Execution Play vs. The Black Box

[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.

Black Box.

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.

Execution Play.

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?

An example:

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.

1. 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. 
2. 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.
3. 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.

Comments

[perry]

Fantastic Post. this was the missing companion piece to your earlier post. thanks for recognizing that and filling us in on execution play scenarios.

I would say that personally i wouldn't fear any re-packing or leaking of an execution play idea, the fear is if any of the VCs, or their pizza-buddies, have portfolio companies that are in the space. I know you should know the VCs portfolios before you meet them, but perhaps its a deal in the pipe that you don't know about.

So lets say these pizza eating VCs have a company that does or is moving into airport security. they meet with these guys, they conference with them often. Is it to be assumed that the VC will not pass on this "obvious once heard" execution idea to their company. If they wouldn't, well kudos to them! but it sounds like a tough thing to do for anyone -- to not help your brood, to not at least infer.

I agree that good VCs are ethical VCs, but the real-world is tricky sometimes when you know too much. Perhaps?

Replace airport security with something more contemporary like the examples you gave -- flickr, youtube, and the overlaps are not that unlikely.

Have you ever been in a situation where you knew something that would have helped your portfolio company but did not disclose or infer to your portfolio company.

Thanks for all your insight.

[ZF]

I agree with Perry that your blogging is extremely helpful.

He has though identified the damaging case, which you didn't address and which can happen.

Specialization makes it quite likely that VC's you're interested in as an entrepreneur are close to other VC's with portfolio investments in or near your own space. As long as the VC you are talking to believes he might make an investment in your company he has an interest in keeping your information to himself. As soon as he decides to pass, however, his interests point in the opposite direction.

[Rick Segal]

Perry/ZF,

Good point(s). First, let's get very granular for you. I have an investment in an ecommerce company called Truition. We have, in Toronto, a thing called speed dating where a whole bunch of companies get time in front of a bunch of VCs. They rotate and sit at tables where we are.

A guy comes up and says, hello, I am from such and such company and we do this really cool thing. In 5 seconds, he gives me the mission statement of Truition. I stop him, say, I am the chair of the Truition Board, I'm wrong guy to talk to. He says, oh, hmm, well, how 'bout those Raptors.

Two weeks later I have a board meeting and the guys put up a chart with competition and this fellow is not on the list. I do NOT say anything for two reasons.

One, erring on the side of caution, for sure. But secondly, he stopped in mid-sentence,knew he had screwed up by not checking out the websites of the VCs in the room and he clearly was not expecting Mr. Potato Head (me) to be sitting there.

If he had said yeah I know, I assume you guys look at everything, rising tides lift all boats, whatever, I would have stopped him anyway, said we don't invest in competitive businesses and gone back to bitching about the raptors. At the board meeting, I would have disclosed the guy came up to me, I stopped him and passed.

Another example. I am on the board of SIRIT technologies which is public. anytime somebody wants to talk to me about an RFID HARDWARE play, I disclose I'm on the board, and ask permission to disclose to the SIRIT board that I've spoken to you. I do that just because, I'd look goofy doing the perp walk. If they don't want me to disclose to SI, I pass and stop the conversation. Note, see the post on sending stuff out blindly.

To the point of helping the Brood, my loyalties rest with the start up types because they drive business. I suspect you will find most VCs will ask permission before passing on anything to another. It's not that hard to be disiplined and if my reputation is trashed because I've got loose lips, that's a bad thing.

Thank you for coming by the ol blog.

[ZF]

Frankly this is more of a difficulty in some places in Europe (*cough* L*nd*n *cough*), where VCs are more likely to have gone to the same school together, belong to the same clubs, etc.

In that situation a VC may know a lot about an investment he passed on, and soon after be asked by someone who is his buddy about a particular market, for investment purposes. The most likely question is about whether X is a fully competitive technology or business model.

Some VCs in this situation will give their friend a heads up about a stealth competitor they were not aware of. I've seen it happen as a way of fostering 'comity' between VC's with an eye on future syndications, and (more shocking than that) I've seen lawyers do it as a way of positioning for future business.

For me personally your blog has done a good job over time persuading me that this isn't something I should worry about with you.

[Rick Segal]

ZF,

Thanks for the kind words and you do make good points.

best,

>R<