I am often asked by entrepreneurs to sign NDAs before they will share their business idea with me. Putting aside the issue of why VCs can’t sign NDAs for the moment (no, we can’t, sorry), the request reveals something more significant. Entrepreneurs usually believe that their business idea is unique, and that it is the entrepreneur’s competitive advantage. Some go to almost ridiculous lengths to be oblique, or to otherwise keep from revealing their “secret sauce.”
What is interesting to me is how often an entrepreneur’s unique idea is similar to an idea I heard the week before from another entrepreneur or team. Sometimes I’ll hear the same idea four times in a month. Other investors that I know have similar stories to tell. There are often different spins on the idea or twists, but the core idea is the same. There are many reasons why ideas tend to clump, but the largest reason is that entrepreneurship doesn’t exist in a vacuum. It exists in a shared moment in time, where economic and technology conditions cause individuals to similarly answer the question “what bugs me right now.”
If you ask entrepreneurs most will tell you that they start their businesses because something bugs them. They start a business to address a need that they think should be met – usually because they have personal experience in the market that they want to address. Usually, a business idea comes out of an itch that the entrepreneur has to scratch – an idea that doesn’t trigger a strong emotional response from the entrepreneur is unlikely to sustain the entrepreneur through the challenges (which are many) of starting a company.
Because entrepreneurs live in a broader society, therefore, they generally will come up with ideas that are driven by the circumstances of a moment in time. That is why you will see hundreds of social networks looking for funding at once, or thousands of iPhone developers working on the next great app. The chances of an individual coming up an idea that is truly unique is very rare indeed, if the idea is based upon a method of doing business or a product to sell consumers or enterprise.
Sometimes there are unique ideas that can be protected as hard intellectual property. I’ve seen that more than once. However, even where there is a unique idea or a piece of intellectual property, the issue isn’t really can another entrepreneur steal it. It’s whether a business can be executed around it.
Revealing to me is some of the recent chatter on the blogosphere around intellectual property rights and enforcement. When you have Mark Cuban, Google and Brad Feld worrying about IP in a single week, that tells you something. When they all are focusing on patent enforcement by owners who are not “operating a business” they are telling you something else completely. They are expressing a similar principle – it’s not the idea it’s the entrepreneur.
This is not to say that ideas don’t matter (they do), or that intellectual property rights shouldn’t be perfected (they should). But, what I believe strongly is that it is the quality of the entrepreneur or entrepreneurial team that is the most important determinant for start up success. I have never seen a bad entrepreneur successfully commercialize a great idea. I have sometimes seen a great entrepreneur overcome a mediocre idea. But, for the most likely success you marry up a great idea with a great entrepreneur.
What makes a great idea? In my experience great ideas are viral. They inspire passion, excitement and have an obvious path to success. I think most professional investors would agree that the startups that they have had the most success with were the ones where the idea was compelling. A great idea can create distinctiveness through execution. A great idea can be explained in less than a minute to various audiences and have them react with excitement and a desire to see the idea succeed.
What makes a great entrepreneur? There are many characteristics that matter, but for the purposes of pushing forward a great idea they need to be able to tell a story that is exciting and involving. The entrepreneur needs to have the skills, alone or with his team, to get the initial product built and the initial customers obtained. The entrepreneur must be irrepressible. And, most importantly the entrepreneur must be ready to execute against the known challenges preventing success and able to adapt to the unknown challenges along the way.
What does this all mean for entrepreneurs? You should assume that there are many smart people around the world who have thought of something similar. And, if you have truly thought of something that is unique, you should assume that an investor is going to be less concerned with whether it is unique and how you plan to succeed.
The most important question you must answer to obtain capital is not what your idea is; it is why you are the person who will succeed with that idea. That is what investors really care about.
A short note on the use of Non Disclosure Agreements and confidentiality. You should always provide any information to investors with an expectation of confidentiality and make sure your information expressly states that the information is your property. This is expected by investors and they should, as honest people (and most investors are concerned about their reputations) keep the information confidential. Additionally, by marking your information confidential you also protect your position vis-à-vis your employees and competitors to keep your business ideas and concepts as trade secrets. But, you shouldn’t ask for an NDA from a VC, because the NDA makes a significant shift in the burden of proof in an intellectual property law suit, and the shift is not something that professional VCs will generally accept. If you really believe that you have something that is so unique that it is entitled to an NDA my best advice would be to hold back that information until the end of due diligence, and then either ask for an NDA (and hope it is signed) or forget about the NDA because you have a high degree of comfort with the recipient.