[Note: This blog post was inspired by Jim Polleck, who runs a Tech Incubator in Boulder, Co and Brad Mazurek who were both kind enough to leave comments on the last NDA post I did. Thank you for stopping by and contributing to the dialog.]
In very (VERY) broad terms, there are two types of 'plans' that can walk into an investor's office.
This is the business opportunity with secret sauce. RIM, MusicIP (my company), etc. The company has some IP or amazingly great code or something that is very very special which 'the bet' if you will is tied to. This is a very very broad categorization.
This is a business opportunity where (again broad terms) somebody goes, jezz, why can't we just [fill in the blank]. Flickr, nothing special, just first, cool, viral, tons of customers, etc. YouTube, same thing, brilliant viral execution play on sharing videos. Google? Secret Sauce play. b5 Media, execution play.
The Secret Sauce NDA issue is mostly as I described in my other post. You shouldn't to ask until way way down the path, etc.
But what happens when the idea just pops into your head and there is no secret sauce or black box?
Let's say while at the airport you figure out a brilliant way to check in people/process bags that cuts the airline costs by 30%. You can make money on a per passenger basis and it is all process. And its brilliant. Once you have this business, there are three other things you can immediately offer on top. And the switching costs for the airline are reasonably high. It is all about execution. Its a cool outsourced system that the airlines will sign up for. In fact Air Canada says, we're in, totally, let's give it a go.
You need money to rollout this trial but you are very worried about telling people about the system/process because they will go "DOH!" why didn't I think of that and go run to do it.
So, you want people you talk with to sign an NDA and of course, the investor world says, yowsa, no can do for all the reasons we've previously mentioned. There are some pieces of advice I can offer up.
- Avoid using the term NDA and go for a confidentiality agreement. Simply ask for whomever to agree that the information shared is confidential. There is a big difference between the NDAs flying around and very simple one paragraph (or two) that says, I acknowledge you are sharing your company's confidential information with me and I promise that we will keep it confidential and not share it without your permission.
- File a disclosure document for a process patent. You never have to actually do the whole filing, this just records the date of your process idea and sets some kind of timeframe around it.
- Keep good records of who you are meeting with so that, in case it does happen, you've got a record of who you talked to, when, where, along with your notes. This, again, helps establish you were pretty careful with laying something out.
Dirty little secret bonus: We're busy/lazy. Today I had 9 no harm/no foul meetings, three conference calls with portfolio companies and had 7 skype windows open with people from various portfolio companies. I don't have the time or energy to take an idea and package it up with your passion, your knowledge, your insight, etc, and get it to somebody else that I would then fund. And I'm now at the airport waiting for a flight. It's too much work to steal with other opportunities coming in every day.
Here is what typically happens. Three VCs meet up for lunch. That's how many it takes to order the light bulb, add another 6 for changing it.
VC3: 'Sup folks. (nobody on Bay Street/Wall Street/Sand Hill Rd actually says that but it's my blog)
VC1: I met up with this smart lady who figured out how to speed up the process at the airport, reduce the costs for the airlines, get back on a per passenger, etc. It was pretty interesting.
VC2: Yeah, that was Leigh Smartowski, right?
VC1: Yeah, really smart. Has a really smart CTO.
VC1: Mostly execution play, you think?
VC2: Yeah, that what we think but, dunno, might be worth digging into a bit.
VC3: Deep Dish or Thin Crust.
[Note: VC3 was played by Michael Hollend of Edgestone Capital Partners.]
Rarely (the odds are in your favor) will it turn into great idea, goofballs, lets go get so -n- so to do/steal this idea. What might happen is you will get introduced to this so -n- so but that's about it.
Finally, as Jim said in his previous comments, at certain point, welcome to the world of trust and (in my opinion) the odds. If you are working with a good firm, trust should be there (easy to check) and the odds are in your favor that you won't get screwed.