Archive for the ‘General QandA’ Category

VCs and Non-Disclosure Agreements

Question: I have heard many times that VCs won’t sign NDAs. When I ask why this is, I’m told that reputable VCs won’t share my ideas with others and/or that my ideas aren’t so special or revolutionary that they would be stolen.

In the real world, VCs talk, they look at many deals, they network, etc. I would think in the real world information gets transferred whether maliciously or not.

I am interested on the true facts about this. Additionally, if a VC already has one company in a space and another company approaches them that is doing something novel and interesting in that same space, what happens?

Our Take: You are correct – VCs don’t sign NDAs. It’s not that we are trying to pull a “fast one” or do anything nefarious, rather in today’s over-litigious world, it is a necessary protection. The hypothetical VCs worry about is the case where 2 years ago Brad meets an entrepreneur, he signs a NDA on behalf of our firm and he takes a quick look at the business plan. He decides that the deal isn’t for us and we don’t invest. Today, I meet someone different, doing something in a similar space and our firm decides to invest. Despite the fact that Brad doesn’t even remember the plan from 2 years ago (remember, we get a ton of plans over time) and I never saw the first plan, the original entrepreneur sues us, assuming that we must have stolen his idea, when in fact this is not the case.

As for your “real world” question, VCs do look at many deals, we do network, etc. Reputable VCs, however, aren’t going to go around town blabbing about your plans. Besides, if I pass on your deal, I really don’t see the reason why I’d want to talk about it.  And if I fund your deal, I’m certainly not going to do anything to injure my investment.  I might have lunch with someone and talk about some industry trends, particular markets, but unless this person is a close and trusted colleague, I’m not even going to go into too much detail, as I don’t want to disclose everything that I know.

What does happen quite often is that we get a business plan from a company doing something similar to what one of our portfolio investments does. In this case, as soon as I realize this, I stop reading and let the entrepreneur know that we have a similar company and that I’m destroying his plan. The key here is being completely transparent and open.

One more thing: We get tons of unsolicited business plans that are marked “confidential.” Keep in mind that you can’t impose a duty of confidentiality sending something unsolicited.

Are There Any VCs Running Their Firms as a Web 2.0 Business?

Question: Are you aware of any companies or sites that are applying a Web 2.0 approach to Venture Capital?  I am envisioning some kind of online war-room with a structured system for inputting data, an RSS feed, an auction type method for VCs to bid on projects, etc.

Our Take: While technology VCs make their living investing in cutting edge technology, rarely are they employing best-of-class solutions in their businesses, themselves. New technologies can be difficult to implement and rarely does a VC firm have the support staff necessary to integrate new technology solutions. Most VC firms spend their management fee dollars to maximize their deal investing capabilities and this is usually a human, not machine spend. Back office, including IT staff spending is kept to a minimum. While we are clearly early adopters of the RSS-related technologies, we have a pretty standard infrastructure apart from that. Once a year, the NVCA general counsel group gets together with our counterparts from the NVCA IT group and it’s pretty clear from our joint discussions that the objective is stability and ease of use, not cutting edge performance.

As for an auction-type method for doing VC investments, there have been some attempts at this both externally and internally with fairly modest results to date. Externally, there were some attempts to create a network, whereby a company would essentially hold itself out for investment and have an auction create an investment clearinghouse price for VCs. None of the established VCs cared to participate, as they have their own proprietary deal flow and therefore the idea went away quickly.

What is a bit more interesting is the idea of a group of people getting together, contributing capital to a common pool and then investments being allocated by an internal auction on a case-by-case basis. There are a couple of folks trying to set up large angel networks to take advantage of this “decision making of the group” / auction theory. We’ll see over time how well this works.

What’s a Good Venture Capital Terms Dictionary?

From time to time people ask us where to find a good dictionary to explain some / all of the terms that we use on this blog.  While not perfect, after some research, we recommend this dictionary

Do Companies Ever Buy Back VC Shares?

Question: Have you heard of cases where companies buy back shares from a VC, much like buying back shares from a founder?

Our Take:  Yes, but the situations usually aren’t pretty.  If the company has the cash to buy back shares from the VCs (at  their cost or above), then the company is doing well and it would be strange to see a VC wanting to sell their shares.  Secondly, cash is “king” in startups and there are better uses for companies to make of their money. 

Most likely the case is that the company is not doing well, the VCs want out and they are getting a fraction of their investment on the dollar.  These are very distressed sales and usually one sees the company or its founders paying the cash and trying to take back the company to restart its efforts. 

Note, there are some real serious legal issues regarding tender offers that one must concern themselves with with company-backed buy backs.

What do VC Titles Mean?

What Do VC Titles Mean?

Question: What is a “venture partner” and how do they compare to a “Partner” and / or “Managing Director?” And what exactly is a “Principal?” How are each compensated?

Our Take: Titles have widely varied meanings in the VC world. Unlike most other professions, there aren’t hard “rules” about what means what. But here goes…

- “Managing Director” / “General Partner” (MDs / GPs): In whatever VC organization you are dealing with, this is the top of the food chain. The titles mean effectively the same things, but many lawyers get nervous letting their clients use the term “General Partner” because this term equates to unlimited personal liability in the partnership paradigm. Therefore, the term “Managing Director” is used. Rest assured that all of them refer to each other as “partners” in conversation.  MDs and GPs are compensated through management fees and receive direct carry in the funds. They essentially run the firm, engage in fundraising and vote on the deals the firm considers executing. Note, that some larger firms have smaller committees of MDs / GPs that wield most or all of the power.

- “Venture Partner” / “Partner” (VPs): This is generally the next step down the ladder, but not always. In most organizations, Venture Partners / Partners source new deals, sit on boards and act in the eyes of start-up companies just like MDs and GPs. In contrast, VPs may not have carry in the funds themselves, rather deal-specific carry for companies in which they are involved in. In some firms, however, they do have general fund carry. What’s most interesting is that some VPs are really MDs in training, while others are folks who just don’t want to be an MD, or are explicitly only intending to be at the VC for a finite period of time. At some firms, MDs / GPs who have “retired” (either voluntarily or involuntarily) are made VPs. In other words this position can be a position “on the way up,” “on the way down / out,” or “just hanging out for a while.” VPs can or can not make a salary off of the management fees. We’ve seen ranges from $50,000 a year on up to several hundreds of thousands of dollars. It can also be a full or part time position. You see everyone from young bucks trying to make their way up the ladder, to seasoned company executives becoming first time investors. Whatever the case, you rarely see these folks having another job (full-time operation roles at companies) while they are working for the VC firm.

- “Principal / Associates”: As with VPs, this functional responsibilities of Principals and Associates can range from “number crunching deal monkeys” to folks who source deals, sit on boards and act as junior partners. At some firms, the role of Principal immediately preceeds the role of Managing Director. Generally, they are younger folks who are learning the ropes and depending on the firm will each have their own level of autonomy and compensation. Rarely do they have a vote in deals and it’s probably about 50% of them who have direct fund carry. They are compensated through management fees, as most of them are still trying to pay off their business school loans.