Schrödinger’s Start-Up – Why VCs Don’t Sign NDAs or Non-Compete Agreements
Every so often, I get an email from an entrepreneur that starts something like this:
“By reading further, you agree to the terms of our non-disclosure and non-compete agreement”
My immediate reaction is to delete these emails with prejudice. I am not alone.
VCs get inundated with pitch decks and proposals for new technology. NDAs or NCAs destroy our ability to freely invest in good ideas, so it is almost impossible to get a VC to sign one. Asking for one, in and of itself, demonstrates a lack of sophistication on the part of an entrepreneur.
The reality of your start-up, whether you want to admit it or not, is that your idea is not Schrödinger’s cat. This refers to a paradox first proposed by Austrian physicist Erwin Schrödinger in 1935.
A gross oversimplification of the paradox goes something like this: A cat is in a box with a sensor and poison. You don’t know if the cat is alive or dead. If you open the box to see the state of the cat, the sensor will break the poison and kill the cat. Thus, you don’t know if the cat is alive or dead, and even trying to verify this will result in the outcome of death.
As a start-up company, you may feel like opening the door to someone seeing your idea will kill it, or at the least subject it to competition as others race to replicate your genius, a-la Schrödinger’s feline friend. The reality is far from that.
As a venture-backed start-up, you may benefit from stealth mode to prevent copying for a season, but ultimately comes a time when your technology must be promoted and made known to the world in order for you to find commercial success. Growth is the only metric that matters to a VC, and it is impossible to do this if no one can look at the cat, so to speak.
If the time for the world to know your company is not yet arrived, well then, neither is it the time right for me to consider investing in your company. VCs want to invest when the time-value of their money will produce the best result in the shortest period of time. That time usually happens when you’re ready to go to market (seed stage) or getting traction and want to scale (A round investing).
So if you think your idea is so awesome that anyone in the world even knowing about it would kill it, then you’re not really ready to talk to VCs yet. We like to get involved when you’re ready to let the cat out of the bag, and not be Schrödinger’s start-up.
Joe Merrill is a partner at Sputnik ATX and the Linden family of funds.
Follow him on Twitter @Austin_VC