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How to Approach Venture Capital Firms? 167

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.
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How to Approach Venture Capital Firms?

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  • by Anonymous Coward

    Venture capitalists lose money on nine out of ten firms in which they invest. That means that they have to get it all back, plus a profit, on the tenth -- or else they don't eat. How much does that leave for you? Not a lot. Don't go there. These guys are sharks. It's absolutely a desperate last resort.

    Before all the libertarians throw an epileptic fit at me, don't misunderstand me at all here: I LOVE capitalism, blah blah blah, profit is the only God I worship, I'd gladly sacrifice my immortal soul for it, yadda yadda. Yes, they have to take a profit in order to stay in business. Absolutely! And that's a wonderful thing! Yes, yes, yes! But does that mean that you have to let them take your profit? No, it doesn't. It's a free country, and you have a perfect right to screw yourself -- but you also have a right not to screw yourself. So don't.

    If he's really got something good, this guy would be a hell of a lot better off arranging a manufacturing and distribution deal with a normal company and letting the VC's suck somebody else's blood.


    (Yes, I have some personal practical knowledge of this:

    The company where I work spent about six months talking to a series of VC's; my desk is near the CEO/owner's office and I overheard a hell of a lot of conversations with VC's that struck fear into my heart. The CEO used the word "Faustian" a lot, and he ended up fleeing the VC's and getting the company acquired by a larger company. He took a job as the VP in charge of the division that's absorbing us. It's a cool deal all around. Our options are now worthless (the guys who acquired us went public twenty years ago, and their stock hasn't done a damn thing since), but we get paid reasonable salaries and it's a great place to work, so we're not crying much about losing a vanishingly small chance of getting rich in an afternoon. )

  • by Anonymous Coward
    I haven't personally been through this, but...

    Do you have a product or a business. If you have a business, and a business plan, and a strategy... Then VC will be easier, and you won't get ripped.

    But, if all you have is a product, and you expect the VC to supply the business sense, management, contacts, and everything else required to get to market, you will probably lose all control. You will end up feeling ripped off, I'd bet.

    VCs prefer funding companies, rather than building them. They build them, they own them. So, the best shot at getting funding and keeping some stake - get a partner you trust, who wants to build a business around your gadget.
  • by Anonymous Coward
    The VC guys don't care about your whiz bang device. It may be the coolest thing ever, but no one cares unless they can make a lot of bucks selling it. The most important thing you can do is formulate a business plan. What is the target market? Who will buy it? Does that market segment have money to spend on the device? Are there other devices that are similar that they might buy instead? How big is the market? How big are similar markets for similar products? How do you plan on building your market? How much will you spend on advertising? How much on R&D? If you walk in the door with a good idea and a sound business plan for executing the creation and development of a market for the device, then you just might get someone's attention. Remember, the VC guys are _business people_. They need to see how you can build a business based on the idea. Oh, and by the way, good luck!
  • :-)
  • Every experience I've ever had with Vulture Capitalists has been a bad one. All this talk about NDAs is a joke - try to keep a secret in the Valley and you'll see what I mean. These guys sit around with their buddies in Palo Alto and tell each other everything. It's a rich boys club that is only interested in making the VCs rich.

    Once they give you money, here's how it goes:

    1. They make sure to fire, or at least kick off the board, at least one of the founders.

    2. They require a majority of votes on the board. There's no way around this if you want the money. At this point it really isn't your company anymore.

    3. They then start lurching the company around, changing directions each time they think they can sell the company to one of their buddies. You'll be stuck trying to BS your employees over and over, convincing them that each misstep is really part of some well-thought-out plan.

    4. Then they start cutting costs. They start with the little stuff, and work their way to the engineers. And if you had any engineers on the BOARD, they'll get kicked off right away.

    This is about the time that I left my last company.

    Investment bankers are a little easier to deal with, but they are all inside traders anyway (seriously), and I wouldn't trust them too much either.

    If there's ANY way you can do it alone, or with money from friends, you should do it that way.

    And NDA or no NDA, once you talk to VCs, you might as well consider your idea public, so you better patent or copyright your invention if you want to make money on it.
  • Every experience I've ever had with Vulture Capitalists has been a bad one. All this talk about NDAs is a joke - try to keep a secret in the Valley and you'll see what I mean. These guys sit around with their buddies in Palo Alto and tell each other everything. It's a rich boys club that is only interested in making the VCs rich.

    Once they give you money, here's how it goes:

    1. They require a majority of votes on the board. There's no way around this if you want the money. They usually achieve this by kicking one of the founders off the board. At this point it really isn't your company anymore, as VCs vote in a well-orchestrated block.

    3. They then start lurching the company around, changing directions each time they think they can sell the company to one of their buddies. You'll be stuck trying to BS your employees over and over, convincing them that each misstep is really part of some well-thought-out plan.

    4. When they can't sell the company, they start cutting costs. They start with the little stuff, and work their way to the engineers. And if you had any engineers on the BOARD, they'll get kicked off right away.

    This is about the time that I left my last company.

    Investment bankers are a little easier to deal with, but they are all inside traders anyway (seriously), and I wouldn't trust them too much either.

    If there's ANY way you can do it alone, or with money from friends, you should do it that way.

    And NDA or no NDA, once you talk to VCs, you might as well consider your idea public, so you better patent or copyright your invention if you want to make money on it.
  • If this is your first entrepreneurial experience, take the VC money. After your first success, you can worry the next time about getting a better deal. There is no way to know going in your first time how to structure everything the best way. Just be happy you are getting enough money to create a real company.

    Once you have this experience, your next money raising effort will be far easier. You'll know the VC community, and be known.
  • It's pretty clear you've never spoken to a VC. They don't sign NDAs. Ever.
  • Umm, I've never done anything like that, but I would think that he might want to patent his invention so that no one can steal it.
  • If you completely open up the ideas, get NEW ideas from other people, and release it under some type of appropriate _public_ license, then you will find many people willing to help develop the technology away from all that capitalist nonsense. This is truely the best option, and the way of the future.
    EMYL,
  • Do it! Do it! Do it! (need any more encouragement?) There is a real real need for stuff like this on the web. Even what you wrote in your post is invaluable!
  • (since you didn't put in your email, reply is here...)

    Mark down one vote for such an informational website. Getting money when a company is just starting out is really tough, and any information can be made valuable information, especially if it comes from reputable sources.

  • I may be a little cynical here, but don't expect a NDA to keep a VC firm from discussing an idea, or even "steering" another team in their stable to make their product more like your proposal. They're investors, and their motivation is to maximize return on their investments, period.

    On the other hand, many companies are pretty good about honoring NDAs, especially if they have to disclose some of their plans to you as part of the discussions.

    As for patents, they're good for protecting inventions, but take time to file and are costly to maintain (by taking infringing parties to court.) Since talking to a VC isn't "public disclosure," it doesn't start the clock ticking on a patent filing anyway. So, maybe a reasonable approach would be to make sure you have solid documentation (dated, signed lab notebooks, drawings, etc.) of your patentable invention, but don't spend the bucks on a patent attourney out of your own pocket. If the VCs fund you, you'll be in a better financial position to proceed.
  • Period. End of story. They see too many similar ideas. They are supposed to operate under code of conduct similar to lawyers (who also won't sign NDAs)
  • FYI, patenting something doesn't come cheap. We're talking $20k.
  • The idea that you can write down the information and mail it to yourself although interesting, is flawed. In talking to a lawyer friend this is not a valid way to prove anything.

    As for the disclosure statement. You have 1 year to shit or get off the pot(patent it as it were), otherwise the data in your "Disclosure Statement" is public domain.

  • Please inform CmdrTaco and they gang when said web site will be available so they may pass that information on to people like myself that read Slashdot.


    Thank you
  • Make a complete copy of idea and mail it to yourself via US Post Office certified mail (do not use UPS or FedEx as they are not federal agencies). Position the postage over the only way to open package. Keep ypur package sealed (in a safety deposit box is good). I would say get it notorized, but that would be another person in the loop and this is actually a poor man's copyright and copyright is much easier to defend. I do not know if this would stand up to any court, but it is better than nothing if you don't have the $ to apply for a patent.

    "Trouble is, just because it's obvious doesn't mean it's true"

  • Useful site: www.inventorfraud.com [inventorfraud.com]

    sorry for the posts being split up.

    "Trouble is, just because it's obvious doesn't mean it's true"

  • First he could simply draw/write all the information down and mail it to himself.

    I heard that notorizing it is also effective (affective?)
  • Anyone remember Nerds 2.0.1?
    The VC's ousted one of the founders of CISCO because he didn't like her, and "She was holding the company back."
    She left with a bunch of stock that she sold for $20M, but had she waited to sell, easily could have got $200M or more.

    Like the above poster reminds us: VC are there to supply $ to make $$$.
    They are not your friends, or enemies.
    They are just people who want to make as much money as absolutely possible.
    Keep it in mind.

    PP
  • Interesting to me that such a posting would receive such a warm welcome in the Slashdot community... or perhaps my moderation level simply extinguished the flames.

    Apparently your friend has learned very little by reading Slasdot? If her newfangled Linux toaster is actually such a great "device", keeping the idea a secret is the last thing she wants to do. She should register a domain name, potentially apply for a patent, certainly make a record of the idea and its implementation (to avoid the patents of others who may have similar notions), and start creating some hype.

    Just my two cents... a linux toaster company is worth more than a linux toaster invention.

  • by praxis ( 19962 )
    Have a good Non Disclosure Agreement. When you get them to sign an NDA, they can not discuss your idea with anyone else (or use your idea for their gain) without your permission. It says "I agree to listen to you idea, but I can not do anything with it unless you tell me to." I am not sure of any good sources of sample NDAs, but I am sure they can be found in any law library or such.
  • by nabucco ( 24057 )
    Carl Steadman's last column in the Standard said the best way to get out of a boring conversation at a new media party was to say you're looking for VC, as that's the ultimate faux pas in an industry with few social graces, and the equivalent of pan-handling. Nevertheless, I have my own business that I would like to get angel/VC money for and would be interested in anecdotes and a discussion of this topic.

    One thing I've heard is that VC people don't like to give money out unless you look like you don't need it...the business I have been working on is kind of a hybrid of several business models on the web, using a technique that I have seen to be very successful on other sites. Unfortunately, without more capital backing then I currently have, the site is kind of slugging it out, and I think an infusion of money would be helpful.

    Another thing you hear is to start businesses with your own money and hold onto it as long as you can so you wind up owning most of it...this is how Microsoft did it...the only problem is that way you grow by your revenues in stead of from outside capital, which in today's marketplace puts you against stiff competition.
  • VC, for the most part, do not sign NDAs. Even asking for one is considered a sign of naivete by many of them. On the other hand, there are other things you can do to protect yourself.

    However, if you're talking to VC, rather than concentrating on the idea, it might be better to concentrate in the idea itself. It's a cliche, but VCs don't invest in ideas, they invest in businesses, which means in investing in the teams that will deliver. Your track record is important. Details like figuring out a viable business plan are important. Knowing where your strengths are and who you need to hire are important. Having someone who can sell the thing is important. Having contacts in the target market is important. If you can arrange sales ahead of time, even better (VCs like proof that the idea can make money). Your great idea may be combined with $1.50 to procure a hot caffeinated beverage.
  • by delmoi ( 26744 )
    if you've already given up why not publish you're spcs? I mean, if its so great, why keep it from the world? you could publish as a 'songwriter machine' if that's your name:)

    If you're not going to be able to make money from it...
    "Subtle mind control? Why do all these HTML buttons say 'Submit' ?"
  • 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 ;-)

    not if he needs custom hardware...
    "Subtle mind control? Why do all these HTML buttons say 'Submit' ?"
  • An idea needs three thigns to take its place on the market. The idea itself, planing and willpower, and money. With out ether one of these peices, nothing can happen. What would have happend if the VCs haddn't invested? Nothing. That's what. sure, they made $700 million, but the others made billions (or somthing). I'm sure that if I was in There postion, I wouldn't mind having a couple billion dolars if it means giving up $700 million. it's better then what I've got now (I think I have like $800 in the bank or somthing)
    "Subtle mind control? Why do all these HTML buttons say 'Submit' ?"
  • Certainly in today's economy, there is a great
    need to broaden the set of people who know the
    ins and outs of entrepreneuring, how to raise
    venture capital, how to staff teams rapidly,
    how to weather business down turns, etc.

    We're going to launch a series of articles within the next 30 days discussing such issues specifically as they relate to Open Source businesses. The articles will appear at www.BeOpen.com. We will tap the expertise of our own staff, business advisors and VCs whom we know but we'd welcome other contributors, as the possible topics are quite broad.

    If you're an experienced entrepreneur, angel, lawyer or active VC familiar with software and Internet businesses and you'd be interested in writing or editing an article in this area, you can e-mail me. Let me know your background and the areas you are most interested in discussing.

    Regards,

    Bob
  • Patents take years to take effect and as long as a year or more simply to be accepted as pending. To reach the pending point you need quite a bit of money. And don't forget that if it's a good idea, you may need to register your patent in many countries.

    As for Venture Capital, it's best avoided if at all pssible. According to a story in a Canadian paper, the guy who was running MP3.com (Auel ??)
    is setting up a NET-oriented VC company in Canada. He's inspired by a company in the States which invested $20M to obtain ownership which is now worth $700M.

    That's $700M of ownership the idea-guys, nerds and geeks have surrendered to rich jerks who did nothing more than provide relatively small amounts of cash.
  • come on! nothings gonna kill you quicker than getting some investment bankers involved
  • if youre in the east coast try VCOnline [vconline.com]
  • integrity capital...isnt that an oxymoron?
  • Sell the idea. Get enough from the sale to
    start an even better business. Then sell it, repeat.
  • Nesheim, John L., 1942- High tech startup : the complete how-to handbook for creating successful new high tech companies / John L. Nesheim. Saratoga, CA : Electronic Trends Publications, c1992.

    Found in good university bookstores (Stanford bookstore has it), or at amazon.com [amazon.com]

  • Who out there could describe the way a typical startup is sliced and diced as it proceeds from Angel Investers to VC's and ultimately to IPO? What percent of the company can the founding team reasonably expect to be holding when all is said and done? How much do the angels who pitched in the first $100K get. The VC's who put in $5 Million? The fouding members who maxed out their cards?
  • If you send it to yourself via registered mail it is much more likely to convince a judge that you did indeed have the idea at the time it was sent. Registered mail provides far more assurance that the envelope hasn't been faked or resealed after receipt.
  • I am taking my corporate law class this semester, and surprisingly enough... we are learning things we can apply.
    He has two options.. he could go the patent route (I'm not sure how much money this would cost)
    or.. a simple contract. Contracts are your best evidence in court :)
    To have a lawyer write up a contract.. just tell them the situation.. and that you wish to show this prototype to firms without fear that they will rip it. This contract could be used for each firm he presents to... simply have them sign it stating that they will not use any ideas they see in the presentation to profit. Permission to videotape one presentation might be a good idea. With that and the contract... you would be safe.

    Remember.. your greatest tool is the ability to sue. And your greatest tool in a lawsuit is evidence. If someone rips you off.. dont fear.. just double what you think you could have made off of it and begin. :) (man.. my law proffessor makes this sound like too much fun)
  • If you are able 2 get a patent on your idea/device, then this will protect you. If you can't an NDA ( Non Disclosure Agreement ) would be your best bet, followed by Government Grants if the US governments have heard of helping its citizen's ( on second thoughts, in the US I dont think the goverment cares )
  • My experience with patents was replying to one of those "Penny for Your Thoughts" ads. They sent me a packet which required me to provide a written and drawn description of my idea. The idea had to do with anchoring swingset legs, so I didn't care at all if it got ripped off. I just wanted to know about the process.

    For this, they did a quick review of the patents that already existed. I was surprised to find out that there were almost a dozen patents that had a little something to do with it. They were obviously found by keyword search, but all of them were a little bit like what I was suggesting.

    So far, it was free. But the next stage was going to cost. They offered me 3 choices. 1) For 20% ownership, I had to pay $4,000; 2) for 50% ownership, I had to pay $9,000; and 3) for 100% owenership, I had to pay $15,000.

    What they offered me for my money was the services of a patent lawyer, prototyping, and display at trade shows. Altho' I bailed at this point, it wasn't because I thought they were trying to rip me off. It was because I didn't believe that I would even make $3,000 from swingset anchors.

    What I suggest to you is that you document your invention and have those documents notarized. At that point, you have dated proof that you invented it. Then, start talking to reputible venture capitalists. If you can demo your invention in blackbox mode, fine. If they are impressed and want to write a contract, then I wouldn't worry about getting ripped off.

    The next thing you have to worry about is that your invention gets promoted at each stage. You have to deal with manufacturing, marketing, sales, accounts receivable, taxes, legal protection, and a ton of other stuff. This is where the venture capitalist should be even more help than just providing money. They should have trusted contacts to take care of any and all of this, which beats your trying to do it yourself or find professionals on your own.

    So, the bottom line is get everything in writing. If it's really important, insist on a contract.
  • Garage.Com

    http://www.garage.com/


  • Garage.Com [garage.com]


    It's where the big boys play.
  • Get everything notarized first, and then put a copy in a safe deposit box, file another copy with your lawyers, and then mail one to yourself. If it ever comes up what you want is evidence that you thought of the idea(s) first. If the product can be patented, start the patent process. If it can be copyrighted, go through the copyright process.
  • Actually, VC's almost never sign NDAs. They don't have to. There are tons of little guys out there who'd be willing to talk to them without the NDA. And, of course, if you sign an NDA, you have to get your lawyer to review it -- which costs money and more importantly time. So, the answer is, go to reputable VCs, and ONLY reputable VCs. And, if you actually want to make money off this deal, you may want to talk to a patent lawyer. (we're not evil... well... we're not very evil. :)

    Thalia
  • The real cost of a patent is the patent attorney's time. The cost of filing a provisional patent is $150. The cost of filing a non-provisional patent is $800. The cost of my time to write a provisional OR a non-provisional patent is about $8000. It's better to file a non-provisional patent up-front. Provisonal patents can muck with your foreign rights, and if there is ever a dispute, you're going to have to prove that everything in your non-provisional patent was already in your provisional patent. This adds a ballpark of $500,000 to the cost of litigation -- which will run $1 million + in any case.

    The only time provisional patents are useful is if you are about to hit a bar date (you've disclose the idea almost a whole year ago... but you have a few extra days). You just don't have time to write a real patent... and you're better off getting incomplete or possibly bad protection rather than no protection at all. Otherwise, get a real patent. Most patent attorneys are willing to arrange a payment plan, and some will even take stock options instead of cash up front.

  • "Beware the advice of successful people; they do not seek company." - /usr/bin/fortune
  • I have to agree with this recommendation. While I've never contacted them myself, they have a good reputation (so I've heard) and one of the primary founders is Guy Kawasaki- VERY respected man in the whole computer field (and one time Mac Evangelist, so you know he's a wise fella ;).
    Definitely check into Garage.com.
  • Good VCs make, maybe, 10 seed investments and decide which 2 should get a second round (as a rule -- your mileage varies).

    VCs may tell you enough to get you off the market, but decide later whether they really want to make the investment. That leaves you hanging if you don't get the money quickly.

    Even when it works out, they typically want at least 51% and you become VP of Marketing or Technology.

    Case in point: what was Mark Andreesen's position with Netscape? VP of Technology... and it was his idea to steal -- er, borrow -- Mosaic as a commercial product. Jim Barksdale was the man with the money, so he got control.

    If it wasn't for them, a lot of tech "startups" simply "wouldn't". Look for an angel. They're harder to find, want significant ownership but usually leave 51% to you (again, your mileage may vary!).

    Ask around... and I mean friends of freinds and freinds of family. If you have a worthwhile idea and present it well, you might get lucky.

    And if lack of control is not an issue, there are plenty of VCs to go around.
  • "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. "


    This is quite true. I remember seeing a documentary on PBS (don't laugh) they had a segment in it on Cisco. The people that started Cisco got burned big time by the VC's that they went to. not long after Cisco got big the two people that started Cisco were fired by the management that the VC put in place. So the people that started the company no longer even worked for it. Seems crude to me! There is one thing in business I have come to live by "TRUST NO ONE!". You have to look out for number 1, but watch out for number 2. :^)

    While I am sure there are some very ethical VC's out there, I would still watch your back every step of the way.

  • Also thought I'd make a mention - a lot of people here are talking about NDAs. Granted, an NDA gives you some legal protection. But honestly, folks. How many news sites out there have violated NDAs (this is especially bad in the consumer 3D graphics accelerator and gaming industries) to bring the scoop? Or, if it's an idea, short of notarizing what's to keep them from making a similar-but-unrelated-enough-to-pass-muster patented thingy? An NDA relies on trusting the other party, and as much as I hate our friends at the U.S. Patent Office for their shoddy checking, I likely would attempt to raise the money for getting a patent if possible before going the NDA route.

    Just my $0.04.

  • .... with your pockets sewn shut
  • God, really be careful!
    I have read so many horror stories about how people have been swindled out of all their life-savings by trusting the wrong people.

    Generally people get taken somewhat easily by a flashy swindler throwing around money and producing references from all around the world (really just his buddies). Things are way too easy with the fake ones... they will be less critical of your business plan and financials.

    I think I actually saved one article around here somewhere...

    but be careful!
  • It wouldn't stand up in court.
    This is an old wives tale.
    An attractive one, but a
    legend nonetheless.
  • I've seen it done on a regular basis (as so far as the dealings I've been involved with). NDA serve to protect. It is standard business practice. Any good laywer will tell you that. Those not wishing to sign NDA should be pushed away and kept at arms length. They generally are the ones that can lead to problems. There is nothing that prevents them from signing an NDA; other than perhaps ethics (er...lack of them). Not signing an NDA does not prevent them from being liable or sued. In short, NOT signing one provides NO added protection for them. All it does it confirm that the product was disclosed, when, and why. If anything, if offers shelter for both parties. Again, if you have people not wanting to sign an NDA, this should immediately be cause for concern.
  • 1. Begin researching into getting a Patent.
    2. Your going to need a few hundred thousand dollars in Angel investment before the VC's will even look at you. Target the smaller boutique firms that cater to wealthy individual investors.
  • A non-disclosure does not prevent someone from stealing your idea. It only gives you the right to sue that person if they steal your idea.
  • by downix ( 84795 )
    Before you do ANY of this, talk to the SBA if you are serious about starting your own business.
    They helped me in setting up my company, that's what they are there for.

    http://www.sba.gov

    Plus always look at the possibility of selling your idea, if you find that you lack the entrepeneurial spirit. Nothing wrong with being realistic and coming to the conclusion that those tax forms, the 90+ work weeks, and lack of a social life aren't for you (but since when has the lack of a social life stopped us nerds before?).
  • Any VC firm that is not open to NDA's or at least an NDA-like agreement is often times one you'd like to avoid.
    Many VC firms (most I've delt with) are not taken back with being asked to sign an NDA, and usually have one made up for such a purpose that protects their ability to invest in a similar venture while protecting any/all of your ideas. They are out to make money, don't forget, and if they spook away the next (amazon, yahoo, microsoft) they don't make as much.
  • In May of 1990, The Connection, a Boston Radio Show, had 3 venture capitalists (Guy Bradley from CMGI, Ted Dintersmith of Charles River Ventures, and Send.com's Mike Lanon) as guests - and listeners called in and pitched their business plans.

    They gave lots of good advice as to how to pitch your ideas, and what VCs are looking for. I would recommend ordering a tape of that show from WBUR in boston. There is a description of the show here: http://www.wbur.org/connection/1999/05/con0524list .html

    There is a link on that page so you can order a tape of the show but the link is broken, try to contact them and see if you can get a copy of that show. I think tapes go for $20 or so.
  • WARNING: AN ENGINEERS VIEW NOT A LAWERS

    First, of all, VC do not need to see anything technical. They invest in the people doing the plan, not technology. The biz plan is proof that you are savey enough to make money just as a schematic is the common tongue of electronics. If the VC have any questions about your tech they will hire a consultant (engineer) to evaluate your tech. It is fair to have the consultant sign the NDA. VC & angles are bean counters and business people. They need to see resumes and business plans not source code and schematics. The simple matter is you need to check on the VCs before you call them. Their web site should list who they have invested with before. Call the comtroller of companies they have invested in and check their referances or call another VC at random & or SBA and check if they are for real.

    Speaking of NDAs, what do you want to keep from the public? That you are starting a business, that have a really cool name for a web site, who your partners are? If you really restrict what you cover in your NDA you have a better chance of having others signing it. The other type of IP protection is trade seceret protection. If you ever disclose anything to anybody without an NDA you can loose trade seceret protection. Trade secerets are a bit more nebulous, but they are worth protecting. You are trying to do two things with an NDA protect yourself from the VCs as well as show that you have take due care to prevent the info from be coming public. If you don't trust the VCs don't talk to them. You don't have enough money to sue them. What you are really doing to trying to prove that you have taken due care so that you can protect youself in the future. Imagine thinking up the key technology for nono tech, getting the patents and just as the industry is ramping up and is about to start paying you big buck some putz finds out that you spread your idea all over town and some shark comes in and overturns your patent.

    As far as documenting your idea's creation date, use the PTOs disclosure statement as described in a previous post. It's cheap and bomb proof. DO NOT USE A NOTARY's SEAL, it will not stand up. Have two ENGINEERS read and sign/date a note at the bottom that they have read and understand what was written.

    The day you publicly (non-NDA) disclose any ideas that might be patentable you start a one year clock before you must file in the US. Public disclosure can end some patent rights overseas the instant you disclose.

    Best of luck
    Scott

    PS How do you get a free meal out of a VC?



    Put your finger down it's throat.

    Blech!
  • Here are the relevant articles:

    Red Herring:
    H ow to approach Venture Capitalist companies? [infojump.com]

    Upside:
    http://www.upside.com/texis/mvm/story?id=34712c116 9
    http://www.upside.com/texis/mvm/story?id=34971c0a0
    http://www.upside.com/texis/mvm/story?id=34712c1b0
    http://www.upside.com/texis/mvm/story?id=34712c0a4 2
    http://www.upside.com/texis/mvm/story?id=34712c0ee

  • While I have never approached venture capitalists, I have always had to sign non-disclosure agreements with companies when they are asking me to bid on projects. I would say that such a document is the single most important document that your friend can have to protect himself against anyone stealing his idea. There are a bunch floating around, but his best bet is to go have his lawyer draw one up for him. The lawyer can't tell anyone about the idea due to lawyer/client relationship rules, so he okay there. By having a VC signing the non-disclosure before your friend tells them anything basically insures that they (the VC's) won't tell anyone about the idea (ever) without his permission; if they do, they are liable for damages incured.

    The other thing I think would be important would be to ensure that you approach reputable VC's, who have a good track record of no ripping people off. Remembering, of course, that in exchange for money the VC's will expect part of the company/profit, you will want VC(s) that you trust and are thinking in the same 'ballpark' that your friend is. Talking to Slashdot is a good first step, but your friend will also have to do some of the research into VC's himself.

  • What website?
  • A couple of pieces of advice, based on my experience with raising VC money (we're still in the process, so if anyone's interested in investing - let me know):

    1. Don't go there in a very early stage, at least not until you find yourself some management/marketing/business development people, or at least SOME people.

    2. Along with VCs and angels consider various incubators (although they take A LOT)

    3. Try to put together a coherent business plan and and/or an executive summary - what the estimated market size it, potential price of the device, potential marketing strategies, competitive advantages, risks, exit strategies, and so on.

    4. Be able to answer the question "OK, suppose we give you $X million. What EXACTLY are you going to do with it?"

    5. In general, most VC firms have webpages with short FAQs - take a look at those.

    Good luck!


    The word "woman" is no longer politically correct.
  • by Anonymous Coward
    The envelope will be dated by the Post Office and so long as he doesn't open it he has proof of when he first came up with the idea. If anyone comes out with it later he will have the necessary evidence to proof that it is his idea.

    This might not be a good idea. The U.S. Postal Service in not at all reliable. It could fall into the wrong hands, or they could take forever processing it and not postmark until after the lawsuit. They could also screw up and print the wrong date (I just received a letter that was postmarked November 14, 1999).

  • by Anonymous Coward
    Very good comments from a working VC.

    I agree with what's been said, and I'd like to add a few more comments/criteria.

    Understand that VC money is the cheapest or the most expensive money you'll ever get.
    Cheapest in that if you fail, there's nothing to pay back.
    Most expensive, as the example give earlier of a 20 Million investment becoming worth 700 Million. But if the VC didn't invest, who would?

    As for the 1:10 success:failure ratio. That's a pretty good number as well. So understand that the type of companies we want to invest in must be able to return not 10% or 20%, but 10 TIMES, or 20 TIMES the investment. And each of those failures, looked just as promising as that single success did at the time of investment.

    In approaching a VC, don't go directly to them if you don't know them. Use a trusted intermediary, a friend of a friend (You'll be surprised at who knows who), or find a company that the VC has already funded, and been a success. Approach that CEO, becomes friends, and ask him to pass along your b-plan.

    All money is green, this has been said a lot of times. So when picking a VC, go to one that understands your market, go to one who will be able to understand your idea, and help you along. Someone who "gets it." That's the real value of a VC, the connections/contacts, not the cash.

    One last bit. I'm located in Pittsburgh PA, (Fly-over territory), and there is a b-plan competition open to people in the region. http://www.enterprizepgh.com This is modeled after the MIT50K, and will assist people by connecting the b-plans/ideas with coaches who will help you write the b-plan, think of problems, and prepare for trouble. The idea is to get exposure for your idea to the people who can help you succeed. If no one knows what you're doing, no one can help.
  • The suggestions concerning making sure that there's documented proof that you produced design material as at a particular date seem wise; whether this involves using a notary public, submitting sealed copy with lawyer, getting a copy postmarked, or going through some formal legal bureau responsible for such is something that you should ask your lawyer about. Safer is obviously better than probably safe enough.

    The CEO of Digital Creations, the Zope [zope.org] people, did a talk at the Atlanta Linux Showcase [linuxshowcase.org] pretty much describing this sort of thing. They looked for a venture capital firm that they felt they could trust; surprisingly, it was actually the VC people that suggested releasing Zope as free software.

    The big point here is that it would be wise to contact a company that produces free software that has IPOed, and see what firms they have dealt with. Such firms are likely somewhat better choices to deal with than firms that haven't done VC work with "free software" companies.

    In the case of Digital Creations, the VC firm was the Verticality Investment Group.

    In the beginning, there are obviously not many VC firms that "grok" free software; those few firms that do, and get extra business as a result, will doubtless be noticed by those that are "later adopters."

  • As someone else mentioned, VC do not invest in ideas. The also don't invest in companies. VC invest in management teams.

    The best thing you can do is try to raise some private money first from local sources (look for cashed out high-tech execs and local angel investment groups). Then build your team. Find a CEO who has CEO and proven fundraising experience, and will work for stock for the first few months. If you are a geek, don't expect to be best friends with this person, they should be a very slick suit with contacts in the VC and investment banking world. As a geek, wear the CTO hat, at least on your first company. Later, with experience in fast talking the suits, you can be CEO.

    Second, begin the patent process. It will take a long time to actually get it. Some patent lawyers will work for equity or a mix of equity and cash to keep your initial costs low. VC slobber over patentable technology. It sets up a barrier to entry.

    Finally, look to institutional investments as well. Intel, Microsoft, and Dell make huge investments in companies, and it is "chump change" to them.

    I'd like to say one thing - avoid venture conferences. They are a useless waste of money, and usually aren't even good for press. Maybe do one, just to have proof that you can get in one. Real VC deals are done over lunch, not at a conference. Get to know lawyers. Get to know investment bankers. Get to know people who work at the big name consulting houses. These are your inside track into VC. An inside contact is your best hope of getting noticed. The vast majority of business plans that go to VC end up rapidly in the trash without an inside contact.
  • I'm involved with a pre-money startup that's been going through this. There is just so much to tell that I don't think I can do the subject justice in the time I have.

    The biggest issue that you may have is finding the right VC. There are lots that are scared of hardware and are looking for pure Internet plays. The only thing you will accomplish by presenting to these folks is to do yourself damage. Ask upfront: "Are you interested in a combine Linux and hardware play?"

    Most VCs will not sign an NDA. Although, I've heard that some will be more willing to sign in the case of hardware.

    When you talk to a VC tell them a little about your idea -- just enough to give them an idea of what market you're addressing and then ask: "Are you working on or thinking about a potentially competing venture?" Most VCs will answer truthfully. Don't trot out the NDA until you've reached this point -- even then don't be surprised if they refuse.

    In the initial meetings, make sure that you stay away from the "how" of what you're doing -- that's the part that's patentable -- stick with the what and the market opportunity.

    Get an introduction to the VCs that you target -- don't bother with sending in a plan without an introduction. It's usually not worth the time of the money. One VC says that they get 10,000 plans a year and fund 15.

    Think about approaching 3Fs (Friends, Family and Fools) or angels investors for seed money that will allow you to start the patent process.

    Check out http://www.garage.com

    VCs invest in idea based on the strength of 1) Market 2) Team 3) Product in that order.

    Well, that's it for now -- have to go prep for another fscking demo.
  • THE most important thing for a VC... is that someone knows YOU. Most will not even SPEAK to you, unless someone has introduced you to them.

    My suggestion. Fly to CA, meet a couple of guys in Stanford's MBA program, and have them introduce you to a couple of friends.

    Good luck !!

  • I just saw a great talk by Ted Schlien, a partner at Kleiner Perkins Caufield & Byers, a top VC firm which has launched such juggernauts as Sun and Excite. Note that Ted is also on the board of LinuxCare. This was at the Second Jini Community Meeting (www.jini.org [jini.org]) and I believe that his slides will be online in a few days. I don't have my notes with me but I will write down what I can remember:

    Ted's advice was very straightforward. First, you e-mail a VC partner a 2-3 page executive summary. If you are then asked for one, you present a business plan. The shorter the business plan, the better. The first meeting will consist of about an hour -- 15-20 slides MAX! -- where you try to sell your idea. He suggested that if the VC asks about what percentage in the company you are willing to sell for VC help, you say something vague like "we'll let the market determine that".

    Pitching your idea to multiple VCs is good as you can get them to compete for what percentage of your company they will own -- and of course you should be shopping around for VCs that will actually contribute value to your venture rather than add value. Ted's main point was that firms like KP put a lot of work into helping you launch the company, recruit executives, strategize, and so forth. Other VC firms only "manage portfolios" of companies and may not be there for you if you start to run into trouble.

    I wouldn't worry about your idea being stolen in this way. It belongs to you. You can't get VC money unless you can put all of your cards on the table, and I believe that you retain all rights to the IP even after delivering the pitch. It sounds like you are at the perfect stage to approach VCs -- not too far along with your ideas, but not totally green either.

    I took the opportunity to ask Ted what he thought of the Linux market, since he's funding LinuxCare. His comment was that Linux looks great for the server market and even better for embedded systems -- but he personally doesn't see it making a lot of impact on the desktop. It's up to us to prove him wrong, of course, but what this means is that there's a lot of good opportunity to push Linux into the server and embedded space. Note also that Ted doesn't think that selling Linux distributions is going to be as important as services based on Linux -- which is what LinuxCare is providing.

    Good luck!
    Matt Welsh, UC Berkeley
  • Venture Capitalists are interested in QUICKLY making money. That means, they will take between 40-65% share of your company and then SELL it at the first best opportunity. Unless you have an established customer base and can demonstrate a long-term income stream, the VC's are NOT what you want to deal with if you are interested in your company's future. Investor bankers are more the way to go. They will take a much lower %age of your stock and are interested in developing your business plan with you in order to provide long-term income to the bank. VC's are often "looser" with their money than IB's, but they expect a much higher, quicker return for that risk. If you care about your concept and want a long-term company, IB's are a much better choice.
  • The best way to approach a VC is having a very cool looking demonstration of what you can do
    Keep in mind they aren't technical usually -- they just have lots of money
    Keep your example looking as best as possible and make it seem like it can save the world and the world can't exist without it
    Make sure that before anybody see's it that you have a standard NDA -- also a good suggestion is to duplicate all documentation, along with a statement that is signed by a disinterested witness that states that it was mailed on date so-and-so to protect intellectual property rights, and mail using standard US Postal service to yourself -- as long as it's not opened, it can hold up in court.
    This covers your bases while you are going around and talking to VC's -- I've never done it myself but I know a few VC's and know a few people that have gone through the process
    Good luck!
    -= Making the world a better place =-
  • Having never tried to get funding for anything that I was directly involved in creating, I can only provide you with my opnion on what I have seen while working for a number of start up companies.

    It would seem to me that in the world of VC you must provide to the company nearly full information about your product to get even a chance at funding. This does not however mean that you don't need to protect yourself.

    The first step is probably talking to an attorney and getting a fairly solid NDA. Barring that expense you may want to at least take a copy of all the NDAs that you have signed and try to cull out the pertinant bits(I would recommend finding a good technical lawyer, it would really be a shame to have your technology leak out due to a loophole you inadvertentaly left in).

    After you feel good about the state of your NDA, you will probably have to fight to get good face time with any real VC firm.

    Assuming you do get an offer for funding, you should keep in mind that a VC firm is giving you money to make them money. They will most likely want a place on your board of directors(you have incorperated havn't you?). At least quarterly status reports on what you are doing with their money. All sorts of proof that you are doing your best to make your product work. Certainly a majority stake in the ownership of the company.

    As a matter of fact you had better have a couple of lawyers look at any offer you receive, and then get an accountant to look over the numbers, as well as an accountant to handle the money and the books.

    It would be a shame afterall to get locked into a contract with a VC and get bumped off the development, design, and focus of your product. Especially if you end up having to pay the money back because you violated some clause in the contract.

    Really I'm not pessimistic, but the view of VC firms as sharks does have some basis in fact.

  • I hear this advice all the time, and I can assure you it is completely untrue -- mailing yourself something does nothing to prove when it was created and has NO legal basis whatsoever.

    What would prevent you from mailing yourself an unsealed envelope, getting it postmarked, and putting a great idea in the envelope 3 years later?

    seriously, legal advice from rumors is a bad way to start a business...
  • by platypus ( 18156 )
    I did one such talk, and they offered a NDA without being asked for that.
    They explained such NDA would secure them too, cause they wanted to give some insight in their strucure, and I liked this.
    If I were your friend, I would first wait if they offer a NDA. If they don't, I would be very carefull.
    If I still wanted to talk to them, I would ask them whether they could offer me a NDA.
    If they can't, I would forget them, this can't be serious. Every serious investment venture capital firm will always have to use one.
    If they do have a preprinted NDA, I would check it very carefull, and ask lawyer if I'm uncertain.
  • Besides being so old school, why not spend the time and energy everyone else seems to think would be so well spent on patent applications, non-disclosure agreements and related shenanigans (and the related fees for attorney time) on developing the idea?

    I would like to recommend that your friend spend his (or her) time locating someone (be it a VC, senior accountant, regular business or ?) who can join with him and develop and bring to market the concept involved.

    Even better, as the tool runs on Linux, why not make it open source and pursue compensation by achievement instead of flogging the sick horse of reward by scarcity of closed source knowledge, secondly reducing the value of your friends device to business by creating it as a proprietary item? Your friend is already out front by thinking up the concept and if he is good enough to think up this idea, he is probably the best person to develop the idea even if, through disclosure, the whole world knows about it.

    VA Linux Systems sells machines and will make money because they take the same parts that other companies have available, but people people (and more often businesses) buy their Linux computers because of the value add they provide by knowing more about what works and what doesn't than anyone else and provide better linux support than other computer producers who now install Linux on their computers, not because they have a patent on ways to implement Linux on PCs.

    The concept is the same regardless of whether of the idea in question is hardware or software.

    Reading ESR's The Magic Cauldron [tuxedo.org] should get him started on the right road.

    Quote from the VA Linux [valinux.com] web site...
    " There were no matches for patent found on www.valinux.com."
  • Most VC firms worth anything should be willing to do that as they regularily deal with proprietary or secret information.

    From my experience, most VC firms won't sign a NDA (non disclosure agreement) because they get so many business plans many of them overlap and they would have a conflict of interest. They are more likely to sign a NDA if you have a proven track record, but then you probably don't need money.

    If it's a really good idea, people will steal it no matter what you do. The advantage you have is that you have a working proto-type and hopefully not to far off from production, where other people will be playing catch-up. Patents now take 18 months to go through, so they are not worth much in a startup environment. Better just to file a sloppy patent yourself and slap a patent-pending on your product to scare people off. If you go to lawyer you are looking at $20k for a good application.

    I suggest leaving out the really technical details from your business plan and wait till you find someone who sounds really interested before disclosing the rest.

  • I'm hearing alot of stupid things in these comments below. It really goes to show how little the public understands the VC market.

    First off, don't ask for them to sign a NDA. They don't want to -- they don't care to. And they won't.

    Second -- having a great product idea isn't going to get VC $$ funneled into your pocket. VCs want to see a great team. Most VCs will pick a Grade A Team with a Grade B Idea virtually anytime over Grade B Team with a Grade A idea. Begin building a Grade A team.

    Third -- don't waste your time mailing your damn business plans to VCs. They are call 'over the transom', and are usually deleted, destroyed or eliminated almost immediately. If you don't know someone who can get you in contact with a VC firm -- start looking for that someone immediately. Contact your legal firm -- public relations firm -- advertising firm -- people on your board -- keep looking.

    Four -- of course they are going to take a chunk of your company. Don't be stingy (that goes along with -- don't be an idiot either) -- do you think they want to see your business flouder -- and their money evaporate -- hardly! They are in it for the money -- you should be too -- but have a passion for what you do.

    B Prater, CTO
    http://www.plugingo.com
  • The cost of filing a provisional patent application is (as I recall) $75. All you need to do is write a detailed description of what you want to protect (source code would be ideal), and file it with the USPTO (check out the web site www.uspto.gov, I believe they have information that is helpful).

    That gives you one year in which to file a real patent application and claim the provisional filing date as your date of priority. After filing the provisional, if you show someone your idea and they decide to rip it off, you can decide to spend the bucks on a real application, and you will have priority.

    An NDA would be good, but venture capital firms can be hesitant to sign them. I believe it is for historical reasons ("we've always done things with a handshake"), but I know that at least some VC's now sign them.

    -Steven Young
  • I just checked the PTO's website. The fee for filing a provisional patent application is $75 for a small entity, $150 for a large entity (don't worry, it is measured by number of persons, not waist size).

    Since the PTO website is a bit difficult to get useful information from, here is the link:
    http://www.uspto.gov/web/offices/pac/provapp.htm

    Remember, this is not a substitute for a real patent application, but it will hold your place in line for up to a year.

    -Steven Young
  • i'm a web solutions provider here in the boston area. i have been in and around the "startup" scene for a while now. basically, i create the e-commerce and branding solutions that startups are looking for. this means that (as a web partner) i've been on many sides of the screening process, and i've seen first hand what VCs are looking for. the one bit of advice i can give you is this: if you've got an idea, share it with EVERYONE!!!! don't tell them HOW you're going to do something, but definately tell them WHAT you are doing. why? according to 100% of the VC reps i work with, "if you have an idea, and at least 5 other people aren't working on it at the same time, then it's not a good idea." being paranoid implies that you think your idea is so original and great that no one else can think of it... this is not the kind of thinking that VCs like, and it WILL turn them off. i've seen it. in a nutshell, VCs look for PEOPLE with good ideas, not good ideas themselves. if the PEOPLE are there, they will work with the idea. if the idea is there... and the people aren't, they will turn you down. additionally, VC firms did NOT get to where they are by stealing ideas. they are very professional about what they do, and in the end, 99.9% of all VCs i know are in it b/c it's fun and they like working with people to see ideas come alive.

    now... if you want to get in touch with a VC, here is what you need to do: 1) get a team together. you need people with EXPERIENCE in either a) building a final product, or b) runing a company that has a final product. if you have one, the VC will help you build the other. if you have both, that's super good, and if you have neither, that's bad. 2) get a referral. you WILL NOT EVER get any attention simply by emailing a VC, or by cold-calling. in the end, only 1% of all prospects get funding, and only 5% of all prospects even get to see the VCs in person. 3) this means you have to NETWORK, NETWORK, NETWORK!! find just ONE person and take it from there... if you ever walk into a VC's office and don't have a name to toss out, you don't have credibility, and you won't make it very far. no matter where you start, you can work up the ladder... beleive me, i've done it. and ask EVERYone you meet for names. even if a VC turns you down, it may not be for the reason you think. often times, the idea and team may be very strong, but just not on strategy for the VC in question.. but asking that VC who might be interested is a great thing to do. 4) never give up. even when you're at your bottom dollar. cisco was rejected by EVERY VC in california and eventually was "funded" when the founders maxed out all of the credit cards they could get. 5) get a plan together. you don't need a business plan. you don't need projections. no one ever looks at projections. all you need is a few pages of text that explain what you are doing in plain english. remember.. VCs are people too, and at the end of the day, if they can't explain what you are trying to do to their spouses or friends, IN PLAIN ENGLISH, then you will fail. you can have lots of pretty charts and numbers, projections, etc... but if you don't give the VC something s/he can use to explain the idea to other people... it ain't gonna work.
    and finally... when building the team... remember this: equity is NOT given away. the VC does not TAKE equity. equity is a bargaining chip. your goal is to streth your "spending dollars" and see how much you can get with the equity that you offer. often times, if the founders are even still around at a publicly traded company, if they are still holding 12% of the company, they are going VERY well.

    i guess that's about it.... if anyone has any questions, please feel free to email me at jonty@teralon.com [mailto]. additionally, if anyone is in the boston area and has any ideas, PLEASE email me. i have MANY associates that are looking to fund hot new ideas.

  • Random Fact:

    US$7.67 Billion was given out 2nd Quarter of 1999 for venture capitalism. Highest ever! (I haven't heard the numbers for 3rd quarter 1999).

    Just something I read.

  • My four-person startup is currently going through VC rounds and it's been very educational. If all you have is a prototype but no plan on how to sell it, you aren't ready for VC money. VCs want to know how you are going to sell it, to whom, and for how much. They want a comprehensive business plan with market forecasts, competitive analyses, customer profiles, and spreadsheets on projected development/marketing expenses and eventual revenues/profits, etc.
    Angels are folks who give you smaller amounts of money (like $100K) to get you started on building a team and planning the future. They tend to get more of your company since they are taking major risks, but in the end you can still do well for yourself. You don't say where you live, but there are angel networks in all of the main tech cities. Do some net searches and see what it takes to apply. There is an astounding amount of money out there and the majority of people involved are honest. Look for folks with demonstrable records and don't hesitate to ask for references. There are law firms out there who specialize representing startup companies. Hire one of them.
    If you have little or no business experience, be prepared to give up larger pieces of the pie, as folks will expect something in return for their experience and effort.
    Good luck. We'll look for you on the cover of Wired someday.
  • You are both right and wrong. I've seen VC's who understand the need for NDA's and will sign them, I've also seen ones who won't. One way around this we use is to get them to either sign a reciept for the Business Plan or to get them to sign a memorandum saying that they met with you on XX day and discussed YY. What's even more important is that you get your shite together on the business plan. DON'T leave any stone unturned in creating a solid and comprehesive plan. This plan once created (and dated) can become your proof that you created this idea and when. The worry is not that VC's will steal your idea, they don't have time to develop stolen ideas. The worry is that you won't be able to convice them that you have a viable product. This is where the Business plan is vital. We just got 2 million in start up capitol because even though my bosses English isn't the greatest (He can code but forget spelling) it was so complete in facts and details that it blew them away. They had seen proposals in this market before, but they went with us because of the quality of his research. 20 research teams with the same tools will eventually come up with 20 nearly identical solutions. The reason you get funding is because you know your shite better than anyone else. Don't sweat the NDA sweat the business plan.
  • check out Garage.com [garage.com].

    the site is dedicated to matching VC with developers/companies with new ideas. (any chance of getting a finder's fee??) -la
  • First, write a business plan. The Business Plan will contain what you want to do, how this device will sell, who it will sell to, and how you plan on making money and how long it will take to become profitable.

    Check out www.bplans.com [bplans.com] -- do it online there with some of their examples.

    Then, find a non-disclosure agreement. I found a few just searching, here are some sites:

    http://www.ilrg.com/forms/non-disc.html [ilrg.com]

    http://www.freenet.tlh.fl.us/~wo lfj/FCLO/AOLNDA.html [tlh.fl.us]

    http://www.kidtrak.com/nda.html [kidtrak.com]

    http://www.defiant.com.au/nda.html [defiant.com.au]

    Any generic NDA will work just fine. First have them sign the NDA, then give them the business plan that lays out how your product works, what it does, and what market it fills.

  • I would like to see the information posted on Slashdot to allow for future readers to look at the 'VC FAQ on Slashdot'... where tech's regularily go. This would save you (the VC) from having to create a site and get traffic. Also it would allow other VC's to add their 2 cents worth. Seems like a natural fit really, slashdot.org and the VC FAQ :-)
  • by slew ( 2918 ) on Thursday October 21, 1999 @12:13PM (#1596175)
    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...
  • by FallLine ( 12211 ) on Thursday October 21, 1999 @12:56PM (#1596176)

    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.
  • by the eric conspiracy ( 20178 ) on Thursday October 21, 1999 @11:26AM (#1596177)
    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.

  • by Uller-RM ( 65231 ) on Thursday October 21, 1999 @11:01AM (#1596178) Homepage
    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 ;-)

  • by dfung ( 68701 ) on Thursday October 21, 1999 @11:16AM (#1596179)
    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!
  • by techmage ( 72232 ) <joe.latrell@quub . s p a ce> on Thursday October 21, 1999 @12:56PM (#1596180) Homepage
    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.
  • by Fnkmaster ( 89084 ) on Thursday October 21, 1999 @11:27AM (#1596181)
    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).
  • by schporto ( 20516 ) on Thursday October 21, 1999 @11:05AM (#1596182) Homepage
    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
  • by Matt2000 ( 29624 ) on Thursday October 21, 1999 @11:03AM (#1596183) Homepage
    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 [hotnutz.com]
  • by Bozdune ( 68800 ) on Thursday October 21, 1999 @02:02PM (#1596184)
    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.
  • by JohnG ( 93975 ) on Thursday October 21, 1999 @11:06AM (#1596185)
    There are several ways. First he could simply draw/write all the information down and mail it to himself. The envelope will be dated by the Post Office and so long as he doesn't open it he has proof of when he first came up with the idea. If anyone comes out with it later he will have the necessary evidence to proof that it is his idea.
    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.

  • by humphreybogus ( 99410 ) on Thursday October 21, 1999 @11:43AM (#1596186)
    Believe it or not, some VCs do read slashdot. I am an analyst/associate at a prominent, early-stage VC firm on Sand Hill Road in Silicon Valley, with several hundred million dollars under management. We have invested in many technology companies, and we have seen but rejected orders of magnitude more (that's the nature of the business).

    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 [garage.com], Angel Investors LP [svangels.com]. 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 [mit.edu]. 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!

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