Spilling The Beans – When Is It Safe To Talk About Your Entrepreneurial Ideas?

OswaldWho is this character?

Hint: It is not a mouse.

The fact that you likely cannot name this creature confirms the reality that ideas are cheap.

All too often, inexperienced entrepreneurs struggle with sharing their ideas with potential investors, Donors and others who might be in a position to help them. The next time you wonder if it is safe to share your ideas, recall the fate of this long-eared, anonymous cartoon character.

Oswald The Unlucky Rabbit

MickeyAfter struggling for over five years, Walt Disney and his brother Roy scored their first hit with Oswald the Lucky Rabbit. Unfortunately for Oswald and Walt, Universal Studios, which owned Oswald’s intellectual property rights, assumed that Oswald’s initial success was formulaic and could be readily replicated.

Universal severed its relationship with Walt Disney, hired the majority of Disney’s creative team and began creating Oswald cartoons. Although an additional 140 Oswald episodes were produced over the next 14 years, none of them was nearly as successful as the first 26 installments, which were developed under Walt Disney’s tutelage.

Meanwhile, Walt tweaked Oswald, morphed him into Mickey Mouse, and parlayed the highly derivative mouse’s success into the $50 Billion Walt Disney Company.

Ideas Are Worthless

What was the inherent value of Walt Disney’s idea to draw an anthropomorphic rabbit?

Zero.

What was the inherent value of Walt Disney’s idea to draw an anthropomorphic mouse?

Zero squared.

Outside of adVentures based on hard science, most entrepreneurial ideas have a similar inherent value – zero.

The value of Walt’s ideas laid in their execution: the storylines’ humor, which appealed to both children and adults, the quality and believability of the animation and the intangible degree to which audiences could relate to and empathize with the on-screen characters.

Conversational Foundation

Some entrepreneurs confuse the identification of a market to be served or a customer pain to be assuaged with valuable ideas. Institutional investors are seldom presented with unique inspirations. Most businesses are based on variations of established themes, such as new ways of solving old problems and old ways of solving new problems. A potential or even partially implemented solution generally does not warrant rabid protection.

As noted in Your Personal Pitch, entrepreneurs must take chances and judiciously discuss their ideas, plans and dreams in order to bring their adVentures to life. If an entrepreneur does not share her thoughts, it will be impossible to marshal the necessary resources, recruit investors and inspire employees to join her adVenture.

Simply talking about your idea is seldom risky. As long no propriety information is disclosed, such discussions will almost never result in adverse consequences. However, as noted in the discussion of Big Bad VC, below, you must consider the capability of your audience (and their surrogates) to take advantage of your idea when deciding with whom to speak and how much detail to include in each discussion.

Parlay, Protect, Promote

Although it is true that businesses are built upon a foundation of conversations, there are a number of judicious things you should do to protect your idea while you are sharing it.

One inexpensive way to protect your idea is a provisional patent. The U.S. Patent Office allows one year from the date of a provisional filing before a formal patent application must be filed. A provisional filing allows you to publicly discuss your idea with potential Donors and Stakeholders. Such feedback will help you craft your definitive patent application.

Another simple means of protection is a Non-Disclosure Agreement (NDA). This agreement precludes the party that receives the confidential information from sharing it with others and, in some cases, from using the information for his or her own gain.

If you attempt to protect an idea too early, you risk expending energy and resources protecting an unworthy, ill-formed idea. Thus, it is important to exclusively discuss your ideas with trusted parties before you spend the time, money and effort to protect them.

Walt Disney learned the importance of owning his ideas the hard way. Despite the urban myth that Oswald was stolen from Walt Disney, the reality is that Walt never owned Oswald. This lack of ownership was a mistake that Walt Disney did not repeat. He never again allowed another party to control the destiny of his cartoon characters or his adVenture. As noted in (Non)Sense Of Entitlement, successful entrepreneurs uncompromisingly control their own destiny. To this end, properly protect your intellectual property before you promote it.

Who’s Afraid Of The Big Bad VC?

When attempting to raise money, reticence to share your idea will be perceived as amateurish and will cause most sophisticated investors to assume you lack the maturity and judgment required to lead a successful adVenture.

However, a bit of trepidation when dealing with Venture Capitalists (VCs) is wise. De facto protection in such discussions is difficult to secure, as most VCs will not sign an NDA during the initial stages of your discussions. There are pragmatic reasons for their reluctance, so do not argue the point.

If your dialog progresses to the point that it is necessary for you to communicate sensitive, proprietary information in order for the VC to fully evaluate your opportunity, entering into an NDA might be appropriate. However, during the early stages of your discussions, you will sound naive if you ask a VC to sign an NDA.

No reputable VC will steal your ideas. Note the operative word: reputable. As with any professional interaction, do your homework and know with whom you are speaking. You must have an adequate depth of knowledge of your target market(s) and where your idea or technology fits into the respective market ecosystems in order to determine how much information you can safely disclose.

Reputable VCs militantly protect their reputations. The cost of compromising their ethical standing is far greater than any gains they might achieve by co-opting your ideas. However, if you seek funding from a VC that has a potentially competitive company in its portfolio, you are placing your adVenture at risk. With no malicious intent, it is quite possible that a VC might communicate your business plan to a portfolio company which has the necessary knowledge, resources and inclination to transform your ideas into a business.

This unfortunate sequence of events occurred at a Voice-over IP company that I (many years later) tangentially helped go public. During the company’s initial stages, management made the mistake of communicating its plans (to create an Internet fax service) to a VC that had a telecom startup in its portfolio.

The portfolio company was struggling with its initial go-to-market strategy when the VC suggested that they consider the viability of the Internet fax market. The portfolio company subsequently refocused its product development efforts and entered the electronic fax market before the unfunded startup.

In this instance, did the VC steal the idea of delivering faxes over the Internet?

No. I would not characterize their actions as “theft.” The idea of Internet faxes was not unique; PC-initiated, phone-based faxes had been introduced nearly a decade previously. However, the fact that the technological infrastructure had evolved adequately to enable an Internet-based product was not readily apparent to the struggling portfolio company. Once the VC alerted them to the opportunity, the portfolio company applied significant resources, at great risk, to exploit the idea. As such, simply alerting the portfolio company to the Internet fax opportunity was worth little – the value was derived from the hard work that was required to turn the idea into a profitable venture.

Lesson learned? Before disclosing the basic premise of your idea, determine whether or not your audience is in a position to leverage your idea, either directly or via their affiliations.

Oswald Comes Home

Nearly 80 years after its creation, the Walt Disney Company purchased the rights to Oswald the Lucky Rabbit. Now Oswald stands side-by-side his heralded cousin Mickey, as an infamous example of an idea’s relative lack of value in the absence of unyielding execution.

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John Greathouse is a Partner at Rincon Venture Partners, a venture capital firm investing in early stage, web-based businesses. Previously, John co-founded RevUpNet, a performance-based online marketing agency sold to Coull. During the prior twenty years, he held senior executive positions with several successful startups, spearheading transactions that generated more than $350 million of shareholder value, including an IPO and a multi-hundred-million-dollar acquisition.

John is a CPA and holds an M.B.A. from the Wharton School. He is a member of the University of California at Santa Barbara's Faculty where he teaches several entrepreneurial courses.


Note: All of my advice in this blog is that of a layman. I am not a lawyer and I never played one on TV. You should always assess the veracity of any third-party advice that might have far-reaching implications (be it legal, accounting, personnel, tax or otherwise) with your trusted professional of choice.





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