A woman contacted me about six months ago, asking for some feedback on a startup idea. While not a friend, I had known her for quite some time and always enjoyed chatting with her. She had been a visible member of the business community for a number of years and had a good reputation. I agreed to a 30-minute meeting.
She arrived with her husband, and immediately, they jumped into a barrage of questions about hiring, funding, and technology. I stopped them and asked, “What’s the business?” She said, “That’s confidential.” In response to my surprise and befuddlement, she turned to her husband and said, “OK, have him sign the NDA.” I smiled and said, “Can I give you a reality check?” They both nodded uncomfortably.
NDAs, Confidentiality, and Idea-Stealing
People don’t steal ideas because they have a plethora of their own crappy ideas. Ideas are common; execution is mind-bogglingly difficult. The chances of someone hearing an idea, then spending years grinding and sacrificing to turn it into a company, is infinitesimally small. In fact, the challenge for people capable of building a company is not finding ideas — it’s deciding which to work on. Are there copycat startups? Absolutely. But people don’t copy a “new” idea with an unproven business model.
Despite this, many entrepreneurs, especially inexperienced ones, insist on an NDA to “protect” their idea. If you’re not familiar with the terminology, an NDA is a non-disclosure agreement aimed at ensuring confidentiality and disallowing the recipient from utilizing the information discussed.
I never sign them, nor do I know anyone in the startup world who does. Why?
- An NDA causes complexity. People who sign more than 10 NDAs will find it impossible to remember what they can and can’t discuss.
- It doesn’t actually protect much. Most NDAs merely address disclosure (hence the name), not utilization.
- In the end, you won’t sue. Legal proceedings are expensive, time-consuming, and rarely useful.
- Ideas are rarely truly original. With rare patentable exceptions, there’s nothing new under the sun. What is uncommon is a combination of excellent leadership, thoughtful strategy, and valuable culture.
While “stealth” sounds sexy, the reality of it is damaging. Loads of honest feedback from a variety of sources is incredibly valuable. Buzz attracts users, investors, and partners. You want a company culture of openness and excitement, not silence.
Painkillers, Profits, and Blinders
People are busy and distracted, and frankly, they don’t care unless they have significant pain. People with pain are a different animal. They’re attentive, willing to expend effort, and not price-sensitive. At the root of every great company is pain and its painkiller. The trick is to find the pain, devise a cheaper, better, or faster painkiller, and create scalable systems that can deliver more painkillers at a higher margin.
Unfortunately, real pain is hard to find. The couple I spoke with recently had trouble buying and selling a house. They knew little about the industry but saw an opportunity to help connect homebuyers with home sellers. Their methodology was what you would expect: a marketplace website with supply provided by brokers and agents. Their plan was to advertise online for buyers and “get a lot of PR.” Oh, and they were going to focus on Missouri and a town in Texas — because her sister lived there.
I responded by asking them about competitors, market opportunity, and the people who felt the pain. They responded that there were no competitors, recited how many homes were sold in Missouri last year, and said, “Agents want to sell more homes, and buyers want to buy them.”
After 10 minutes of picking apart their business model, pointing out competitors, and explaining the challenges of building a marketplace, I shifted my focus to “the facts of entrepreneurship,” hoping to scare them out of proceeding.
The Birds and the Bees
Almost everyone knows that “startups are hard,” but the entrepreneurial reality can be a rude awakening. Failure rates are quoted between 66 and 90 percent, depending on the definition of failure, industry, and background. So, why is it so hard to even survive the startup phase?
Default Is Death: The basics of good business demand understanding the factors that influence negative outcomes and mitigating the risk. But startups are a different animal. Seemingly everything can kill a startup. The pace is chaotic. The clients are fickle. The vision is necessarily fuzzy. The only way to survive is to work, work, work, and hope to have a few things eventually fall your way.
Emotional Roller Coasters Are Trying: Emotionally, startups are brutal. One minute, you’re on a clear path to intergalactic domination; and the next, you’re an inch away from insolvency and shame. Realizing that it’s never as good or as bad as it seems will help, but most people can’t handle it.
Hidden Risks Are Around Each Corner: In the beginning, every startup feels easy because the hidden risks are not yet known. There’s an overwhelming amount of regulation, industry oddities, and historical momentum lurking underneath the surface, waiting to jump up and swing at you.
Human Misjudgment Hurts Us: Our minds play tricks on us. We buy into our own BS, distort reality, minimize others’ contributions, maximize our own contributions, engage in self-justification, recall what is easily available, and struggle with overconfidence. We are susceptible to stress, change anxiety, and ideological biases. With that in mind, managing yourself may seem challenging, and you haven’t even begun to build a team.
There’s a Lack of Resources: For people who have always been employees, it is a startling realization that IT, HR, accounting, taxation, logistics, compliance, finance, and operations all fall on their shoulders. All that “stuff” seems easy until you get your first threatening legal demand letter. That “stuff” gets real, painful, and wildly distracting in a hurry.
Projections Are Difficult to Set: Startups die because of poorly conceived projections. Revenue is projected high. Costs are projected low. In reality, it always takes twice as long, costs three times as much, and results in half of what you were expecting.
After spending closer to an hour trying to check their reality, the couple left, more emboldened than ever. While they said my questions were helpful and my cautions were logical, they had a “billion-dollar idea” and felt compelled to take the leap.
Three months later, I followed up with her. She explained that she had quit her job and spent $85,000 on software development and $25,000 on professional services. They were hopeful to have the first version of the product released within the next two weeks. She rattled off a game plan for attracting users and had decided to expand the scope of the company beyond the previously discussed geographical boundaries. I was surprised and even a little impressed. I thought for sure this was headed down an unfortunate path.
Last week, I followed up again and got a different response. The startup had failed. They ran out of money, couldn’t get any traction, and couldn’t find anyone else who wanted to risk time or money on the project. Her last sentence was, “Apparently, startups are hard.”