This morning, a start-up company sent their first email to me after a warm introduction from a great former colleague of mine. I was quite positively predisposed to giving this opportunity some close attention, since I think quite highly of my buddy's judgment, and the company's technology put them well within Pangaea's advanced materials mandate.
Like a kid on Christmas, I didn't read the message, but immediately tore off the wrapping paper. The sole attachment to the email was a PDF, which I assumed to be their slide deck presentation, and I was eager to be blown away by the amazing technical and business innovation I hoped to find inside. What could it be!?!?
It wasn't a glorious, beautifully designed PowerPoint with the next world-changing idea. It wasn't even a poorly-formatted executive summary giving the vaguest of impressions of the company. It was an NDA. And not just any Non-Disclosure Agreement! No, it was a 3-page, dense, small font, double columned, Microsoft-intense NDA. Signed. With Pangaea spelled incorrectly.
Imagine my disappointment.
So, as I responded to the company frankly that sending a contract in the initial contact email might be poorly received by other VCs, and they may have read between the lines (or just read this blog) to know how I personally might have felt, I advised them that their NDA-as-hello might be poor business practice. Being Canadian, I also apologized if I had offended them.
They aren't the only ones though, and if they're reading this now, they shouldn't feel too singled out. This happens all the time! It happened again while I'm editing this, although this time it was an investment bank that made the faux pas. I even remember once flying to another town to visit a start-up, and being presented with an NDA they wanted me to sign before they would let me past the reception desk!
So, why doesn't Pangaea like NDAs? Why don't VCs in general like NDAs, CDAs, or whatever you want to call them?
Imagine if you will, an alternate dimension where NDAs were our modus operandi. We do due diligence on hundreds of new companies every year, and invest in just a few. Let's presume that the typical term on these mirror universe NDAs is five years. Imagine the thousands of contracts we would have to keep track of, on top of, and be worried about, on an ongoing basis. Imagine having to prove for every one of those when we had last communicated with the company so that we could know when we might be able to destroy the contract. Imagine the legal fees we would incur each year just to review and negotiate all these contracts.
Now, imagine it from the perspective of one of our portfolio companies, with a Pangaea partner on its board of directors. They have to worry about getting sued over any innovation they come up with, because it might have similarity to something that was disclosed to some Pangaea partner by any of thousands of startups over the last five or more years.
Imagine it from the perspective of one of our Limited Partners, many of whom are major multinational corporations. Imagine their concerns about lawsuits over IP contamination! How could this Spock's-beard Pangaea possibly deliver strategic value to LPs when it has all information bound by NDA? How could this alternate Pangaea raise money for future funds?
Let's snap back to reality. I pride myself on my pattern recognition, and let me tell you what it tells me after an entrepreneur gives me an NDA. That entrepreneur is probably one or more of the following:
Which item on that list do you think describes the kind of entrepreneurs with whom I want to work? Right. Exactly.
An NDA is not the only possible assurance an entrepreneur has that a VC will handle their information appropriately. One of the most powerful assurances we can give is our reputation. Pangaea has been in business since 2001. We are well respected by entrepreneurs, multinational corporations and other VCs. Our dealflow, the lifeblood of our entire business, is dependent upon our discretion. You may rest assured that the future of our company is worth more to us than any possible benefit you might imagine us getting from being indiscrete.
The truth is, you don't need to disclose confidential information to effectively tell your story. Leave the truly sensitive data or trade secret details out. You don't need to confess to us your entire cost basis in the initial communication. We don't need to know the name of the European partner with which you just signed a confidential agreement. And we certainly don't need to read "CONFIDENTIAL AND PROPRIETARY" stamped onto every page of your material, especially when it's sent to us unsolicited (I'm looking at you, investment bankers).
Maybe you're the entrepreneur who's read this far and understands all the points, doesn't think any of those bullets describe you, and yet are still convinced that an NDA is critical to you. Why is that? Is it because you haven't filed your patents yet? FILE YOUR PATENTS! The whole world is first-to-file now. Nobody cares if you can prove you were first-to-invent. Once you have your IP in order, come back and don't ask us to sign an NDA.
To be honest, we do actually have a form of NDA we will enter into during late stage due diligence. It's a specific IP release that allows a company to disclose unpublished or unfiled patents, so that we may review them just prior to making our investment. Obviously we only get to that stage with a very few companies each year (see my "Why We Say No" blog). And of course there are confidentiality clauses in our contracts with our portfolio companies and our investors. But generally speaking, we don't do NDAs.
I think Guy Kawasaki said it best, when he said that an entrepreneur who asks a VC to sign an NDA "might as well tattoo 'I’m clueless!' on [their] forehead.”
Sorry for the rant-y, PSA blog about NDAs (there I am, being Canadian again). Hopefully this information is valuable to some of you. As for the start-up that reached out to me this morning, I warned them about the blog and they thanked me for giving them frank and helpful feedback. They've retooled their presentation to be non-confidential and we're setting up a meeting to take a closer look at their business and technology. First impressions can be overcome, but they're strong. Don't send an NDA to a VC.