There’s a guest post on Silicon Alley Insider today by Mark Davis, a VC at DFJ Gotham, which does a great job describing why VC’s generally don’t sign non disclosure agreements (NDAs). If you’ve ever been curious about this or if you’re an entrepreneur planning to ask a VC to sign an NDA, you should definitely read this. It can help illuminate the reasons why we don’t sign them, why we’re unlikely to rip off or disseminate someone else’s idea, and how asking can negatively impact first impressions.
As a bit of an aside, I had a post lamenting the lack of east coast tech blogs/media at the start of this year. So it’s great to see “new” media outlets like the Alley Insider in NYC and Xconomy here in the greater Boston area doing well.
But back to NDAs and the value of ideas. It’s true that great ideas can be incredibly powerful. And an entrepreneur’s impulse to ask VCs for an NDA often stems from an implicit feeling that startup ideas in and of themselves are rather valuable. But in the realm of raising venture capital funding, the reality is that ideas in and of themselves are of modest value.
First off, VCs literally never invest in an idea alone. At a bare minimum, VCs may invest in an idea in conjunction with an outstanding management team (the “3 guys and a Powerpoint” scenario) though even that doesn’t happen very often these days. In practice most companies funded by VCs have not only an idea and a management team, but also some existing execution and results. For the consumer internet companies I typically work with that’s often at least a few months of live traffic or user acquisition data, but it could easily be a functional prototype for a medical device startup or a rough FPGA layout for a semiconductor company.
Additionally, if by exposing an idea to the scrutiny of others puts a startup at such great risk then the company probably has few competitive advantages. These could include “hard” intellectual property (IP) like patents or proprietary algorithms, but they can also include “softer” IP like a consumer brand or existing user base or a particularly efficient architecture for a software application. If an idea cannot be wrapped within such competitive advantages or barriers to entry, then it’s difficult for a VC to justify investing millions of dollars in the startup.
Finally, it’s not uncommon for several smart folks to simultaneously converge on a good startup opportunity entirely independent of one another. Evidence would suggest that the person or group who “invents” an idea is by no means certain to produce the most successful startup based on that idea. Just as Facebook didn’t invent the online social network (personally I’d point to SixDegrees or SocialNet in the Web 1.0 era, certainly Friendster in Web 2.0 as precursors), neither did Cisco invent the router nor Google the search engine or even paid search advertising.
Over time I think great ideas do indeed rise above the rest, thanks to the forces of innovation and the competitive marketplace. Thank goodness, since both entrepreneurs and VCs depend on this phenomenon. So be conscientious with whom you discuss ideas and strategy with, but people and execution are more valuable than ideas by themselves.