Not Talking Technology
Here at August Capital, we often look at some highly technical deals. We've had to assess materials ranging from nanotubes to macromolecules, and processes from reactive etching to crystal growth. On the communications side, we deal with clever network architectures, new encoding algorithms, improved error correction and compression, and high-speed signal processing on a weekly basis. Even in the relatively established field of general computing, there are always new approaches including semantic processing, direct-execution machines, highly-parallel architectures, and distributed query mechanisms. And the list goes on and on... needless to say, a technology-focused venture capitalist quickly accumulates a broad but not-very-deep knowledge base.
Therefore, it's surprising and frustrating when an entrepreneur refuses to go into the details of how their miracle technology works. The reasons often cited are technical ignorance, either on the presenter or presentee's part, a fear of intellectual property theft, a desire to postpone such conversations until one sees if a VC is "serious," or an inability to present complex technical details in a formal and brief encounter. Omitting the technology details is equivalent to not having bothered to present to the serious technology venture investor.
Common excuses and potential workarounds:
"I'm just the CEO, I'm not very technical"
This is one of my least favorite answers, as one would hope that even the business people have a good enough grasp of the technology that they can present it at a high level.
Solution: In any case, always bring the CTO or VP of Engineering to any pitch if your company is based on sophisticated or proprietary technology.
"You wouldn't understand"
If your potential investor is incapable of grasping the technology at a reasonable level, either by experience, analogy, or offline research, then that investor will be incapable of helping you make strategic decisions involving your technology company.
Solution: Find a new VC. Seriously.
"You'll steal my idea"
Firstly, if the idea can be stolen so easily, perhaps it's not worth all that much. Secondly, no reputable VC would do such a thing. Lastly, the vast majority of VCs will only remember the highest-level explanations of what you do, and will be unable to pass on the details -- they see too many deals in too many different areas.
Solution: Make sure the VC does not have competitive investments, before you make the visit. Check out a VCs reputation on "build" vs. "buy" through your local contacts. Ask them not to have their EIRs sit in on the meeting.
"You must sign an NDA"
Unfortunately, this is completely impractical. A good VC will see as many as a dozen companies in a week. Imagine the nightmare of negotiating hundreds of NDAs every year, and then facing the possibility of any paranoid presenter suing you for supposed tech transfer to any other presenter who passed through the halls.
Solution: Most investors have a non-disclosure policy that they will share with you. Ask for your printed materials back after the diligence phase is over. It is legitimate to have technical due-diligence consultants hired by the VC sign an NDA -- they may or may not be able to.
"We'll cover technology after you decide that you're serious"
This is impossible, because the technical details are usually the best possible resume for the technologist. A VC has no choice but to take a technologist's word initially, just given the relative information disparity that results from the technologist's deep focus. However, diving through the details allows the VC to evaluate the technologist's thought processes, critical thinking, problem-solving drive, and general depth of knowledge.
Solution: Cover the technology and focus on your differentiators. We never "get serious" about companies that are too secretive.
"It's too hard to explain"
Try us. The Venture Capital business is one of pattern matching, and there's generally some analogy from another field that may apply. Let's face it -- there are really only about a few dozen basic ideas in computing and communications, and everything else is a combination, an implementation, or a variation on those ideas.
Solution: Use analogies at a high-level, and the whiteboard for the low-level. Pay attention to body language and make sure that the investor is keeping up. Oh, and define your terms.
"I don't understand it myself"
Solution: Consider a career in law. Or politics.
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If the idea alone was really that valuable, then it wouldn't take years to turn the idea into a successful product. The devil is in the details. Read More
This is so true. I find that companies that cannot or are not willing to explain their technology to potential investors seem to struggle when it comes time to explain their technology to customers, partners, and analysts. Management needs to have at least a talking-level understanding of the technology and non-technical CEOs should always bring a technical lead for any important meeting.
Well said. It goes doubly for very early stage ventures. If you're still in tech development, and can't or won't talk specifically about it, what are we to conclude? Usually we conclude to spend our time on something else.
One related point for entrepreneurs: Know your audience. Most funds have decent partner profiles on their websites, and ten minutes with Google will find out more about their sordid backgrounds. If someone walks in and (for example) starts giving me baby talk about database technology, I know instantly he hasn't bothered to do his homework. Strike one....
"You'll steal my idea" is a big one that no VC (that I know of) effectively deals with. And, actually the fear is not "you'll steal" as you'll disclose it to someone else who'll get a competitive advantage over me from knowing it.
I first dealt with this a bunch of years ago in an entrepeneurship class with a VC panel. The students' first question was this, to which the VCs answered, essentially, our reputations are too important for us to ever do that. Then towards the end of the class a student asked about when to present to VCs and the VCs all agreed that presenting an immature idea was the equivalent of idea-suicide because the VC community is close-knit and word of the immature plan would quickly get around. It was not until the follow-on question pointed out the contradiction that it became clear to the panel.
You offer three reasons not to worry about this. The first and third ("if it's so easy to steal..." and "we won't remember") can't be serious. If I am giving you a presentation of my core technology, and as you say, it is a breakthrough that will be the basis of my business and omitting a description of it would be the equivalent of not presenting at all, then I expect two things are true. 1) It is important enough to steal. 2) You'll remember it. If you aren't going to remember the details, why should I present them?
The second reason presented "no reputable VC would do such a thing" is belied by your answer regarding NDAs. If there is no chance that you would disclose my technology, then what are you worried about?
If you won't spend the fifteen minutes to an hour of your time (or your lawyer's time) get an NDA done, then how am I to expect you to devote significantly more time to negotiating a term sheet or paying attention to my business. You'll pay attention to the term sheet because it is where you establish your upside, but the NDA is nothing but downside (for you). And therein lies the rub. If "no reputable VC would do such a thing" then put it in writing.
Finally, as to why NDAs are impractical, I don't buy your two reasons ("negotiating hundreds of NDAs is impractical" and "possibility of any paranoid presenter suing"). As I mentioned, if you won't take the time to negotiate an NDA, what kind of VC will you be. Also, I assume that once you have invested you (or the company) will take the time to negotiate NDAs with potential business partners -- why are VCs so special? And, on the possibility of lawsuit, are you saying that there isn't a possibility of one if you don't sign the NDA? Is that what your "disclosure policy" states? I give you my ideas and have no recourse to sue no matter what you do? If so, it is no wonder that entrepeneurs won't disclose their secrets...
I'm sure you have answers to some of these questions and I am looking forward to hearing them.
-Alex
Thanks for a very interesting post!
One question I have re. deals that are not highly technical: When you get pitched for a business model like, e.g., Epinions' one, would you expect the team to dive into the technology as well? I know it's hard to answer in general, but I'd be very grateful for your insights.
Alex,
We're working on a more general piece on why VCs can't sign and negotiate NDAs with every company that they meet. Suffice it to say for the moment that it's impractical. Furthermore, I was serious about the first point - if it's so easy to steal, it's not really proprietary and you have no hope of keeping it proprietary. As always, the best defense is knowledge - checking out the reputation of the VC beforehand.
Best,
Naval
Stefan,
Good question - in the case of a non-technical pitch, one should focus more on the product and demonstrate expertise more through product design choices than through technology innovation. There's little worse than putting fancy labels on and presenting well-understood technology as something new and wondrous.
Naval
Naval, thank you! I was assuming so and my experience at dooyoo (which you might know from your Epinions days) was exactly as you say. In terms of venture capital, Europe and the US are strikingly similar to each other. Stefan
Naval,
Looking forward to reading the longer justification. As I said, I have yet to see one that works but I am open to persuasion.
-Alex