July 8, 2003 - NDAs (and why VCs
won’t sign them) + a look at Selective Search
by
Bill Snow
Let’s take a look at one of the most common miscalculations made by early stage
entrepreneurs: Asking potential investors to sign a non-disclosure agreement
(NDA). In the pantheon of entrepreneurial mistakes, the NDA is right up there
with the infamous line, “these projections are conservative.” Simply put, if you
hope to raise money from VCs, you increase your chances of success by eschewing
the NDA request. Most (if not all) VCs will not sign the darn things. There are
bound to be some exceptions to this rule, but not many.
Why won’t investors sign NDAs?
The answers to this question can be lumped into two camps: the obvious and the
covert. First, the obvious reasons: Risk management and liability. Investors
will not sign NDAs because it exposes them to too much risk. If VCs signed
every time someone asked, they’d be signing hundreds of NDAs every month. In
today’s litigious society, the odds of getting sued increase with each piece of
paper signed. A VC is bound to see numerous similar deals before (possibly)
making an investment in one. Entrepreneurs often think their deal is unique,
when in fact, there are probably dozens of very similar deals in circulation.
Now the covert reasons why VCs will not sign NDAs: Raising venture capital is
not fair, and entrepreneurs are graded on things they don’t even know they’re
being graded on. An entrepreneur who asks a VC to sign an NDA is unwittingly
exposing himself as a rank amateur. Simply uttering the phrase “will you sign
an NDA” is a virtual death sentence. VCs know there is usually an inverse
relationship between the voracity of the NDA request and the strength of the
deal.
There are unwritten rules and decorum in the venture capital business, and
asking the NDA question demonstrates that the entrepreneur does not understand
how the game is played. Unfair? You bet! But it isn’t your money, and we do
not live in a fair society. The person with the money makes the rules. If you
don’t like it, you don’t have to play.
VCs are not likely to tell you this. They will simply ignore you. They will
stop returning your phone calls. They will not answer your emails. Don’t kill
your deal. Don’t ask the NDA death question.
If you reflexively ask for an NDA before you’ll let someone read your plan,
that’s a bad habit on par with chewing with your mouth open or driving slowly in
the left lane. Further, if your plan is based on an idea so tenuous that merely
hearing what you do (or plan to do) will cause grievous harm to your plan, you
don’t have a plan. You have a pipe dream.
I spoke with a number of Chicago area VCs to get their comments on the NDA
issue, and not surprisingly, they all echoed the same sentiments. One VC told
me point blank: “Bill, I will never sign and NDA.” When I asked him what
he does if an entrepreneur is insistent, his reply was, “I tell them we cannot
sign NDAs, under advice from council. If the entrepreneur cannot get past this
issue, I move on. I won’t return that person’s calls.”
“NDAs are not worth the time and money,” I was told by Dave Baeckelandt of
Chicago Pacific Capital Partners. Dave is unique among investors in
that he told me, under certain circumstances, he would sign an NDA. Then again,
as Dave pointed out, he’s “playing” with his own money, not managing a large
fund of other people’s money.
So, what are those “certain circumstances”?
Dave essentially said he’d consider signing an NDA if the deal was far enough
“down stream,” and the entrepreneur was about to reveal non-patented
intellectual property such as source code or a trade secret.
While the entrepreneur may get lucky and find an investor willing to sign and
NDA, the entrepreneur is better off following a basic rule: Don’t ask VCs to
sign NDAs.
Selective Search
Shifting gears from discussions of non-disclosure,
let’s move over to the world of full disclosure: the world of high caliber match
making.
Barbie Adler, President of
Selective Search, has been making
some waves in the Chicago area with her high caliber match making service.
Barbie sees a flaw in current matchmaking services for high-level executives,
and not surprisingly, she sees opportunity. Barbie’s goal is to bring executive
search quality to the world of matchmaking. Obviously, this service is not for
everyone, but as Barbie says, “You wouldn’t use Monster.com to find a CEO.”
The service is the antithesis of companies such as
Match.com. Selective Search takes the time to interview each client, providing
a “hands on” approach as opposed to the impersonal and canned approached found
in on-line services. With 7 employees in Chicago, the company is still in the
early stages of growth, and makes an interesting case to study.
Barbie is executing on a basic plan that all
entrepreneurs should follow. First, she’s been able to self-fund the business.
Instead of searching for outside and capital and whining “she just needs some
skinflint to open up the purse and provide $500K to get the business started,”
she’s actually doing the business, finding clients, generating revenue, and
proving her model. It’s refreshing to find an entrepreneur who isn’t begging
for seed capital.
Prove the model
First, Barbie is focused on “owning Chicago.”
While she has done searches in other cities, Chicago is her main focus for the
time being. Once she perfects the model, she’ll begin to open offices in other
cities. One interesting note, she’s discovered that the people best suited to
work for Selective Search will likely to have executive search backgrounds.
Do what you enjoy
Barbie got into the matchmaking business because it was a natural extension of
her professional and personal lives. She found that she was constantly
connecting people on a professional level, and at the same time, she noticed she
had success in setting people up on dates. Selective Search allows her to do
what she enjoys and what comes naturally – another lesson for all would-be
entrepreneurs.
Leverage your connections
Drawing on her 12 years in
public relations, it isn’t surprising to discover that Selective Search has been
featured in media ranging from the Tribune to Forbes to Fortune to coverage by
various local and national TV networks.
Deliver results
Nothing speaks like actual results. Instead of talking about what she thinks
she can do, Barbie is able to furnish results. According to company statistics:
“186 marriages resulting in 73 babies; 25% of our clients couple up in the first
introduction; 45% of our clients need only three introductions before pairing
off to form real relationships.”
Venture Worthy?
Barbie seems to do a great job, and she definitely
has the high energy and drive needed to be a successful entrepreneur. The
question then becomes: Is this a venture worthy deal?
Based on my understanding of the business, I would have to say no. By her own
admission, one of her challenges will be to retain Selective Search’s “hand on”
approach while the company grows. The “hands on” approach is wonderful, but
this requires many people, therefore limiting the scalability of the business,
therefore limiting the “venture worthiness” of the company.
But is this a bad thing? Not
at all. One thing early stage entrepreneurs need to remember is that venture
capital is not a stamp of approval. There are plenty of ways to grow a business
without venture capital, and Barbie Adler is demonstrating that smart
entrepreneurs don’t talk about doing it, they simply do it. She isn’t sitting
around waiting for someone to provide her start up capital; she’s actually
running her business, generating revenue, and satisfying customers.
Has your company been profiled by Bill Snow? Send
an email to introduce your company:
bill@billsnow.com
About the author
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