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How to Approach Venture Capital Firms?
dev asks: "A friend of mine has designed a device (yes, it runs Linux) which fills a gap in a certain market. A prototype is nearly ready, and he asks himself how to approach a Venture Capital firm or a partner firm the right way. He is really paranoid that someone could rip him off, or could steal his design, and he would like to know what he should look for and how secret he can keep his device, i.e. talking to a firm without telling too much." I'm hoping some of you out there who have some experience with this are willing to give some good advice.
Rule #1: The first thing to remember with VC first is that they have no interest in technology, per se.
;-)
The biggest mistake that most people make is that they think "wiz-bang" is the way to sell to VCs.
VCs are more interested in the "business plan" or how a company can take your wiz-bang device and
make a jillion dollars from it in the shortest amount of time. Remember VCs fund businesses,
they do not fund technology (so called "incubator" companies have been started to fund technology)...
If you can't answer how you are going to make money, they are usually not interested (although
they might appear to be intersted in the wiz-bang nature of your technology, no VC wallets or checks
will come out based on a wiz-bang invention).
So, if you're not business inclined and can't write a business plan what should you do? Well
the best thing to do is find someone you know that is and get them to sign an NDA, create a plan
together. VCs like it when the tech and the biz parts come in the same package and they don't have
to put it together.
If you don't want to do that, at least have a rough idea of how your device will change the
world without (I repeat without) going into technical details. If you have to say something
technical to get your point across, there is very little chance it will change the world. VC firms
rarely do small deals under $10mil that don't have $1000mil potential.
Chances are you won't get an audience with a VC w/o a business plan. But, if by stroke of luck you
get in, it is quite likely that the VC has seen 100's of business plans for a wiz-bang device just
like yours (otherwize they won't call you at all). Although you might think your idea is original,
chances are it isn't.
But all is not lost, if they are interested but you don't have a track record, they will want to
either hook you up with some other people that they are trying to get off the ground or who can
at least evaluate your technology relative to the 100s of other people who are doing similar things.
Getting to this stage is a good thing.
Rule #2: Before you go to a VC firm, do your homework!
Although VCs are necessarily technical, most have probably seen all sorts of inventions that you
have not seen (and you probably thought were impossible or impractical). Although you might
have some technical expertise on your side, they have the empirical evidence. Don't underestimate
the value of empirical evidence over technical savvy. You aren't the smartest fish in the sea...
I've heard lots of stories about people who think their stuff was better than sliced bread only to
have a VC tell them that they've seen something better for 1/2 the cost and, oh yeah, we funded
it last year and it'll be on the market next week. What did you say your name was again?
We'll be in touch...
However, VC funding is not impossible, but be prepared to answer a lot of business oriented
questions because that's all they are interested in. Sometimes VC can hook you up with people
to figure this stuff out, but more commonly, they would rather such companies be funded by what are
called "incubator" companies until the business stuff is sorted out.
The business questions that you should be prepared to answer are: What is the total available market?
Who are the competitors? How will you beat them? How will you make money if new competition emerges?
If you haven't researched the answers to these questions, hang it up, they will eat you alive.
They don't call them vulture capitalist for nothing...
That's why VCs have a pretty good track record over people starting their own businesses and
the so called "angels" (wealthy people who privatly fund start-up companies). They may not
know what it takes to make a business succeed, but they sure know how they fail and they try to avoid
businesses that will probably fail.
If you are one of the lucky few that gets funded, you aren't off the hook. The biggest mistake that
most people make is undercapitalizing their companies. In an underfund situation, you have
spent all the money the VCs give you and are only "a few months" away from being a sucess. Now the
VCs have you over a barrel, if you get any more money from them they will take a big percentage
of the company.
Don't ask for too little money! The good VCs will just know that you asked for too little and just
think you don't know what you are doing. The slightly less reputable ones might just go along
and screw you later...
This VC may be very good; I agree with most of what he said. However, I personally known a couple established hi-tech CEOs (president and founder) who've been burnt by VCs. VCs like all other professions come in a variety of shapes and sizes. Not all are ethical, or even particularly good at what they do.
Not all are "up to date on the latest technologies" -- in fact, in talking to some they're suprisingly ignorant. Not all VCs know the nature of the business. Many VC firms tend send their more junior people who're straight out of business school, with little to no practical experience, who propose business school formulas with unparalleled naivety.
Venture Capital certainly does play an important role in mediating risk these days, but even here there can be an irrational aversion to "risk". Many demand larger preferred shares and other special treatment that private and equally large share holders will not. Many look down on the CEO, despite experience or success. Damn few have any experience starting up a business themselves, yet wish to dispense advice.
There is a certain herd mentality amongst VCs -- extremely incestuous. They'll take large risks, but only as long as others are. Few are willing to stray from whatever what the rest are doing, even if that is actually the safer/better path (eg: they'd rather fail with company, but never alone despite its relative safety). As a result, in many industries they're the last of the major financing to come in.
That being said, VCs have helped thousands of firms come around. What they say and do, is helpfull to the vast majority of startups, those with little to no business experience. However, It'd be naive to go in blind folded. I'd recommend that the person first consult someone who is familiar with the process (eg: a business owner who's been through it).
If not that, there are a couple major law firms in the major cities who're specializing in advising hi-tech startups. They perform a variety of services, from finding you private investors, to providing limited legal advise, and just generally steering you the right direction.
In a case like this it might be worth filing a provisional patent application. This is an application without claims that can be filed at minimal cost in order to establish a record in the patent office. This can be later turned into a real patent application if you desire.
Provisional patents are rather new - perhaps since 1995 so many patent lawyers may not have experience with them. But it sonds like something that might be useful in this case.
Warning: I am by no means a lawyer.
;-)
Basically it all boils down to whom you decide to go to. There are venture capitalists who have reputations for being very ethical about this sort of thing, and others who have become known for dumping inventors and redoing it themselves, then patenting it.
My immediate thought would be to grab copies of the schematics, code if needed, etc. and have those babies notarized. Backup tapes rule. Get some solid proof that you had it first. Then see who you can talk to.
Hell, who needs venture capitalists - if it's cool and it runs Linux, you'd probably take in just as much money by putting on banner ads and posting the site here as a news item
Your problem is a tough one that people do face every day.
Unfortunately, the business reality of venture capital will put you at a serious disadvantage. If you were going to talk to a big company about an invention of this sort, you would probably ask them to sign a non-disclosure form that explicitly covers the areas of your invention that you consider proprietary. Sometimes they will sign, often big companies will not.
Because VCs are seeing multiple pitches per day, day after day, common practice is that they will NEVER sign an NDA. It seems unreasonable, but it's not if you think about it. You may think your idea is totally novel and you're the only one working on it. You're probably seriously wrong in that respect, and signing the NDA could lead to legal problems down the line if the were to partner with somebody else who you thought was infringing on your intellectual property.
All that said, it doesn't mean that you shouldn't make every effort to protect your IP. That means seeking patent and copyright protection as appropriate (this is as little as making sure you type a copyright notice in your source code, labels, etc. all the way up to applying for patents). You would also want to make sure that you have reasonably documented your work to date (what? You're not keeping a developmental notebook?) in the event that you do get ripped off later.
After that, it's pretty much trust. If you don't trust the person you're asking a million bucks for, then you probably shouldn't talk about what you're doing and you probably should stop asking for money. None of these rules are written in concrete - if Jim Clark has an idea and wants to pitch it tommorrow, then he probably can get that NDA signed!
After you get past the initial pitch, you'll probably find that NDA-type protection will be something that you get. Of course, 95% of the pitches never get to the discussion level.
I do have some background in this. I was VP of Engineering at a company that was venture funded and was involved in the later stages of dealing with a board of directors that were mostly VC folks through our IPO. My wife works at an A-tier VC firm and deals with the supplicant list every day. If it's any consolation, her firm treats all the business plans and other materials with an extremely high level of confidence, so you shouldn't really worry too much about your product description falling into your competitor's hands.
At the end of the day, your IP and your ability to execute on it will make the decision. I wouldn't be suprised to hear of people who had their ideas pirated out from under them by private investors, or unethical VCs but if you're really out ahead of the rest of the world on a concept and have the ability to execute, that's better than secrecy.
Good luck!
Having been the VC route some time ago (before the world went Internet crasy) I will say that this info is straight up correct. If you don't have a defensable position and an idea of your marketing information, you are SOL. My experience is that VCs are interested in the following:
The Market size and your attack position
The Management Team
and lastly Product.
Expect to give away somewhere around 80% of the company, but in some cases the management and finacing assistance you gain is very well worth it (if you are good enough to get in the door).
One way to get attention is to be able to provide all of the above mentioned items in a 5 minute speech. Get used to giving it (join Toastmasters International if you need to learn how to get up in front of crowd and give a speech), and be ready at all times. Show the what, where, when, why and how to everyone you meet. Network with people - you never know what surprises will pop up (when you least expect them).
Trust me...I've been there...twice!
By the way, I am working with a team to create a business guide web site that includes VC funding and other resources. I'll keep slashdot posted.
- We dream of the stars. Now let us return to them.
No large VC firms will sign non-disclosure agreements with an individual on any sort of web based / internet software related project these days. Things may be different with a device (physical hardware), but your best bet is to fork out a few grand to at least get a decent IP lawyer to start patent filing for you (this takes a long while at best for an "official" patent search). If you can convince a good law firm that you have amazing potential for business success, they may do the initial patent work on the cheap, in exchange for small bit of equity or later compensation after you get financing (ONLY if they think you can succeed). The patent will have the added bonus of making you seem much more legitimate to otherwise ignorant venture capitalists who don't know shit about tech (none of them do, I am speaking from experience here). As far as approaching angel investors or smaller VC firms for an initial round before you later hit up the big guys, it's a decent idea. It will put you on firmer ground to deal with the big wigs and have your own hard hitting lawyers for the negotiations. Also, that initial money will let you put together a team with more technical know-how, marketing pukes, and attract a good management team (this will help INFINITELY in getting the big money from the VC firms). I wish you good luck, it's never really as easy as everyone makes it out to be (if you want to keep from getting hosed and reamed along the way).
Walk with your shoulders slouched forward.
Be wishy washy in your speach.
Giggle nervously.
Oh wait that's how VCs should attract geeks! Never mind.
-cpd
If its an invention or a device with unique characteristics / purposes, then he should definately talk to a patent lawyer and get advice on whether to file a claim. Actually, he should probably talk to a patent lawyer in any case.
Other than that, get a lawyer to do you up some Non-Disclosures and make sure that anybody he talks to signs them. Most VC firms worth anything should be willing to do that as they regularily deal with proprietary or secret information.
Good luck and most of all, take the advice of a lawyer over any you read here. Especially mine.
Hotnutz.com
I traipsed around and visited a bunch of Boston area VC's over the span of about 14 months, a while ago. Ultimately, our venture was not funded, and we gave up. But I learned an awful lot.
1) VC firms are in the business of meeting with investors. That's how they find new opportunities. They are *not* in the business of stealing your idea; most of them won't have the faintest idea how you do what you do. It may be difficult to get a first appointment, but there are a number of ways to do so. In Massachusetts, there is an organ of the state government that functions as a pseudo-VC; they are extremely helpful in getting you in to see other VC's.
Getting a meeting with a VC means nothing. Don't get excited when it happens. They're PAID to meet with you.
And don't expect them to sign an NDA, for the reasons that others have enumerated below.
2) VC's generally have a "hidden agenda." They like to invest in certain companies with a certain profile. It helps to identify this profile before you see the VC. Ask every VC you get to meet if s/he can think of a VC who invests in companies with the same basic market/structure/whatever as yours. A VC who decides you don't fit the profile dismisses you, and you'll often never know why.
3) Some VC's invest in zero-stage companies; most don't. Most VC's would rather be second- or third-money in; nobody wants to be first. So the first investor is the tough one, because everyone else just piggy-backs off #1's due diligence. It's usually easy to find a zero-stage VC -- just ask. For example, "Zero-Stage Capital" was such a VC in Boston. Duh.
4) For some ventures, only "angel" investors are appropriate. Our venture, for example, fell somewhere between two VC "categories", and everyone from category #1 was scared off 'cause the venture smelled like category #2; and vice-versa. Angels are tough to find; several of the ones who met with us were funneled our way by a VC who couldn't fund us, but who believed in our idea.
5) Patents are appropriate for four reasons: first, they smoke out whoever else has already patented your idea. "Wait," you say, "my idea is totally original and wonderful and nobody could have possibly patented it." Wrong. You should see the claims in some of these patents. Patents from left field are uncovered by the patent search, and are somehow applicable to your idea! You have to navigate carefully through this minefield.
Second, a patent (pending or otherwise) is a valuable commodity when dealing with some investors. Hip VC's know that a patent is useless, and that speed to market is the key to success; but angel investors (and even some VC's) sometimes aren't that bright. Neither are bankers.
Third, a patent is an important *asset* for your new company. Why? Because patents can be CAPITAL ASSETS. Developed software in an LLC, for example, IS NOT A CAPITAL ASSET. What does this mean? It means that when you sell out your little LLC to some bigger fish, you pay ORDINARY INCOME TAXES on the sale of the asset. Can you say ouch? On the other hand, you can sell the PATENT to someone (along with the software) and get capital gains treatment for most of the transaction. This could amount to huge $$.
Fourth, a patent *protects* you from some other asshole who comes along later and patents something similar. Until we slap ourselves upside the head and make software patents illegal, there's always going to be some moron who tries to patent, say, a heapsort. And there's probably some patent examiner who will let it through. So you *have* to patent your idea, in self-defense.
You should expect to pay about $5-7K, spread over several years, to your patent attorney. S/he should be able to tell you whether you are likely to exceed that amount or not, depending on what the patent search turns up.
6) VC's are generally looking for reasons NOT to invest in your company. That's helpful to them, because it culls the herd, so to speak, quickly. I can remember one meeting with a Boston VC which was dominated by a woman who had read an article the day before (with only tangential applicability to our idea) that pissed all over certain technologies. She trotted out her article, and that was the end of us.
Maybe she was just having a bad day. Whatever. We were screwed. Get used to this phenomenon -- VC's try to pigeonhole you so they can understand you. Truly new ideas are difficult to get across to them. They would, by and large, much rather invest in something conventional.
7) VC's tend to like big deals better than little deals. If you need $20M, you are more likely to find it than if you need $2M. Paradoxical, but true. Try to find reasons why you need boatloads of cash, but don't think you can fool anyone. They have to be legitimate reasons. These guys are finance dweebs and they are idiot savants when it comes to budgets and dollars.
OK, that's the brain dump. Hope this was helpful.
Or you can file a Disclosure Statement with the patent and trademark office, and they will keep it in confidence as evidence of the data of conception of the invention or idea. You can either send a 8 1/2" x 13" drawing, a copy, signed disclosure, SASE and a check or money order for $6 or a request for more information to the address below:
Disclosure Statement Commissioner of Patents and Trademarks Patenet and Trademark Office Washington, DC 20231
The phone numbers to that office are as follows:
Recorded Message 703-557-3158
Disclosure Office 703-308-HELP
Legal Council 703-308-HELP (Yes I know it is the same number as the Disclosure Office)
Note that someone else could still go out and patent the idea first if you don't dispute it while the patent is still pending. So your friend might want to consider getting a patent attorney and filing for the patent before he goes to the VC firms. If I was your friend I wouldn't worry too much about Venture Capital Firms stealing his idea though. VC firms would be out of business if people couldn't trust them. Just make sure to go to a firm that has given capital before. In other words stick to the more established capital firms when introducing new technology.
I hope this helps.
Some clarifications: First of all, we don't sign NDAs. Neither do any other reputable VCs along Sand Hill Road, because we'd quickly be swamped with them (we review upwards of 10,000 plans a year). Our business depends on our reputation, and nothing else--everyone's money is green, and our competitors are literally everywhere along Sand Hill. If someone approaches us with an NDA, and refuses to talk until we sign, we pass on the deal.
Second, VCs do take a big ownership stake. But it's not just about money. We have the connections into our portfolio companies and into other large companies around the Valley and beyond. As an early stage firm, we work for our money. We help recruit talent, we help with later financings, we help make strategic decisions, etc. CEOs often talk with their lead investors several times a week.
Third, regarding patents, they're nice, but what's more important is defensibility in the marketplace. With the exception of foundational algorithms like RSA, it's unlikely that patent protection will be all that significant. It's more important to have a lead over potential competition due to a combination of better technology, speed, and strategy.
Finally, no bank in the world is likely to give a loan to a startup company without financial backing--you're simply too risky, and there's no assets to recover. VCs can handle the risk; we're used to it.
As far as advice goes: 1. Make progress. Prove your assumptions--people want your product, say they will pay for your product, want an alliance with you. Move your technology as far along as possible. Hire good people.
If you have had no professional money invested yet, consider approaching angel investors Garage.com, Angel Investors LP. They will help you advance to the stage where VC money is appropriate. If it's two guys and an idea, we generally won't back it unless it's people we know and trust already. And sometimes not even then.
2. Think about the strategic landscape of the market you're entering now, 6 mos from now, a year from now, and beyond. What will happen once you enter the market? Most importantly, what problem are you solving, and who will pay you to solve it? How much will they pay? How will you market to/sell to them? VCs will ask tough questions about everything--you, your competition, your technology, your strategy, etc.
Good VCs aren't just money managers--they are engineers with MBAs. Many have CS or EE degrees, and all are up on the latest technologies. You'd be surprised how many technical discussions take place here.
3. Do your homework. Figure out who else is out there, what they're doing, and make yourself stand out. Be the diamond in the rough of 10000 plans we see. For advice on how to do that, check out MIT's 50K page. Pay special attention to the "resources" section.
There are dozens of other pieces of advice to offer. So I am considering creating a website with this and other information on the VC process. Does that seem like something people would be interested in? If so, please post a reply, and I'll start putting one together.
I may not know much about the kernel, but finally a subject I can be useful on!