Here’s a question I got in email: Tim, you say I can’t get investors to sign a confidentiality or disclaimer statement before I talk to them, so what do I do to protect my idea while I discuss it with potential investors?
Answer: Your next step is to research potential investors carefully. Look for those who seem to have experience and/or interest in your business segment. Also, look for those who seem to have interest in investments like yours in some other way, such as the stage of investment (seed, follow-on round, etc.).
Before I suggest what you do with the narrowed, selected short list of investors, I should probably add already that I realize that this research phase is not easy, but is important enough to justify the effort.
Start with the Internet at first and do a good web search for investors interested in your type of business, and perhaps your area. You will get some phone numbers of organizations and institutions to talk to, which you’ll use to start phoning people. Most of these phone calls will be disappointments, but make sure to ask each person who doesn’t know to suggest another lead who might know, and eventually you’ll get to some real information, a good list.
When you get to a shorter list, you start contacting the possible target investors and asking them, or the people who screen their calls, or their website query forms, what their investment interests are — amount of investment, type of industry, stage of business, etc. This might be done through a telephone call, or a database list, or some other contact method, and it will be frustrating to be sure, but important.
When you finally get a match that seems like there might be interest, what you want from them is permission to send a summary. The summary is a 2-10 page summary of what you have to offer an investor. Don’t detail your idea in the summary, but instead, your management team, it’s track record, the size of the market you want to address, the amount of money you need, how you intend to turn that into money for the investors (exit strategy), and how much money do you suggest that might be, and in how many years.
If your summary interests the potential investors, then you meet with them, face to face, to talk about next steps. Recognize at this point that you are suggesting a very serious relationship, and you should be checking out the investors as much as they check out you. What track record do they have? Talk to founders of companies in which they’ve invested. How do they want to manage their investment? Can you deal with them as co-owners?
Think of this as a marriage, you have to be compatible. They aren’t going to just give you money, they are going to be partners in your business. In most cases they will own more of the business than you do.
Which brings me to the original question regarding protecting your idea. Realize that if your idea is so easy to duplicate that it’s dangerous to share it with professional investors, then you’re either rich enough to implement it yourself, and you’d better do it fast, or it’s not a very interesting idea. Most good ideas are linked to their management team, so that nobody but you and your team could actually mplement it. Investors assume that’s the case; no professional investor wants an idea without a team to implement it and you are supposed to have the ideal team. Still, serious investors don’t really want to know the idea in detail until after you’ve sold them on the team and the market. And, at that point, after you’ve gotten to know them, you can deal more professionally with them and your attorney about proper disclaimers and legal documentation to protect yourself as much as possible. Having said that, I’d like to point you to additional resources.
You’re reading this at allbusiness.com, so browse through the other resources on this same website, particularly those focusing on starting a business and getting financed. Do a good word search on “idea” at www.bplans.com and read the articles that come up. Also, the “getting financed” chapter of my online book at www.hurdlebook.com, and I have a multimedia short presentation on owning ideas at www.timberry.com. I don’t want to seem full of myself by suggesting only these resources, since they are all my writing, but these are the ones I know and I definitely want to add that there is a lot more information available on the process of investment for start-up companies. There are lots of other web resources, books, and magazine articles on this subject. Don’t forget that you should look also for local sources — universities, community colleges, the local Small Business Development Center (SBDC), local experts — because there is no substitute for local knowledge. I hope that helps, — Tim