Naval · July 6th, 2010
If you’re a passionate entrepreneur, you can often see the vast potential for your product. In your head, the possibilities of the future branch out, with infinite forks and potential. When pitching to investors, you’ve learned to define your market as broadly as possible while remaining credible. So, it’s not surprising that you’re disappointed when investors don’t disclose a conflict, and you steer clear of investors who might already have an investment in the same space — dating, social gaming, compliance, security, etc.
If you’re an experienced investor, you’ve seen it all. How every startup thinks they can take over the world, but usually has to struggle to accomplish even its one core product or task. How three copycat business plans will arrive in the same week, and how each one thinks they’re unique and protectable. How domain knowledge and therefore your ability to help a startup accrue by having multiple investments in the same space.
Both points of view are pretty extreme, and the truths about conflicts of interest are highly contextual. Here’s how to think about it.
1. The idea
Firstly, the idea — it’s no big deal. If it’s any good, someone has had it before and someone will have it again. If you’re still convinced it’s that good, go file a patent first, and then go talk about it. Keep in mind that investors outside of big tech (cleantech, biotech…) automatically have a bias against “patented” ideas, and most brilliance seems obvious in hindsight. Ask an investor to sign an NDA, and you’ve just filtered out all but the most desperate investors.
2. The space
Secondly, the space — it’s tricky, but you have to define it as realistically narrow. There was a time when having an investment in “web” might have been considered a conflict for another “web” company. There was a time when the term “portal” was a competitive category. Unless it’s head-on competition, Foursquare v. Gowalla, Disqus v. IntenseDebate, Google v. Bing, it’s really, honestly, not competitive. If there’s room for multiple equal-sized players in the space, it’s not as competitive as you might think. Also, theories about where you might zig or zag don’t count — just compare on what you’re doing at this moment.
3. Angels vs. VCs
Thirdly, the type of investor matters — active angels have a lot more deals than active VCs and are more likely to have an investment in an adjacent space. This is not a big problem — angels invest in syndicates and usually only provide help in a contextual, on-demand way. Because VCs are likely to be on your board, have more money into the company, and have more control and information rights, it makes more sense to pay attention to conflicts VCs might have (Disclosure: I consider myself to be an angel investor).
4. Conflict checks
Fourthly, just ask the VC to disclose potential conflicts up front, but don’t be too broad-minded about what constitutes a conflict.
Lastly, beware the “entrepreneur check.” This is where the VC tells you that they like your company, want to do due-diligence, and then just have to check with the entrepreneur in one of their investments about whether this investment would be competitive or not. Since entrepreneurs tend to have an overly-broad view of what’s competitive, this check usually fails. Even in the rare case that it doesn’t, it’s used as an excuse by the investor to pass. Therefore, always insist that they run the “entrepreneur check” early in the process, before you’ve invested too much into this investor.
Your own biggest competition
Our flawed patent system aside, ideas do not have the merit that we were all raised believing. You do have to pick the right space, but after that, execution is everything. Here’s a quick confirmation test — go back to your classmates and pick out the smartest ones, and then the hardest working ones. Now look at who is successful. A certain base level of intellect and idea-formation capability is required, but beyond that are strongly diminishing or even negative returns.
Consequently, the best entrepreneurs display a lot of chutzpah. They aren’t fazed by the competition, nor do they see shadows in every corner. They are their own biggest competition.
Topics Competition · Pitching · VC Industry
I’m not sure about your ‘space’ section – are you saying that you must or must not be in a competitive space to be successful with angel investors?
I can understand that it may be too competitive to be heads-on with Google – so are you saying you should be defining a niche where there is no competition or joining a niche where there is space for a second player?
I just realized Edison’s “Genius is one percent inspiration and 99 percent perspiration” is about right on how valuable your idea really is. Good point that they should focus on more in school, actually…
This sounds like the ‘competition vs. execution’ discussion. If ideas are seldom original then only the ability to execute on the idea is the investing criteria. Filtering out bad ideas is easy- I’ve run business plan contests where 95% of the plans were eliminated at the first paragraph. In every case it was the perceived ability of the founders to execute the plan that got them the attention.
How about a post about assessing the people behind the ideas?
For someone like me about to start the funding rounds, this is good advice. I’ve already seen the idea vs. execution piece in a set of meeting I had with an entrepreneur who wanted to share an idea with my partner and me and immediately own 40% of the company. Bizarre does not begin to describe it.
As the saying goes every battle plan works until you engage the enemy. Until you execute, a million dollar idea and $4 will buy you a cup of coffee.
I agree that the people implementing the idea is what makes the difference.
About having a post on how to assess people behind the idea…when I meet and speak with people that have that entrepreneurs’ oomph – it’s pretty tough to generalize what “type” of person they may be. Awesome entrepreneurs in online tech have a different kind of oomph than those in say medical sciences.
On filing patents and waving them around during an investor pitch – I have done that before and knew that some investors wanted to hear we had filed a patent for the sake of having a patent. Those actually aren’t the types of investors entrepreneurs should be engaging with. If they think your patent is going to be the best barrier to competition – they are placing low value on marketing, branding, people – all the other important aspects of the business that ultimately builds a great and sustainable business.
My 2 cents.
Great post and have run into some of these scenarios.
Another thing to keep in mind – if you’re raising Angel money, even if it seems competitive, the company is likely to pivot somehow in the first 3-9 months so what seems very competitive at first will probably not be the case once you adjust for product/market fit.
Good point. I can’t tell you how often (as an attorney representing start-ups) I have to clear a conflict because of a seemingly competitive company that is already a client. Then, they both pivot within a month. I would say that the start-up that does not pivot is by far the exception.
Great post on a subject that is of much concern to entrepreneurs.
Your point about looking at conflicts narrowly (only direct competitors) is, I think well taken.
A related problem is service providers with conflicts. These can arise in many ways. A couple are that we represent your investor in another investment or that we represent another company in the same space. The classic case of we represent thus and such a VC firm and now one of our clients gets a term sheet from them, happens all the time. (We actually like to refer clients to funds where we have relationships.) Ditto for angel investors. Having clients in seemingly competitive spaces also happens a lot. Bar associations have very carefully developed standards around what representations lawyers can and cannot take, and reputable lawyers and law firms adhere to them closely. Nonetheless, I am curious how entrepreneurs feel about these actual or seeming conflicts.
Another one is lawyers who take equity for fees (or invest) in clients. As a general proposition, I have not done that and have been glad I didn’t, but I am aware that it is common practice in some firms. There are some good arguments in its favor. Any thoughts?
I agree. And here’s where it gets challenging – Ideas seem to have their ‘time’ in history – now arguably we see the same ideas coming full circle with a slight twist at the end but in realty – none of the businesses out there, even the cool, sexy, new, hot, green or whatever businesses…are unique! None of them! Now to an entrepreneur – that’s like tell a parent that their baby is ugly. They won’t listen…but lets give it a try…Hey Entrepreneurs – your idea is not completely unique!
Nope – just as I thought – the word…”But…” is already forming on their lips.
And because of those similarities – there will always be potential conflicts in the minds of the VCs or Angels who are seeing so many plans and founders that they’re all starting to look the same (or at least similar).
Is it any wonder none of them will sign an NDA and look at you like you have two heads if you even mumble to abbreviation “NDA..” under your nervous breath?
So – here’s the real secret that entrepreneurs need to get.
Know what the real uniqueness of a baby business is?
….
And this might surprise you but its…
…the few people who are driving the concept – its their drive, passion, tenacity, creativity, ability to network and basically – they’re ability to EXECUTE!
The plain fact is – you and I can both be given the same business plan and if you give us both eighteen months and $1m – the two companies that come out the other end of the sausage machine will be completely different. And the the magic fairy dust that makes it so?
The founding team and the people they bring onboard – the culture they create – HOW they take those ingredients and put it together.
So – ideas and business plans and new business can look similar – and there appear to be conflicts for investors who see similar businesses. But where they really need to be looking is in the whites of the eyes of the people behind them. Don’t bet on the business plan or the concept or even the sexy space – always bet on the people! One way or another – the right people will make it happen.
Last note – Hey entrepreneurs – part of the reason why you guys change the world is because you don’t listen and you don’t let anyone call your baby ugly! You Rock!
Andrew
Hey guys – a few spelling mistakes in the last comment – Fixed:
++
I agree. And here’s where it gets challenging – ideas seem to have their ‘time’ in history – now arguably we see the same ideas coming full circle with a slight twist at the end but in reality – none of the businesses out there, even the cool, sexy, new, hot, green or whatever businesses…are unique! None of them! Now to an entrepreneur – that’s like tell a parent their baby is ugly. They won’t listen…but lets give it a try…Hey Entrepreneurs – your idea is not completely unique!
Nope – just as I thought – the word… “But…” is already forming on their lips.
And because of those similarities – there will always be potential conflicts in the minds of the VCs or Angels who are seeing so many plans and founders that they’re all starting to look the same (or at least similar).
Is it any wonder none of them will sign an NDA and look at you like you have two heads if you even mumble the abbreviation “NDA…?” under your nervous breath?
So – here’s the real secret that entrepreneurs need to get. And by the sounds of it – the investors too…
Know what the real uniqueness of a baby business is?
….
And this might surprise you but its…
…the few people who are driving the concept – its their drive, passion, tenacity, creativity, ability to network and basically – they’re ability to EXECUTE!
The plain fact is – you and I can both be given the same business plan and if you give us both eighteen months and $1m – the two companies that come out the other end of the sausage machine will be completely different. And the the magic fairy dust that makes it so?
The founding team and the people they bring onboard – the culture they create – HOW they take those ingredients and put it together.
So – ideas and business plans and new businesses can look similar – and there appear to be conflicts for investors who see these apparent entrepreneurial clones. But where they really need to be looking is in the whites of the eyes of the people behind them. Don’t bet on the business plan or the concept or even the sexy space – always bet on the people! One way or another – the right people will make it happen.
Last note – Hey entrepreneurs – part of the reason why you guys change the world is because you don’t listen and you don’t let anyone call your baby ugly! You Rock!
Andrew
Very good topic discussed…
Very interesting lines are providers…
This article helped me a lot..
Try to discuss more helping topics…
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