March 14, 2005
Confidences
Posted by Gordon Smith

When I meet people with the-next-great-idea, one of the things they almost always ask is whether they can get funding commitments before disclosing the idea. Techdirt is pooh-poohing an article in the Boston Globe encouraging entrepreneur paranoia. How are entrepreneurs protected if they disclose? VC reputation, of course. And if you believe that ...

Here is the basic problem: VCs don't like to sign confidentiality agreements because they hear lots of ideas from lots of entrepreneurs, and they do not want to be hauled into court everytime they finance a company that bears a passing resemblance to an idea that was pitched to them once upon a time. This makes sense, and as long as they have the money, entrepreneurs had better get used to it.

Although VCs usually have no interest in stealing ideas -- they are, after all, in the business of investing in ideas -- suggesting that VCs never steal ideas because they are concerned about their reputations, well, that's just naive. The constraining force of reputation simply is not that strong.

VC Jeff Nolan has a more reasoned explanation for entrepreneurs: "Entrepreneurs only hurt themselves when they start telling VCs that they can't disclose information. What entrepreneurs should do is understand what a VC is invested in before you take the first meeting; if the investor is already invested in a competitor then you know what context potential questions are in and how to frame your answers." This is sensible advice for entrepreneurs. Recognize potential conflicts, but don't let paranoia get the best of you.

UPDATE: Mike (of the Techdirt post linked above) wrote to clarify his position: "I most certainly wasn't implying that no VCs steal ideas. I think it happens all the time. In fact, I pointed out two examples in that post alone. My point was that (just as Jeff pointed out), it's silly to worry about VCs stealing ideas. While it does happen sometimes, it's not that common, and VCs aren't in the business of stealing ideas, but funding them. If they really do steal ideas all the time, then the reputation card comes into play." Exactly right. As I wrote to Mike in my response, I was  guilty of caricaturing his post because I have heard so many VC's take the more absolute stand ("we would never do that!"). Sorry, Mike.

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