Published in the San Diego Union-Tribune, May 6, 2024
by Neil Senturia
The purpose of an NDA is to limit “confidential” information. Normally, a basic pitch deck does not contain confidential disclosures.
The pitch deck. Does it have 52 cards and two jokers, is it the deck of the Titanic or is it the key to the universe of truth, fame and fortune?
I recently got an email from a reader who thought that my request for a founder to send a “deck” was not something he would consider without a “one-sided NDA (nondisclosure agreement) with my signature on it.”
My initial response was to write back and say that reasonably reputable venture capitalists (I can see where he might take exception at this point) do not normally sign NDAs, except under very limited circumstances. Traditionally, if a founder asks for an NDA, it signals that such people are “beginners.”
However, let’s dig a bit deeper. The purpose of an NDA is to limit “confidential” information. Normally, a basic pitch deck does not contain confidential disclosures.
Later, as an investment comes together, it might be appropriate, particularly in a biotech where the molecules may very well be proprietary. But the more traditional reason that VCs do not sign NDAs is because they do not want to be limited in their efforts to evaluate future investments in a given sector, like e-commerce, battery development or artificial intelligence.
The investor needs room to explore a given thesis where there are multiple companies competing.
If the novel breakthrough is worth it, the founder can manage that risk by filing a patent. The next piece of this puzzle would be a discussion of patents versus trade secrets. That subject is for another time.
Another reason VCs give for not signing is their “reputation.” If they disclosed founder material to other companies, then word would get around and no one would seek them out for an investment. Also, the potential for an inadvertent breach of an NDA could put a VC into litigation from an unhappy founder who did not get funded.
Bottom line, the primary goal of the deck is to generate enough interest from the investor to at least get a phone call or a meeting. The value of an “idea” is really quite modest without the execution from the team. A good deck should be no more than 12 slides. “Just the facts, ma’am,” said Joe Friday.
Finally, an NDA is not a “standard” agreement, which means you are going to want an attorney to review one before you sign. They can have fishhooks in them. The tech world is awash in both real and imagined outrage over ownership when enough dollars are involved.
OK, but there is another way to try to get rich.
Why should an entrepreneur build a company when perhaps he could just buy one? Stanford, professor H. Irving Grousbeck is credited with coming up with the “search-fund idea” in 1984.
Just graduate from a famous business school, call up some of your friends, raise $30 million, look around, buy a company and become an instant CEO, whether you actually know anything or not.
The New York Times reports that the “average internal rate of return for all search fund investments from 1986 to 2021 was 35 percent.” Sounds like a no-brainer.
How do you get this gig? G. J. King, a search fund investor, lists these three criteria before he invests. He is looking for “entrepreneurs who are humble and collaborative and have a good sales pitch.”
Whoa, I get the P.T. Barnum sales pitch skill, but I am a bit skeptical about finding those other two characteristics.
Might be that major MBA schools are going to have to do some touchy-feely before they teach standard deviations.
Kelsey Holland, a 2023 Harvard Business School graduate, raised $500,000 and went searching for a company to acquire. No deal yet. Fierce competition; others also are looking for the “right” company.
She admits that search funds “are not a surefire path to the corner office,” but she remains determined.
Remember about fishhooks. Try this treble. You raise money from an investor for your search fund, you spend a couple of years looking for a company and you don’t find one. That happens frequently.
Then you write a thank you note, and the investor loses everything. Rate of return is zero.
This is called OPM (other people’s money). They teach those three letters in every business school in America.
Rule No. 806: “Seek and ye shall find” (maybe) — Matthew 7:7