One of the questions that entrepreneurs ask me the most is, "When I appro=
ach
a venture capitalist, how can I protect my idea?" Unfortunately, there ar=
e
no easy answers. Many first-time startups try to persuade venture capital
firms to sign a non-disclosure agreement (NDA), a legal document that
prevents outsiders from discussing a company's business plan or its
presentation. But the overwhelming majority of venture capitalists will n=
ot
sign NDAs. In fact, Promod Haque of Norwest Venture Partners says that
entrepreneurs who push NDAs on VCs look "amateurish."
There are reasons why VCs won't sign NDAs. As Tod Francis of Trinity
Ventures told me, if a venture firm signed an NDA for every business plan=
it
accepted, it would have to hire a team of lawyers to track the origin of =
the
ideas that it funded. More important, perhaps, VCs could not invest in
certain deals because they were bound by a loosely worded NDA they had
signed earlier. (I know of one recent high-profile deal in which this
occurred. Not surprisingly, the VC firm in question did not wish to be
identified.) Venture capitalists' agendas differ from entrepreneurs'
interests. VCs and entrepreneurs can learn a lot from each other. If you'=
re
that worried about your intellectual property, consult a lawyer.
Venture capitalists say entrepreneurs should look carefully at a venture
firm's reputation. But it is no secret that even highly respected VCs
sometimes share "hot" business plans with others. Eric Greenberg, chairma=
n
and cofounder of Scient (Nasdaq: SCNT) and cofounder of Viant (Nasdaq:
VIAN), says first-time entrepreneurs are the most vulnerable. "There is a
strong code of trust for entrepreneurs who are known and respected by VCs=
,"
Mr. Greenberg says. "But it is difficult to determine what that code is w=
hen
the VC and the entrepreneur don't know each other."
PROTECT YOURSELF
In order to make sure that a VC firm is not using a startup's business pl=
an
for market research, Mr. Haque recommends that entrepreneurs do their
homework. Entrepreneurs should pore through a VC firm's Web site to
determine if it has a similar investment. If the startup sees no conflict=
s,
it should only send VCs an executive summary, not a full business plan. T=
his
suits most VCs just fine. Stan Fung of Zero Stage Capital says that 95
percent of a company's success is determined by its team anyway, not a
unique product idea. When entrepreneurs first meet with VCs, Mr. Fung
recommends that entrepreneurs ask VCs if they have any similar investment=
s
that may not have been posted on their Web site. Mr. Haque, Mr. Greenberg=
,
and Mr. Fung all recommend that entrepreneurs only discuss their idea in
minimal detail. Startups should be especially careful about leaving
materials behind or providing elaborate detail. "Don't spill your guts," =
Mr.
Haque states.
Mr. Greenberg points out that certain types of businesses are more
defensible than others. In his opinion, service businesses like Scient,
which rely mainly on human capital, are much more difficult to replicate
than product-based businesses, such as networking equipment. Nevertheless=
,
he says entrepreneurs have to accept the fact that they are running a ris=
k
when they bring their idea to a venture capitalist. Many entrepreneurs wi=
ll
end up exposing their ideas to people whom they don't know. But that does=
n't
mean they can't be smart about how they do it.
Tushar J. Mehta
email: [email protected]
voicemail: (206) 405-2335