[tyler-codenvy]

I have a couple of stories that I want to share. One of which has taught me a lesson about being too trusting.

I am both:

1) A venture partner (Toba Capital) where I manage existing investments, do diligence on potential new ones, and make decisions regarding how capital is allocated; and:

2) A founder / CEO (Codenvy), a development cloud with a browser IDE front-end, often times called a cloud IDE.

This article resonates with me as I can see the perspective from both sides of the coin. As a rule, in venture capital, myself and my firm does not sign an NDA. The basic rationale is that it's virtually impossible to resolve all of the potential conflicts that are associated with the NDA from both firms. So, we go with the basic principle is that we need to trust the people we are talking with and vice versa. Our reputations and history of deals / interactions are the best guide and we openly tell people up front that if there is information that is secret for themselves, they should withhold it until they have a chance to do background checks on us. In some cases, there are startups that are so secretive that we cannot infer anything at all, and we just have to politely decline and move forward.

A couple of interesting scenarios playing for me recently. I sit on the board of Sauce Labs, a cloud test company. But my venture firm recently inherited a stake in Smart Bear, a QA vendor where there are edges of competition. While neither vendor sees the other as competitive, the optics of the situation to an outsider could suggest otherwise. So in this case, we have opted to create a chinese firewall inside of Toba where I do not listen in on core data provided by Smart Bear, even though their CEO said this wasn't an issue.

Another scenario that came up recently was a referral to explore a pre-funded startup idea around making database querying easier for non-SQL expects. The referral was a warm one to the founder. We asked for the usual background information to make a surface area assessment. The input given was a very limited sales presentation with a couple screen shots and a few accompany statements from the founder that they presented to a VC and that the VC recited their entire pitch to them. And then that person stated they would only work with people who had their same vision. When probing for more thorough information, the founder became a bit squirrely, which is probably due to some sort of discomfort around sharing stuff. But there wasn't an NDA requested, and we could only conclude that maybe their claims of awesomeness were slightly exaggerated.

Now for the story around trusting too much. With my Codenvy CEO hat on in January we had recently closed our Series A for $9M in January. It was a great feeling as it took us over 6 months of raising to close it. And let me tell you, just because you a valley VC doesn't make it any easier to close your own firm's financing. Post funding we were looking at strategies for how we could grow faster. We came across a likely competitor that had 2 people part of the business and based in Europe that had raised a small amount of seed funding (<$300K). It was obvious to us that there was some great talent in the team and their focus on the market was complementary to our own. We felt that it would cause both companies to grow much faster if we could merge and join forces. They were interested and we all met together to discuss what a game plan might look like. Of course, in that conversation, we shared specifics around how we were envisioning the next 12 months to look like. We made an offer and they opted to pass. No big deal. But where we learned our lesson was that about 5 months later, this summer they released a number of features that were -- somewhat -- reflections of the vision we had shared with them, all the way down to them calling the features the same marketing brands we had ear marked. At the time, we felt foolish and anger around their ethics of the situation, and it was particularly irritating to our own engineers that they were beat in the market. There were many discussions around this, and it raises the question of how you discuss potential plans around an acquisition / investment, if you are afraid they may steal the ideas.

In the end, it's all good as we have learned some stuff: 1) The acquisition would have certainly failed. How could we have worked with people who have thin ethics? 2) We have subsequently released everything they heard from us, and our approach to everything is a) more mature, b) more scalable, c) better received. We learned that while they could take the surface area ideas, they haven't been able to exploit them to their true meaning the way they were intending. 3) Our engineers found a new form of competitive motivation that didn't exist before these - trusted - individuals decided to pawn some of their ideas. The entire culture, motivation and mindset within our (rather large) engineering office has developed into a killer instinct. And as a leader I find this trait as crucial to long term success. I am unsure if this killer instinct would have developed as quickly without this incident.

So, the issues in the article are real, and they show up when you least expect them. I think, going forward, I am just going to keep thinking about being truthful, keep my ethics high, and work with people who are the same. I'll sleep easy at night as a result.

[nagrom]

I think that there's probably a difference between approaching potential customers or funders whose businesses are somewhat orthogonal to your own direction and approaching direct competitors or parties who have the competence to 'steal' your ideas.

If I'm working on something similar to you, it's probably a trivial thing to include your ideas in my product. But if I am doing something completely different, the cost of switching track to 'steal' your great idea is probably so high that it's not worth while.

Now of course there may be second order effects or you may misjudge someone else's direction. That's where you have to rely on trust and reputation. But I think that getting ideas out to people who may help and are unlikely to want to compete is essential - external feedback is what's likely to stop you from disappearing down the rabbit hole, so to speak.

I like your last paragraph very much - life becomes a lot simpler when you try to stay around people who act the 'right' way (whatever that may mean to an individual). It takes a lot of mental load off and gives you the freedom to do things of which you can be truly proud.

[ScottBurson]

I'm not sure I agree, in the case of the latter story, that the other company was unethical. You contacted them, correct? In order to place them under an obligation of confidentiality, you needed to offer them some consideration in exchange for that obligation. It's not clear from what you relate here that you did that. I think you just flat screwed up, and your engineers' anger would have been more appropriately directed at you than at the other company.

Perhaps a fuller account would change the picture, but that's how it looks to me from what you've said here.

[tyler-codenvy]

Yes, good points. There is some missing context. We did contact them, but I failed to point out that the conversation developed over a number of pre-cursor setup calls. And that before there were substantive acquisition talks, there was discussion between the parties on the general areas where each of our businesses were claiming strategic importance along with tacit acknowledgment to generally vector away from those segments. In our case, we provided deeper insights around the specifics of how we intended to pursue our unique strategy after the initial discussion.

With any acquisition or potential partnership with a company that has the potential to compete, whether on the edges or directly, there are unique challenges to figuring out what information you should share and at what time.

But the take away for us was that we had a reasonable expectation that this particular vendor would not behave this way based upon our pre-cursor discussions.

[loceng]

Thanks for sharing. The one difference I'd like to point out between this scenario and someone at idea stage is that you had a team together (resources to execute), and new $9 million to "play" with. Imagine if you went to those 2 in Europe and you were just getting started. They perhaps could have come into your market with investment money and beat you to market. This is why I think it's naivety whenever people say "ideas are a dime-a-dozen" or they themselves are unoriginal, uncreative and copy ideas relentless (and perhaps exactly) and that's a justification phrase for them to not feel guilty.

[omegant]

Good examples. I pretty much agree with all you say, but didn´t have live experience to support my ideas. I would also say that where you are located or the group you are talking to, is important. I live in Spain and I pretty much could give away hundred of copies of our business plan, and no competitors are going to rise from that. I think that even in SV I could pretty much give the general idea and I´ll bet that no competitors would rise either. At least not in the same form, execution surely would be different. Not because is a new idea, but because it´s not something you can hack in a month with some ruby gems, it needs some investment in coding, and even more effort on market development. Execution and product vision is everything in startups, unless you are talking of a new feature in an established industry, AND talking to people related to the industry. That´s probably the place for an NDA.

[yogo]

Couldn't they just have copied those features later? Sure they might have been later to the market but pushing features out first doesn't mean you will win. I understand the anger and I absolutely think it's unethical but something like this will happen as long as the other party is untrustworthy. Situations like this are like a hand of poker sometimes you have all the information you need and you can move all in confidently, while sometimes you don't and you have to gamble a bit. You were understandably angry because you lost.