After the Adobe Engage event a few of us grabbed drinks at the Jade Bar. The conversation spanned the gamut from RIA design patterns to magic tricks (thanks to Jared Spool of User Interface Engineering). Many interesting stories were told.
Mike Sundermeyer, head of design for all of Adobe, provided new light on how Tom Seibel started Siebel Systems. (Mike worked with Tom in the early 90s at Gain Technology, a multimedia company that sold to Sybase.) According to Mike’s story, Tom used the few tens of millions he’d gotten from his Oracle days and the sale of Gain to pose as a VC and meet with every startup doing work in what became the CRM space. He’d use the “I’m an investor” line to get away from signing NDAs. He aggregated all the lessons and self-funded Siebel.
This type of IP scraping sometimes happens with professional investors also. Some of it is part of the fundraising process. When I hear a company pitch, I learn more about a space. I cannot wipe that knowledge from my head. It does inform how I think about the next pitch in the same space. That’s OK. What is not OK is blatantly using proprietary information obtained as part of the fundraising process. Two examples come readily to mind. Sharing proprietary information with another company, even if a VC hasn’t signed an NDA, is a big no-no. Unfortunately, I’ve heard stories from entrepreneurs of this happening. What’s much worse, however, is when investors seed a team with the ideas of others. I’ve heard it happen a few times.
Trying to get VCs to sign NDAs is not a solution. Most, including me, won’t do it. When VCs are interested in a space, it is very natural for them to look at all viable companies in it and try to make an educated decision about which one to back. Any startup talking to VCs understands that. Most of the restrictions of NDAs, especially around residuals, don’t make sense in this situation. In addition, VCs really don’t have the processes to manage confidential information. Almost everything we touch is CI. Our laptops, servers and offices are overflowing with it. The best we can do is to be really careful and never share CI we’ve obtained by looking at companies or through the diligence process.
Ultimately, investing is a reputation business, a repeatable game where news of bad behavior spreads and where those who misbehave see their deal flow dry up. That’s the market feedback system that keeps things from going out of control.
Startups are most likely to get burned in one-off situations where the game is not repeated, where bad behavior has limited consequences, as in the example of Tom Siebel. My advice would be to avoid these situations and deal only with professional angels and VCs with established track records.