Much as I did before, I’m running a live, world-writable spreadsheet of my notes on the pitches from Techstars demo day 2012. Things are just getting started as I write this now and the lineup of companies looks strong. You can follow along in realtime (questions & comments very welcome!) at:
This blog post was originally published in Xconomy, after which I promptly forgot about it and left it to languish in my drafts folder until today.
There is no love like a first time entrepreneur’s love with nondisclosure agreements. They are a romantic dream: secret pacts bonding two economic entities together as one, if only for the transaction. Promises of futures together and sweet nothings exchanged. The Humbled MBA nailed it – newpreneurs love NDAs.
NDAs don’t stop leaks.
Theoretically, a nondisclosure agreement commits the signing parties to… well, not disclose stuff. Practically, it gives you theoretical standing to prevail in a lawsuit where you sue someone for disclosing your secrets.
But that’s a giant stinking load of donkey dung. It’s almost never going to happen that you actually sue someone for disclosing a secret and prevail. It’s just too hard, too complicated, and frankly too easy to lie your way out of getting caught. How are they going to prove they didn’t just think of the idea themselves, or hear it from a different, third party that wasn’t covered by an NDA? Remember that if you have 99 people sign an NDA and 1 person doesn’t, that person can publish your idea in the Wall Street Journal – and to add insult to injury, when they do, the other NDAs all become invalid since they only apply to confidential information.
NDAs: terrorist threats
So forget winning lawsuits. What about threatening lawsuits? Well, you can threaten a lawsuit for any reason, and you can generally file lawsuits for almost any reason. But having an NDA with someone is a very good way to make that threat more annoying. You can file a suit that you have no intention of consummating, and if there’s an NDA in place, they will be forced to take it more seriously – and that’s a pain in the rear. NDAs are a force multiplier in legal blustering. If you like legal blustering, get lots of people to sign NDAs. It’ll make your sound and fury signify a bit more than nothing.
If you’re not the legal threatening type, there’s still some value to an NDA. They don’t know that you’re not a crazy legal Quixote, so they might think twice before leaking. Maybe. But I find deceptive folk make a habit of being deceptive, and honorable folk respect these things with or without paperwork, so I don’t see a terribly great amount of benefit to it.
When NDAs get signed
There’s one and only one reason that NDAs get signed: when one side or both have a great deal of leverage in the negotiation. You see, whichever side makes a commitment not to disclose is basically opening themselves to NDA terrorism. Usually NDAs are exchanged before real value trades hands. Why would someone take on that significant liability for no benefit? Generally, because the other side has something they want. Let me give some examples.
Company talking to a potential service provider, contractor, or employee
Someone approaches your startup and wants you to pay them money. You think you can best evaluate their capabilities by sharing Secret Sauce with them, so ask them to sign an NDA. They almost certainly will. That’s because you have the money, and with money comes leverage.
Company talking to an investor
Fundraising time! You go talk to an investor, and ask them to sign an NDA. What’s wrong with this picture?
Well, the investor will give you a story about how they hear lots of ideas over and over again, and most ideas aren’t original, so while you might think they misappropriated your great idea they really just came across it separately. And they might resort to platitudes, saying “VCs don’t do that” (which is true, but not a very good argument).
But the bottom line is that they have the money and you don’t. You have no leverage to get them to sign.
Of course, there are always exceptions. If someone of sufficient stature showed up in a VC office and said they had to sign an NDA with a first-born assignment rider in order to look at their pitch deck, they’d be fighting over the pen. It’s all about the leverage.
Two companies talking
You can guess how this works:
- Startup signs Microsoft’s NDA
- Two startups dicker a bit before agreeing on a mutual NDA, or decide to save energy and skip it
- Microsoft and Intel negotiate a master NDA for nine months, and can’t start any individual project without spending three months building out an addendum to cover the specifics of that project.
It’s all about the leverage.
NDAs: the sign-ee’s view
If someone asks me to sign an NDA, I have to assume they fall in to one of three categories.
1. They’re a legal terrorist and see great value to getting me to sign it, so they can abuse me later with frivolous lawsuits if they think I leaked something.
2. They have leverage, and know that they can probably get me to sign it.
3. They’re inexperienced, and don’t realize that absent 1 or 2, it’s probably not worth asking.
#2 is pretty easy to spot, because I’m asking them for money or we’re negotiating a major business agreement. If that’s not the case, then I figure I’m dealing with a terrorist or a novice, and either way I’m going to decline and have second thoughts about working with them.
A special note for visitors to Google and RealNetworks’ campuses
Google wants you to sign an NDA before they let you in, but they do have the courtesy to offer a “decline to sign” button. I always click it and get a funny look from the receptionist, and then nobody else cares. The line I have prepared (just in case) is: “If we need an NDA to have this conversation, please send it over and I’ll have counsel look at it.”
Real wants you to sign an NDA before they let you pee. This is not a dramatic hyperbole to emphasize their vigor in pursuing your signature; it’s the literal truth. Go in to the front desk of their Seattle office and just try to get to the bathroom without signing an NDA. I pulled it off, but it required three security staff, one of whom had to escort me to the men’s room. Fortunately for all involved they opted to stay outside.
In summary, then:
1. If someone is asking you for money, make them sign an NDA. It will make them slightly more scared of leaking information.
2. If you are asking someone for money, don’t ask them to sign an NDA. You will come off looking like an ignoramus or a terrorist.
3. If you’re doing real business with a company, you will probably sign an NDA. If one company’s bigger, you’ll use theirs.
It was a few mint juleps in to the evening when Joe Heitzeberg and I started talking about the common experiences of startuphood. “I just maxed out one of my credit cards”, Joe told me, consulting his iphone nonchalantly at 1 in the morning. “I should get a badge for that.”
We both looked at each other, and the idea for StartupVille was born.
(apologies in advance: the content of this blog post is for startup financing geeks)
I was having drinks with a dozen founders who should know better.
“So YC company valuations are up around $10mm. And some are $20mm+.”
“What!?” I exclaim. “That’s crazy! It’s insanely high. And, wait… I thought YC was using convertible debt for most of their rounds?”
“Yes, they are. They’re doing convertible debt with a $10mm-$20mm cap.”
AARGH. Come on. This is bananas.
When I founded Ontela with my friends Charles and Brian, we were all sick of big companies. There were a lot of things we wanted to do differently, but one of the big ones was to build a company that wasn’t a faceless bureaucracy. (Hindsight: good goal)
A company where everyone was impactful. (Absolutely!)
A company where nobody felt disempowered. (Everyone should be empowered to do their job, for sure!)
A company where everyone was a part of the decision making process. (Wait… everyone should be a part of every decision making process?)
A company where nobody was left out! (Now something has gone dreadfully awry.)
We made one of the classic startup blunders. We confused individual empowerment, which we all wanted, with its precise inverse: decision by committee.
Everyone knows of the mythical elevator pitch. You find yourself in an elevator, rocketing towards the penthouse suite of a downtown office edifice, when you realize that the person standing next to you is a powerful and influential investor. She asks what you do, and you calmly deliver your pitch. Just a sentence or two, properly chosen. The doors open, the conversation continues, the IPO is near at hand.
I’m here to tell you that the elevator is real. While you may not be trapped in a small ascending room, the potent entrepreneur’s life is full of inflection moments: brief opportunities to shift the destiny of your company. And a proper pitch is essential to take advantage of them. But contrary to what you might have heard, the solution isn’t the 60-second elevator pitch. In fact, the elevator pitch is only a simple, basic example of a much more powerful tool: the Pyramid Pitch.
The Pyramid Pitch is based off of a simple and fundamental principle: startups are dictated by randomness and chaos. Sometimes this is obvious, as in the elevator case. Other times the situation appears controlled, for example when you have 5 minutes allocated to speak at a pitch event. But minds wander, distractions beckon, bladders fill… if you don’t grab your audience immediately, you may never get them back.
The Tacocopters are coming. Sure, the original pitch was a clever troll aimed at credulous and impatient fast-food junkies. But the numbers don’t lie – a typical taco weighs less than a pound, and aircraft that can autonomously fly a few dozen ounces of payload to your doorstep are already available for around a thousand bucks. Amazon Prime is cool, and I can’t wait for self-driving delivery cars – but there’s a reason they call a beeline a beeline. Flying autonomous deliverybots are coming. Fast.
Lest you doubt the logistics, the Hong Kong based hobbyshop of wonderment, Hobbyking, recently sponsored a contest called “Beerlift 2012″. While the contestants mostly used water as a standin for the bubbly, the winner, Romanian pilot Muresan Alexandru Camil, lifted over a hundred pounds of liquid – meaning that deliveries of entire beer kegs are not out of the question. While his massive octocopter looks like quite an endeavor, American David Ditch lifted a respectable 50 lbs with a 2-foot-square quadcopter – enough for quite a few Taco Bell Doritos Locos to your door. 279 of them, if you’re counting.
I was fortunate enough to be invited to check out the 70+ companies of the current YCombinator batch. With that many companies to keep track of, it helps to take notes! I did this in a public Google Docs spreadsheet, and it turned out to be a lot of fun. A few hundred (at least) people joined in, and there were questions and additions from all over (including some of the YC partners and the companies themselves).
If you want to see what YC was like this year, here’s the spreadsheet (still editable, if you have questions or thoughts). Here’s the original spreadsheet of Ycombinator demo day pitches.
Whenever I’ve been involved in fundraising, I’ve hit a frustrating rejection: “Sorry, but I have an investment that could be competitive.”
As an entrepreneur, this drives me nuts. I always marshal the same counterarguments:
- I know what they’re doing, and we’re COMPLETELY DIFFERENT!
- Let’s have an initial conversation. I won’t disclose any ‘secret sauce’, and you can be better informed and decide whether or not there’s a real conflict.
- I don’t mind if you invest in both companies. I trust you to keep information confidential.
I didn’t actually grok what was going on until I sat on the other side, looking at investments. Now I understand the problems with each of these, and the real, underlying problem that I missed completely.
It’s been seven years since I started my first company. My successes over that course have had a great deal to do with the generosity and wisdom of the startup community, particularly in Seattle – countless meetings, meetups, blog posts, backchannels, and a mind boggling number of cups of coffee. Since the very beginning, I’ve been thinking about the question in the title – what’s the best way for me to pay it forward, and really help the startup community?
I’ve always known that the greatest way to help startups is by building a great startup. Success breeds success, injecting talent and cash in to the ecosystem. It rejuvenates the optimism and bank accounts of investors and startup employees alike. It begets positive press, which begets optimism. It demonstrates to people that success is possible, and shows them a way to achieve it.
But I wanted to help more. For karmic reasons – to pay back the people who helped me – and for selfish reasons, in that I love helping companies succeed. It’s just incredibly, deeply, personally rewarding. So each week I average about five to ten meetings with startup founders or executives, and usually do one speaking engagement for a large group as well. But how to make the most of that time?
Here are the principles I’ve found so far when trying to help startups.
Lots of People
Try to find opportunities to help as many companies as possible, at once. Like mentoring for great organizations (I love Techstars and Founders’ Institute). There’s an opportunity to help a lot of companies at once. Further, you get to have a bunch of short conversations to get an idea of what they’re up to, and dive deep with a few companies that are a great fit.
Help Companies That Help Themselves
The greatest impact on the startup ecosystem is helping companies that have already demonstrated commitment and traction. If someone’s working a day job and wants advice “about startups”, that conversation is less likely to result in a successful company. By comparison, in a conversation with someone who’s committed fulltime and trying to add a cofounder, or negotiating terms with an angel, or stuck on their B-round financing there’s a real opportunity to make a difference at a powerful inflection point. The further down the funnel the startup is, the lower the chance that good advice will be rendered moot by one of the many random quirks that strike down entrepreneurs, sending them back to the clutches of Big Companies.
Being short and blunt sucks. It’s uncomfortable to skip small talk. But when a startup needs help and time is constrained, talking about a founders’ kids or hobbies is time that either comes out of their help, or out of helping someone else. For me, the former is better than the latter, and I schedule most startups for 30 minute meetings. I personally hate the rushed agenda, but it’s usually enough time for me to be able to try to provide some help.
If You’re Not An Expert, Shut Up
I sat next to a guy on a panel who was pontificating to startup founders about qualities to look for in a cofounder. The speaker was a former consultant who mostly invests in real estate and restaurants. WTF. It’s easy to have an opinion, but if there’s no experience behind it, just explain that it’s not an area of expertise and move on to a new topic. I’ve sometimes had to drive this home. “Why are you asking me how to marketing your social network when I’ve never done it before either? Let’s focus on questions I’m actually qualified to answer for you.”
It’s hard to be direct with people you don’t know very well – at least, I find it so. And being direct is just a thin grey line away from being an asshole. But nobody wins if the conversation just goose-steps around, and 30 minutes isn’t enough time to be soft and circumspect. These my three favorite phrases when time is short:
- “How can I help?” This is my favorite phrase. If there’s a succinct answer, everyone benefits.
- “Sorry, but I can’t.” At least one of the things a company asks for are probably not possible. But if the requests are out on the table up front, everyone can focus on the “yes”es instead of the “no”s.
- “Here’s my reaction to what you just said.” Sharing a quick gut-take reaction is crucial to companies that are trying to polish their presentation – after the 25th pitch, details and nuance get ground down. The pitch is an art form, and a tight feedback loop is crucial to improvement.
Help People Help Others
This is the last principle, and a new one. It may not be popular. We’ll see.
As a part of my effort to make a difference in the broadest way possible, I’ve signed a contract with O’Reilly to publish a book about startups. I’m ridiculously excited about this because it’s the ultimate application of the “Lots of people” principle. Part of this book is going to be illustrating problems with stories from real startups. And that’s hard, because most entrepreneurs are pretty tight lipped about what they’re up to.
So from here on out, I’m going to be asking one important thing from companies that want to meet with me to get advice: let me use the contents of our conversations and emails to help other startups by writing about them. If there’s something that must remain confidential – for example, a trade secret, or the name of a sensitive party in a negotiation – that’s fine. But I think the startup community suffers from a little too much secrecy, so I’m going to prioritize helping companies that are willing to ‘pay it forward’ over companies that are not.
So that’s my new thing. Continue to help people, and ask that they allow me to use their situation for my book, so together we can help even more people.
What Do You Think?
I don’t normally solicit comments, but I’d really like to hear reactions to this in the comments below. Am I asking too much, that startups be willing to share with the world? Is there a principle missing? Are there better ways to help?