future releases. Nor do protect against a lack of supplier resources. Against such objections, young suppliers can only argue that their software is sufficiently powerful to overcome such concerns.

Another issue: As corporations streamline their supplier networks, smaller vendors are often perceived as unnecessary sources of software that is already available elsewhere. Corporations often stick with suppliers with the product breadth to meet all IT needs and provide a simpler future integration path. "Procurement departments are trying to cut down the number of suppliers, not increase them. Unless a little company has a distinct product in a must-have niche, they are likely to get passed over," Conexo's Howcroft says.

This was exactly the strategy proffered by US strategist Geoffrey Moore in his book Crossing the Chasm in 1991. His starting point was that the young companies – even those with good products – could not easily win customers or profile because the competitive noise in the market made it virtually impossible for them to 'cross the chasm' and become big enough to survive.

Moore's advice to young companies: find a niche and develop such an overwhelmingly strong competitive position in it that customers simply can't ignore you. Only later, when sales are strong, should a company attack other niches or even go on to become a general-purpose software platform. In speeches, Moore has frequently mocked companies that say, for example, that their target market is 'all blue-chip organisations with sales of over £200 million'.

Other tactics may help. Young companies with officers well-respected in the industry can have ready-made credibility that will influence buying decisions, according to Duckett, who says his experience at Speed-trap demonstrates the effectiveness of existing personal relationships: "I was one of two company founders that built a chunk of a national network for a Dutch bank. The bank was very pleased with our work. In the early days, when we were finding it hard to generate business, I called them to ask if they'd be interested in our new software. They are now a Speed-trap customer."

Piggybacking on an established supplier and putting together a joint proposal with several other small suppliers will also improve the odds. The payment specialist Mobilistics, for example, put together a bid proposal with two other small software vendors to supply a comprehensive system to Egg. "It's important to get hooked into a network," Cuffe says. "Mobilistics came with two other partners, and that's what clinched the deal."

Foster, Ovum's monitor of the European IT purchasing market, also provides a ray of hope to young software companies struggling in Europe's most crowded software market: look across the Channel. "UK CIOs are more conservative than their opposite numbers in Europe, because the UK is dominated by the same software market that operates in the US... infrastructure and business-critical software tends to come from the big suppliers. The small players provide niche software or products tailored to a specific vertical."

This observation supports the advice of many market analysts: Think global but be niche. And, of course, there will always be some that succeed against the odds.