Scraping Ideas

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.

About Simeon Simeonov

I'm an entrepreneur, hacker, angel investor and reformed VC. I am currently Founder & CTO of Swoop, a search advertising platform. Through FastIgnite I invest in and work with a few great startups to get more done with less. Learn more, follow @simeons on Twitter and connect with me on LinkedIn.
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6 Responses to Scraping Ideas

  1. willhsu says:

    first time I’ve heard VC’s fess up to the existance of this practice . . . many times EIR’s institutionalize this “scrapping” too . . . thanks for being open.

  2. Will, EIRs are in the business of starting a company or, in some cases, jumping in to run one. So anyone who talks to an EIR implicitly should know that their business is being evaluated not on an exclusive basis but as part of the field of study for the EIR. So, yeah, EIRs end up with a lot of residuals but as long as they are open about the end goal, I don’t see that as a problem.

  3. Will says:

    many entrepreneurs dont understand this (and VC’s assumes that the entrepreneur does know) . . . to no fault of either party. . . . the entrepreneurs gets a rude awakening when they realize parts of their business plan gets implemented as a new company the EIR starts . . .

    either way, I agree transparency and communication are key.

  4. You can only cheat some of the people some of the time. IMHO ethics and reputation work better than any legal framework. I am also not a big fanof NDAs, although I sign them when asked – but my personal principles control my actions far more than the piece of paper (which I instantly forget).

    Seeding one team with the ideas of others: this can be a good practice, when properly done by an ethical party. I have cases where I’ve done this by bringing them together where I notice a synergy, resulting in anything from collaborative alliances to mergers. And a few mismatches, I have to admit, but it always happens with that elusive aspect of people we often call ‘chemistry’…

    If the Tom Siebel story is true, it explains a lot about a culture that was widespread in his company, particularly in the growth years of ‘world conquest’. Many stories of Siebel behaviour in respect of alliance partners, channel partners and clients reflect a questionable integrity; not to mention the very act of sticking the ‘CRM’ label on something designed essentially as sales automation that does nothing for the ‘R’ in the acronym… but that’s from another book 🙂

  5. Vinod says:

    Enlightening! Will keep these ideas in mind during my next pitch!

    Having said that, don’t you think that residual knowledge happens as a trail and not in silos? Let me elaborate – By the time I get to a VC to have a discussion, I have already spoken to a chain of people who’s connections lead me to the VC. At each relationship gate (as I call it), I leave residual knowledge. If the VC is smart enough (which, I am sure most of them are), he/she can easily scrap it up by just making a few phone calls.

    IMHO, as an entrepreneur, if I start worrying about NDAs and other artifacts that constrain IP sharing, I would not be able to get off to having an effective communication with anybody.

  6. Vinod, you make a great point about the need to protect IP vs. the need to network + recruit.

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