NDAs, Subtext and Sales

An entrepreneur asked me the following question this weekend, “I’m having a problem with submitting a business plan and been told by some that they wouldn’t sign a confidentiality agreement… how do I submit a business plan without a some confidentiality agreement?” There are lots of blogs, websites and entrepreneurial advice columns that will list all the reason why investors, particularly VCs don’t sign confidentiality agreements or non-disclosure agreements (NDAs), but I’m glad this person asked the question because I’ve always found the answers inadequate.

Most advisers recount that investors receive lots of plans and can’t keep track of all the NDAs. Others are somewhat accusatory, saying of your plan needs an NDA, it must not be a good one. Others, usually by investors themselves trying to put a positive spin on the answer change the focus to affirm the team by saying such things as “we want to back you not just an idea.” While accurate, these responses miss a more basic premise: it’s not the question to ask.

Raising money is a strategic sales process, not just a paperwork exercise initiated by an application. To the contrary, I prefer the term “selling equity,” which emphasizes not only this point but also that the entrepreneur is about to enter into a long-term, co-ownership relationship with a partner. So, the question becomes, “how do I find the best financial partner to join me in building this business?” Starting such conversations with an NDA is either like saying “Hi, I don’t trust you, but…” or, because it is acceptable to use NDAs in detailed diligence on technical items, it’s like asking for a pre-nuptual agreement on the first date…it’s going too fast. If the company’s counsel or other adviser suggests using an NDA as part of this process, here are a few things to consider:

1. Only send your business plan to people or organizations you trust. Would you want to send one to people you don’t trust? And, would people you don’t trust signing an NDA really protect you?
2. Do due diligence on investors to find out not only whom you can trust–a fairly low standard–but more importantly, who is a good fit for your business and strategy.
3. The most likely harm an investor will do to an entrepreneur isn’t to steal their idea–their likely not to be able to execute on it well anyway, and if they could, almost anyone could do it an the business will likely succumb to competition anyway. Rather, it’s to tell other potential investors, “yea, I saw that…I passed.” An NDA won’t protect you from that; the best defense against that it to make the investor so eager to invest that they don’t want to tell anyone about the company lest they lose the deal!

Confidentiality agreements and NDAs certainly have their place in business. They are most appropriate for governing the exchange of information between two parties in the same market, or among people in related businesses such as suppliers and buyers. For organizations in different business, such as operating companies and investors, they carry more problems than they are usually worth except for the most detailed trade secrets, patent applications and similar material that needs legal documentation to maintain its status.

Simply put, investors lack the time, disposition or skills to do what entrepreneurs do. But that doesn’t mean to be injudicious about sending out your business plan and materials. Rather, if you’ve been told by some people that either you should have confidentiality agreements or won’t be able to get them, just say “That’s OK, I don’t need them. I’m talking with people I trust.”

CommonAngels Again in Top 100 VCs… Go Figure

Well, it happened again…CommonAngels made Entrepreneur Magazine’s list of top 100 venture capital firms. This list is by early stage deal count, so you need to ask what exactly does that mean, and is quantity the same as quantity. But that
said, we’ve found it of interest over the past several years that a growing number of these “top” firms are, in fact, angel groups.

Right in the “top 10″ are our sister organizations Band of Angels and Tech Coast Angels, both in California. Of course, there are the classic early stage VCs such as Sequoia and DFJ and many of our friends in the VC community here in Boston. But even the highest numbers on the list are still less than one early stage deal per month. And, there’s double counting. For example, most of our investments either had VC co-investors in the first round or later rounds while the company was still “early stage.”

Bottom line: capital is still scarce, and it’s as important as ever to focus a search for capital on the potential partners who are likely the best fit for your business.