Due diligence comes naturally to investors—or at least it should. For our team, investing in early-stage companies means due diligence on proprietary processes and data comes second nature to us.
One of the most common questions we hear from founders at this point is how to balance sharing their unique solutions while simultaneously guarding their how-to. Having invested, co-founded, and mentored many IP-based startups, I recommend taking these three do’s and don’ts with you into your pitch:
DO: Start with non-confidential information
As your diligence kicks off, stick to sharing the big picture. Investors first need to understand what problem you’re solving, the market potential, and the solution.
When it comes to pitch decks, I’ve seen founders—especially technical founders—start to put their guard up as soon as they get to slides that focus on their solution or their technology. The fear of being “scooped” can be overwhelming but fear not: during introductory meetings with potential investors, it’s generally acceptable (and often preferred!) to leave out confidential information.
DONT: Overshare while it’s still early
If you’re in an introduction or early meeting with your potential investors, stick to the absolute need-to-know information. Investors want to know how your solution would be exceptionally better than the ones that are already available and how defensible it is. Don’t overshare and stick to letting them know why your solution has not been done before, how you are in the best position to tackle it, and how defensible your solution is.
If you cannot hit all these points without touching on your core confidential information, take a step back and rethink your approach before you have meetings. This perspective will teach you what most founders fail to learn early on: most of what you consider to be your most valuable secrets have very little meaning and implications on the decision to move forward with the diligence at this stage.
DO: Consider the appropriate point to introduce an NDA
After a few meetings, when the diligence moves to a more in-depth discussion, some investors will want to dig into the how-to. This is when all the points you previously discussed on a broader term get unboxed. Different firms have different policies, but specifically for us at Creative Ventures, we would want to understand the core technology and its mechanism, so we can come to our own conclusion on how unique and defensible your solutions are.
That being said, when doing a deep dive, we’re cognizant that certain information is confidential for a reason, and we’re very much open to entering into a non-disclosure agreement (NDA) with companies later in the diligence process.
There’s a balance here, while most firms (us included) won’t be willing to sign an NDA just to get your investor deck, more are likely willing to enter into one when they’re taking a serious look at the opportunity. Count that as a good signal.
DONT: Gatekeep your proprietary information without reason
While it’s important to reveal your proprietary information at the right moment, it’s equally important to consider what any red tape is conveying to potential investors.
From an investor’s perspective, if we are willing to enter into an NDA but a founder insists on keeping too many pieces as black boxes, it raises a major red flag. We will begin to ask questions like, “Is this solution actually real?” or, “Am I about to invest in the next Theranos?”
As I shared earlier in our blog post, especially in deep tech, empirical data and its how-to speak volume. While it’s one thing to ask your investors to “trust” in the vision, core technology and quantitative evidence need to be shown, not told.
DO: Prioritize your own due diligence on investors
As a start-up, your company and solution are not the only elements that should be heavily considered. As much as investors are doing diligence on your company, so should you on them. NDA is an enabling tool, but it’s essentially a downside protection.
Seek answers to questions like:
- Are there any existing investments this potential investor has that can be considered my competition?
- If so, does this investor have prior experience investing in competing opportunities, and how do they handle the dynamic?
- Does this investor come off as trustworthy?
- What reputation does this investor have?
DON’T: Shy away from asking hard questions
When doing your diligence, some questions may be harder than others to answer. You may find answers while you do your own research, but for questions you need more information on, you’ll have to reach out to other folks.
One option is to ask your investors your questions directly. Another option is to ask a third-party reference, either from their existing portfolio companies or companies they have looked at but did not invest in. This is where being part of startup ecosystems helps give you invaluable insights.
Final thoughts
It should bring you some peace of mind to remember that all institutional VC’s business model is to invest in companies, not rebuild or downright copy what you are doing. It’s just simply not what we do. If you have done your diligence and everything checks out, withholding too much information, again, will raise some red flags.
Throughout the diligence process, investors are just trying to be diligent and understand what it is exactly you are building and how it relates to their investment scopes.
If disclosing your confidential information makes you so vulnerable that your business is entirely at risk, ask yourself if your business is really that defensible. Most scientific papers cannot be reproduced easily, even when the methods are all laid out. There’s always a trade secret somewhere. There are many aspects of building a business, and what you have should give you a heads-up. If larger companies decide to spend an unlimited amount of money to re-engineer your solution, ideally, it will take them too long and/or too much money that they would rather just acquire you.
