What not to tell Angel investors and VCs?

Anonymous

November 1st, 2015

Angel Investors and VCs ask all kinds of questions. As a founder or a CEO what makes sense not to tell this types of investors and for what reason?

Is there something they are not entitled to know and yet ask anyway?

Investors don't sign NDAs nowadays, so how to make sure that when they ask for you to do the presentation, they are not testing you or collecting competitive intelligence to see how much threat you are to their portfolio companies?

What you shouldn't tell potential investor vs existing investor or not tell any investor at any stage?

Very appreciated.

Added: Obviously protecting publicly visible information is pointless, but what about if investors asks for your Cost of Customer Acquisitions (CAC) and you reply with time it takes to ROI instead, or they ask which channels produce lower CAC and faster ROI or Before you get the money to implement your very innovative marketing or go to market strategy revealing what it is.

Chris Kitze CEO at Safe Cash Payment Technologies, Inc.

November 1st, 2015

If you can't take your business plan, hand it to your competitor and still have a business, you need to take a hard look at what you are doing.

Nearly everything is out in the open these days; "there are no secrets in the naked city". However, potential deals that haven't closed and partners you are in discussions with probably shouldn't be spoken about in great detail. You can be vague about these; "we're in discussions with a major retail outlet with millions of consumers", that sort of thing. They'll get the idea how you are thinking, the direction you are going, and you can share that information once you receive a term sheet from the investor. They might be able to offer help to make an introduction, too.

Stas Khirman SVOD Conference CoChair

November 1st, 2015

Being multiple times on both sides of the table, I recommend to follow those three rules:
1.) Tell truth, only TRUTH , but never ALL the truth..
2.) Tell WHAT you are doing ( or going to do) , but not HOW you are going to do
3.) If your business know-how can be replicated after 1h of talks, its maximum valuation is about cost of lunch in fancy restaurant...

A few clarification on the rules:

#1 - "vague answers" are not helpful - trust is a major asset of entrepreneur/investors relationships.. It much better to draw a line with "i can't name our potential customer until ..." instead of wiggling with "you probably can guess name of this big retailer" or similar... Potential investor is entitled to truthful information, but not to all information.
#2 - let's use your CAC question as an example - you certainly have to provide potential investors with truthful information about your CAC - it is part of WHAT for your business model and planning. But you can reserve technical details of HOW you achieve such uniquely low acquisition cost until late stage due diligence.

Rob Francis

November 1st, 2015

This is by no means a full answer, but I wouldn't worry about the competitive intelligence part. First, Angels/VC most likely value their time too much to setup a meeting and sit thru the whole thing just to see if you are a threat. If they do, they probably aren't good at what they do and you'll want to avoid them anyway.

Second, nobody is going to approach a problem, and build a company the same way you would. Even if it's the same industry with the same potential customers, the game plan will be different, hustle will be different, etc. So have confidence that you'll solve it better than anyone else, and the Angel/VC will recognize that and invest...or not.

Stas Khirman SVOD Conference CoChair

November 1st, 2015

Max,

It seems you will be surprised to learn that patents are not sufficient to replicate BUSINESS know-how. Usually, they even not sufficient to replicate TECHNOLOGICAL know-how... And, if you read well-written patents claims, you'll realise that they tend to cover WHAT you are doing, dedicating a very little time to describe HOW ( to give wider space for future litigation opportunities, IMHO)

But even if somehow you can understand all technological and business ideas, it is way not enough for success.

For some reason, too many people are assuming that startup success based on some small piece of information, some patent or brilliant idea. While in practice (proven time after time) at least 9/10 of the success depends on quality of execution.

You asked for examples - virtually every successful company had precessors with similar, or sometimes even superior, ideas and technologies. Let's look on Facebook - originally it was based on well-known ideas easily describable in 1h lunch. Plus had a few well-established direct competitors.

Did Facebook have deep technological know-how behind it - no, at least at the beginning... Did it become successful where others failed due to some "1h know-how" ideas? Apparently not...

Yes, Facebook had some good ideas ( but every waiter on University has even better ideas..).

It success came not from ideas but brilliant EXECUTION. And this you can't replicate in 1h lunch...

Pranay Choudhry Founder & Marketing Lead at Actozen

November 1st, 2015

People outside the business are not entitled to know alot of things, and the same logic applies to VC's or investors. It's a definite grey area as they want to be a part of your business so they need adequate information. In my opinion, metrics such as traction, business performance, and the vision for your business are fair play. The details of how you plan to achieve your vision should be guarded and its a gut call who you want to share it with. As most people say, the two best things in a startup is the execution and the team that is executing it, so focus on that. Most VC's and Angels are very transparent with their portfolio so you can have a sense of whether they are just fishing for information or are genuinely interested in your company. Its a very open-ended question so I am sure there will be other opinions coming in.

Nishant Shukla CEO of crestinfotech

Last updated on August 9th, 2017

As per my envision:-

80% deals were spoil due to this "presentation" about CAC. It's such an interesting task to solve with business intelligence.

-Make presentation result oriented not strategical.

-Keep him up to date with magic figures of growth but do not talk about the "way " you are working.

-If he/she ask for it do not regret just repeat same thing in other graphical representation which only includes figures.

Liza Taylor Communication Specialist at Keyideas Infotech

November 4th, 2015

First you need to study the VCs and explore their investment history. If they are investing on any of the ventures which are similar to yours, you better avoid providing them the full details of your business proposal. Don't go too much into details because a detailed explanation is being required only if an investor wants to invest exclusively on your only venture.

I do understand that you would like to convince your investors, through your detailed explanation so that you won't miss the opportunity. However, one needs to be prudent when it comes to protection of one's own intellectual property.

Max Avroutski

November 1st, 2015

Stas,

How one separates What from How?
So, you suggesting on the question: How you bringing in customers? "What" answer is : I am doing Marketing. And on "How" you doing it : You suggest to say "It's a trade secret."

BTW, about know-how replicated after 1 hour worth the cost of lunch, have you heard of Patents ? Patents usually short enough to fully read in 1 hour and have requirement that someone who reads it can 100% replicate it. So You suggesting that anything that is not patentable is not worth keeping from competitors and investors?

Can I have 3 examples of something that can't be replicated after learning about it for 1 hour?

Lets say some VC wants to invest, you do the pitch, because who would turn down chance of getting investment from one of the 100 largest VCs, and they do investments in ventures in your sector, but they start to ask how you planing on doing some of the things that you say that you will do.

Should you give it up? and risk that they don't give you $10M, but protect their $1B investment in another company that secretly was thinking of doing what you planing on doing, but had no idea of how to accomplish it, before you told that VC

Or even worse, they give you $5, and then make it impossible to accomplish anything, and their $1B investment company gets first mover advantage.

Joseph Wang Chief Science Officer at Bitquant Research Laboratories

August 9th, 2017

First of all, there is a big difference between a *potential* investor and an actual investor. Once someone has put a significant amount of money into a company, they they are entitled to know everything, but that's very different from someone that is thinking about putting money into a company.

One thing that you shouldn't mention are things that you shouldn't mention for privacy reasons. Make sure that when you have screenshots they are anonymized data, and don't mention suppliers and clients to potential investors if those suppliers and clients don't want to be mentioned.

Aside from that, It's not so much entitled to know, but I find that a lot of startups spend too much time on things that are irrelevant, and not enough time on things that are In particular, most startups spend far too much time pitching the product, as if they were selling it to a customer, and not enough time on the financial stuff.

You should probably stop talking if you get the impression that the information you are using will be used against you, but that's a function of who you are talking to rather than what you are saying. If you feel uncomfortable sharing the details of your company with the investor, that probably says that you should find another investor. In particular, any investor that you want knows what a startup looks like.

In the specific situation that you mentioned, I don't think that projected CAC or marketing channels is particularly sensitive, and my experience is that most startups think that their strategy is more innovative than it actually is.

Unless you've actually started to implement a strategy, it's likely that all of the numbers are total guesswork, and it's more than likely that your strategy won't work because the first thing that you try never does. The reason the investor would be interested in knowing the financial details will be that they want to know what happens if your marketing strategy doesn't work (and unless it's already been implemented somewhere, it most likely won't).

Neil Gordon Board Member, Corporate Finance Advisor and Strategy Consultant

November 2nd, 2015

You're not obligated to tell potential investors anything. At the same time, the potential investors aren't obligated to give you their money. Just saying.

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