Venture capital · Due Diligence

A VC wants me to talk to one of her companies ... should I be worried about my IP?

Anonymous

August 17th, 2015

Hi, all.

We're a startup using machine learning to improve a particular space in e-commerce.
We have a VC who seems genuinely interested in investing in us, but there's one problem.
She's invested in a company applying somewhat similar machine learning techniques in a different domain (the founders of that company are supposedly machine learning experts and they're from academia), and although she didn't say it, we obviously came to the conclusion that she wants us to meet with them to see if we check out.
We had a short call yesterday and after chatting with the founders for a little bit and showing them our MVP, I realized two things: (1) they have some of the same challenges we have and (2) they want to know very specific things about our engine.
We have another longer meeting coming up, in which we're supposed to dig deeper into our technology with them.
If the founders were from the firm, I'd be less worried, but in a world where startups pivot all of the time, I'm very worried about openly discussing the specifics of our engine with them, especially given that we've had to solve some challenges that I don't know that they've solved at their company.
Added to that, in our first call, the founders made the meeting like an interview, which felt a bit awkward to me, because I'm not interviewing to join their company ... I just want to give them a good idea about what we're doing, so that we "check out".
I want to call the following meeting off and move on, or bring this up to the investor, but I'd love to hear your thoughts, FD!

Thank you.

Diego Basch Holder of Self-Referential Title

August 17th, 2015

You obviously know what things you don't want to disclose to a potential competitor. It's perfectly fine to say: "I'm not at liberty to discuss those details, but here's what I can tell you..." or "sorry, I'm afraid I cannot answer that question because it involves confidential information."

If that makes you not "check out," you did not want that investor on board.

Tom Maiaroto Full Stack Consultant

August 17th, 2015

As you know, VCs definitely will refer you to others they know, work with, or even have invested in to do their due diligence. So I wouldn't typically be too concerned. 

In fact, it may even feel like an interview because those other founders know exactly why you're talking to them. So they may feel pressure to ask questions in a particular manner to appease the hand that feeds.

However, I'm not sure how much of a "deep dive" should be going on in these conversations. I've never had such a deep dive myself when I was sent through the gauntlet so to speak. You should be able to talk about high level concepts and that should be enough.

By high level I mean something like - "I built this ANN to do this" or "I'm using this naive bayes classifier on this set of training data to classify this" and it should be plausible enough. You aren't proving technical theories. This isn't a college course (and maybe it's just their academic background driving that). It's a discussion that should help assess viability in your technical approach. Period. Nothing more. 

All they need to be able to do is to turn around and tell the VC is, "yea, they seem to know their stuff and yea they can use that math to draw those conclusions for their product." Period. That's it. If they are asking how you solve very specific problems then I do start to worry.

You should absolutely ensure there's an NDA with that company. VCs won't sign an NDA of course - but these other guys should have no problems with that and you should make sure they do. 

If they do have an issue with that, then that's another red flag as far as I'm concerned.

If you feel the conversation is heading in a direction you don't like, try to steer it back. You can throw it back at them and say just what you said here - "seems like you have some of the same challenges; maybe there's ways for us to work together."

NOT you work for them, but "together" as in they "need" you too.

Or "...you guys may even be interested in licensing what we have because we can break it out to provide technical solutions across multiple domains, but our product isn't even close to what you're doing so I see no conflict there if you like." if you want to be a little more bold or to the point. They'll get it.

You want them to like you of course, but at the same time they need to respect you. Remember they are going to report back to the VC.

In this particular case with this particular VC due to what they have invested in, you may have a different option available to you. They may be interested in your tech and team. It might lead to a smaller, earlier, acquisition option for you. Depends on what you want to do though. You might not want that early exit. It won't be as large (most likely), tech plays like that never are...But it's a lot less work! 

What round is that other startup in? That might shed some light on the situation. If it's later on, they might be looking to diversify and acquire smaller companies and IP.

So don't be too quick to feel that they are looking to just get free info. There could simply be something else they are all interested in that may or may not be in line with what you're thinking or wanting.

Richard Ramirez Director at Zumbox

August 17th, 2015

Trust your instincts ... If there is other money interested in your company ... Move on, if you have enough cash on the Balance Sheet to keep seeking investors, do so .... Trust you gut ... If you have some doubts ... Seek out portfolio company that has exits from that VC and ask about their behavior ... The partner you are dealing with specifically ... Trust your gut. Sent from my iPad

Dan Hussain

August 17th, 2015

Bring is up to the investor! This is an obvious answer. Why work with an investor U can't even feel comfortable bringing up these normal questions? If u don't feel comfortable -- RUN -- not walk - from this investor ASAP! Good luck in your journey! I'm excited for you! 

Scott McGregor Advisor, co-founder, consultant and part time executive to Tech Start-ups. Based in Silicon Valley.

August 17th, 2015

I'd suggest that you talk to the VC. Find out if you've done enough for her to determine if you "check out" or not. If so, no need to go deeper with the other company without a specific partnership, joint venture plan that is mutually benefit in place. And if you do explore a JV, let your common VC help ensure it works for both companies. If you haven't "checked out" yet, let the other company know that you want their help in closing your found with the VC, by telling them that "once we are both portfolio companies of the same VC, it will be easier for us to share additional information with you." This gives them a reason to help you achieve your goals first. When talking with companies who could be a future partner or a future competitor, Look for ways to say YES that ensure you get what you want, rather than ways to say NO to whatever you fear...

Roderick Manzie Experienced Co-Founder with Sale/Acquisition, Finance, Commercial and COO skills

October 16th, 2017

A lot of VC communication is about trust and your ability to work together, tempered with commercial common sense. You absolutely need an NDA and to draw your own lines in advance about where public knowledge ends and your IP starts. That may well be at a higher level than you think, since what's common sense to you with your experience is a genius idea to the uninitiated.


However the relationships are often very much worthwhile. If you're overly concerned, you can set boundaries around your IP prior to the meeting so they know what is on the table for discussion. It's a perfectly reasonable position to take.


Anton Yakovlev Founder of four successful businesses on two continents who can help you do the same

August 17th, 2015

You may just tell the investor that doing so will make you vulnerable, and that due to the possible conflict if interests you'd prefer your investor to avoid this situation. 

I believe that honest and straight answer to the investor cannot hurt. In case they are intending to swindle you, they won't invest anyways. In other case that would show them that you're not only a good IT-pro, but also a smart business person, and worth investing in.

Peter Johnston Businesses are composed of pixels, bytes & atoms. All 3 change constantly. I make that change +ve.

August 18th, 2015

There is a classic error here. Push v Pull.

Many startups are desperate for money, so they hawk themselves around every glimmer of an opportunity. This makes them prey to everyone trying to "see what's out there", those trying to make sure their investment is really cutting edge and a host of other plays.

The thing is as a startup, you are either hot or you're not. Rather than hawking yourself round funders, do some work to make sure you're hot.

Then you can charge for things like this. And if there is genuine synergy, you're interviewing them, not them you.

So turn this round. You've met these guys, so you know what they can do. So set the agenda with some questions you can ask them and which expose their level of progress, direction and resource.

Your main goal here is to show the investor you can be a consultant to this company and if they invest in you, you start ahead of where they are currently.

And if the investor is using them as your "second interview" and needs their buy-in as proof you know what you're talking about, showing that you can ask questions they can't answer will do you no harm.

You've been given an opportunity to show you're the real expert here.

PS: We're using machine learning in e-commerce. Give me an outline of what you're up to.

Heath Morrison Founder & CEO at HealthSumit

August 20th, 2015

I used to be a VC and I can't remember a time where we used a contact from an active investment in a competing technology to 'interview' a prospect in this way. If the person interviewing you was an EIR at the firm or something, that would make more sense, but this seems quite fishy, especially if the VC wasn't on the call. Is this a well-known firm? However, don't think you can 'protect yourself' with a mutual NDA or some nonsense. VCs almost never sign them for this very reason and it makes you sound naive to ask for one. Also, even if they signed one and breeched it, if you have the money to fight a VC over a breached NDA, you don't need their money in the first place.

Rob G

August 17th, 2015

set ground rules and expectations up front. Ask questions until you are sure you understand their objectives and be clear about your expectations for the next meeting.  Of course they made the first meeting like an interview - they want to see how you think on your feet.  Investors want to invest in smart people and it is smart not to put all your cards on the table. It's perfectly OK to push back or, as Diego mentioned, simply let them know that you aren't prepared to disclose certain details.