Why we don’t sign Confidentiality Agreements

As a rule we don’t sign confidentiality agreements (CDA’s). As it’s something that comes up regularly with new funding applicants, I wanted to make this reference post on why we don’t sign them:

1. We get asked to sign hundreds of them a year. It isn’t practical to be party to so very many contracts just in order to find out what a company has in mind.
2. Managing the commitments would be a due-diligence and compliance nightmare- imagine being asked to “check” the legal status of hundreds of CDA’s, never mind the time negotiating and signing them up.
3. We’re looking to back companies which can build protectable positions. In our view a business idea can’t be protected and expecting to do so is probably unwise. That protection could be patents, or could be customer relationships the company will build, it could be a database, or designs, knowhow or copyright. However, without any such protection we couldn’t expect to sell our interest in the investee at the end of the investment life. So if a CDA is needed to protect the idea, we probably wouldn’t back it anyway.
4. Our experience has been that, the more closed and nervous the management team is about their idea, the less unique and special that idea is in practice. When we did sign CDA’s at the start of the fund life we found that where the team was most insistent was exactly when there was least to be protected.
5. We commonly see the same idea repeated many times, despite the management’s insistence that they are uniquely pursuing the opportunity (after all if they are in “stealth mode” then it follows that their competitors may be too!). We don’t want to have to defend ourselves against an aggrieved founder who thinks we broke a CDA when in reality we just backed someone else with the same idea.
6. Although advisors will often suggest that you need a CDA to protect the patentability of a technology, on a first meeting we may well not need to know “how” the idea is achieved, merely to understand “what” it achieves. If the step from “what” to “how” is obvious then it is not, by definition, patentable. Even if a company chooses to disclose to us, I would be stunned if a direct private disclosure to a professional FSA Authorised fund manager could ever count as a “disclosure” for the purposes of prior-art.

We are therefore confident that, despite having the “no CDA” rule for more than four years, we haven’t missed anything significant because founders couldn’t get comfortable with our reasoning, after all I’m not sure any US VC’s now sign CDAs routinely. At the end of the day we DO sign a confidentiality clause as part of any term sheet we issue. We also sign a slight variant of the BVCA standard CDA “IF AND ONLY IF” we are looking at a more detailed technical disclosures around second meeting stage. However, this is always our BVCA type agreement which you can find here. Update Mark Peter Davies puts a related post on his blog that's worth reading.

Silicon Valley Goes Dry? effects of the credit crunch on VC funding

Redherring trumpets that "Silicon Valley Goes Dry", in yet another report trying to figure out the impact of the current financial malaise on technology VC. So far, I've come across all sorts of tales of doom, and in the RedHerring report the lack of M&A exits and IPOs (in part due to the lack of bank leverage) is cited as hitting exits- which in the next few months must be inevitable. It then goes on to suggest that "...the collapse of IPO and M&A markets mean they [VC funds] won’t be repaid as quickly. That means VCs won’t have funding to finance new companies or to add follow-on rounds for current companies". Erm, not exactly. Whilst lack of exits may hit some fund returns, if their timing is unfortunate particularly, VCs are normally not allowed to re-invest the returns from their exits. That means that VCs who have raised funds should still have the committed monies to invest from for some time. However, the other side of this coin is that VC funds do usually rely on their investors providing the cash in drawdowns to the funds as required. Normally as the fund's investors are financially solid, and once committed they are contractually obliged to follow-through, there is no financial risk to the fund itself. However, if any of the fund's backers fall, then that backer would be unable to meet its obligations. Should that happen then the fund's constitution often allows the other investors to choose to hang-on to their cash. That MAY mean that a small proportion of financial institutions falling, could cause some funds to "shut up shop" entirely. It's too early to say if this will happen much, but Venture beat certainly cast some doubt on at least one fund. Fortunately, none of our backers appears in any way effected, but it does show how hard it will be for any of us to anticipate exactly how this crisis will play through to technology businesses. Perhaps venture-backed businesses should start asking some questions of their VCs! Thanks to Anders.B for the image.

Plan B for Fundraising

Guy Kawasaki has an interesting post comparing the merits of bootstrapping vs. early VC backing which is well worth reading. He nicely positions bootstrapping as a Plan B, and certainly makes it appear quite an attractive option. My own take would be:

	Outcome
	Product Sells	Product Doesn't Sell
Venture Backed	You exit and have to share some of the rewards* with the VCs	The company fails and everyone is unhappy.
Bootstrapped	You exit, but probably only after raising some money to give yourself strategic options and thereby boost the price.	The company fails and everyone is unhappy.

(* in our experience ventures that have insufficient capital to have other strategic options get sold for a lower price, so maybe the rewards would not be so different too.) So my advice would be to understand the future for your business and really decide if VC money changes the potential outcome in a good way. If it doesn't then don't take the money just to give yourself a salary along the way!

The "Lucky 13"- Managing cash gaps in technology companies

Back from hols :-)
Over the years a number of useful tips about how to manage cash in early stage tech companies. It's really commonplace for such companies to have sticky moments waiting for cash to come in from customers, investors etc. and it can be very handy to know some of these hints....

CAVEAT!! If you're this close to being out-of-cash then knowing the solvency situation of the company at any time becomes important, and as a board it should be considered carefully and frequently. I can't endorse the use of any or all of these in any situation on a blanket basis- it's more complicated than that!

Please let me know any improvements or changes to this list via the comments- I'll update it accordingly. Thanks.

Area	Tool	Comments
Managing Ordinary Creditors	Paying late	Careful, you mustn't favour some creditors over others, but generally you should look to the timing of each creditor payment to see what really needs to be paid when. (OK that one was obvious!)
	Paying erratically	One FD I know favours paying erratically from the outset, but paying reliably. So, if sometimes you pay at 10 days, sometimes at 30, other times at 50, then your creditor may get used to the fact that you're inconsistent but reliable. this could give you a bit more slack when you need it most. Contrast this with the company who always pays bang on 30 days. If you don't pay by 31 the credit controller will be on the phone!
	Early payment terms	I've found that many start ups are so keen to impress their customers, and so keen not to draw attention to their small size that their reluctant to go for strong payment discounts. Likewise they tend to favour rental models over upfront models in the face of the economics (see below and here.)
Salaries etc.	Transferring cash	If the new cash is very close, but is going to miss the BACS payment deadline for the salary, it's handy to know that you can usually pay your staff using a same-day payment mechanism from the bank (for a fee). The extra few days saved can occasionally be a lifesaver.
	Staff late payments	If some of your staff are willing to work on the promise that they'll be paid shortly after the transaction that can be great. Watch out though, because there's a chance that you'll still have to pay the PAYE and NI. It can be helpful to get a formal waiver from the staff of some kind- so the company accrues the cost but doesn't necessarily trigger the tax.
	Payment date	During the early optimistic days companies often like to offer their staff a relatively early payment date in the month. Pushing that back as a matter of routine early can make sense and saves you having to ask the staff for the concession at a key time.
	Cost of directors	If things are tight the directors may be willing to work for nothing- make sure you keep accruing the costs otherwise the next round investor may get shirty if you want to pay them the back fees post transaction.
Banks and investors etc.	Bank	Banks need attention well in advance of the cash demand if you expect them to be sympathetic. Especially important if you've a loan already as bad news can give them the jitters.
	Investor bridge	Keeping your investors fully up-to-speed and informed is the key to this one, but if there's real evidence of close cash from either customers or investors it's useful, if unlikely to be cheap!
	Director's loan	Not really where anyone wants to be!
Other etc.	R&D Tax Credit	I'm no expert on R&D tax credit, but it's proved a godsend to companies on tight cash on several occasions (thanks Gordon!). Two caveats- you can only claim as cash up to the limit of the previous years PAYE+NI, so if you've been mean and lean and had no full-timers then it's not going to help much. Second, you CAN do a short financial year to claim early, but remember that you can't keep doing short years from a Companies House PoV- hence never change year end for convenience reasons, keep it up your sleeve for rainy days. It takes a couple of months minimum to go through the process of closing your year and making the claim, but handy none-the-less.
	Grants	Frankly, unless you saw it coming months earlier this is only likely to help around the edges.
	Customers (my favourite!)	The ingenious amongst you will probably have a whole set of crafty ways to extract cash from your customers wallets. One particularly appealing idea is to offer to convert existing rental customers to perpetual licenses for a tempting once-off price.(see this post.

When VC's Say No- Management Issues

There's a great post over at Marc Andreesson's blog. It tries to help entrepreneurs understand why VC's say no, and how to interpret their responses. Marc points out that it's not uncommon to be being turned down due to the investor's view of the management team- but pretty exceptional, if they ever, that they tell you!

Why VC's wont tell you about a management "issue"

The analogy used by Marc and others is that telling someone their startup is no good is like telling the founder that their "baby is ugly". I'm not quite sure what the analogy is for when we have to let them know that we don't think they themselves are not right for their role! I've certainly always tried to find ways to be as honest as possible, but frankly it's tough, in particular because when you do tell them:

• They just put it down to the the VC being an idiot anyway and carry on regardless.
• After the first few words, no matter how you dress it up, they stop listening and you never get a second chance to explain.
• It gets translated into all sorts of random reasons when the entrepreneur relays the story to others- when I gave the bad news to one entrepreneur he relayed it to everyone as we "weren't interested in high risk ventures"- I've no idea where that had come from!

An anecdote about giving honest feedback

I remember early in my investing meeting an interesting firm run by a very bright and young software guy and his mate. The team was supplemented by a the father of one of the founders who had a successful track record in an early stage company. We visited and explored the possibilities with them, but somewhat awkwardly we rated the two young founders highly, but had lots of issues with the dad! Being a somewhat blunt northern type, I had the cheek to suggest that maybe the company would be better off without the dad, but with a new CEO instead (the dad was pushing his son to be CEO when the body language suggested he was much happier as CTO). We heard from them again about 4 years later, looking again to raise money!

How to tell what the VC really thinks...

Here's a few tips (please add any more in the comments)

• Benchmark first
  Ask around to find out what experience/track record other management who did raise funding had already. If it's your first time in a startup, or first time in a C-level post then it'll need checking especially hard.
• Aim low
  This is the hardest perhaps, but if you're in any doubt put the person in as interim CEO for instance, if the VC's happy they might still suggest there's no need for a change.
• Look for indirect feedback
  Perhaps your chairman, non-exec, existing investor etc. could make a phone call, maybe a few days later. We're only human and it's a lot easier to give honest feedback indirectly!
• Look for consistency
  If you get inconsistent responses from the VC then maybe there's something else behind their decision.
• Ask!
  Something about human nature perhaps, but a question is a great way to find out!

Any other suggestions?