Entrepreneurs: VCs Won't Sign Non-Disclosure Agreements (NDAs)!

One of the most common, yet most damaging mistakes that an entrepreneur can make during the startup business phase is to ask an investor to sign a non-disclosure agreement (NDA).

There must be tens of thousands of entrepreneurs at Go BIG and around the world that raise this question. And, I hear it all the time from personal friends who are starting businesses for the first time. Nothing screams "I'm a novice" more than an entrepreneur that refuses to work with a VC or other early stage investor until he/she signs an NDA. In fact, merely mentioning an NDA will throw up a red flag to any experienced investor. It's a huge turnoff to them.

Both Wil Schroter and Bill Snow have written great articles on the subject, but here are the basics:

Why VCs and Angels won't sign an NDA:

There are a number of reasons why the majority (95% or above according to my non-scientific poll) of early stage investors won't sign an NDA. But here's the basic principal: It's too much liability for them! Just think about it for a minute. Many investors receive upwards of a 100+ deals per month and often only end up funding 1 or 2 per year. Imagine if they had to sign an NDA for every entrepreneur that approached them! Aside from all of the paper work and legal review, they'd never be able to keep track of every idea that they were legal bound to. If they decide to pass on the deal, but send it over to another investor, they risk liability for sharing the idea. Or, if they're conducting due diligence (research) on your deal and need to speak to some experts, they won't be able to elaborate on the specifics. Which is a big problem; especially for you. VCs won't fund a deal unless they feel comfortable with the details of the business.

Here's why most entrepreneurs are tempted to make this mistake.

As an entrepreneur myself, I understand how nerve racking it can be to release your business idea to somebody, especially an investor. I know what you're thinking: "they have a ton of money...What if they steal my idea and do it themselves?".

Here's the problem with that rationale. First off, investors are in the business of "investing" (It's not just a clever name)--they're not in the business of getting down in the trenches and building a business from scratch.

Secondly, to be blunt, if somebody can steal your idea just by hearing it, then it's probably a terrible idea to begin with. I've heard hundreds if not thousands of business ideas (some were actually good) from entrepreneurs who were worried about their idea being stolen. I've got news for you, an NDA won't help. There's only one effective solution (see below).

Proper business execution is the answer.

Why is Google successful? They aren't the first ones and certainly not the only ones who have come up with the idea of an Internet search engine or an advertisement model to go along with it. But, it's not hard to argue that they've done it better than anybody else. Why was YouTube so wildly successful? There were dozens of other video-sharing platform sites on the Web that existed before and certainly many more that have popped up since news of their sale to Google hit nearly every corner of the world. There's a common theme behind the success of any startup company, whether Internet or Bricks and Mortar. It all boils down to execution. No matter how great your idea sounds (or may actually be), it's worthless without proper execution.

My advice (If that's what you want to call it).
Don't give up the intimate details that make your business work (Intellectual property, etc). But, definitely lose the NDA when dealing with investors. Focus on executing on a sound business model. That's the best way to impress investors and get the funding that you need. And, it may turn out that you execute so well that you don't need to take on any money afterall!