Answer from Stas Khirman, Managing Partner at TEC Ventures
Having been on both sides of the table multiple times, I recommend following these three rules:
- Tell the truth, and only the truth , but never ALL of the truth.
- Tell WHAT you are doing or are going to do, but not HOW you are going to do it.
- If your business know-how can be replicated after one hour of talks, its maximum valuation is approximately the cost of lunch in a fancy restaurant.
A few clarification on the rules:
- "Vague answers" are not helpful. Trust is a major asset for entrepreneurs in their relationships with investors. It is much better to draw a line with "I can't name our potential customer until..." than to say "You probably can guess name of this big retailer," or a similar promise. Potential investors are entitled to truthful information, but not to all of the information.
- Let's use a Customer Acquisitions Cost (CAC) question as an example. You certainly have to provide potential investors with truthful information about your CAC; it is part of the “what” question for your business model and planning. But you can reserve the technical details of “how” you achieve such a uniquely low acquisition cost until the later stages of the due diligence process.
If you are worried about replication or a patent, you will be surprised to learn that patents are not sufficient to replicate business know-how. Usually, they are not even sufficient to replicate technological know-how. If you read well-written patents claims, you'll realize that they tend to cover what you are doing, and not how you will do it. In my honest opinion, this is done on purpose to give wider space for future litigation opportunities.
Too many people assume that start-up success is based on some small piece of information, patent or brilliant idea. In practice, at least nine out of ten success stories depend on the quality of execution.
Virtually every successful company had predecessors with similar (and sometimes superior) ideas and technologies.
Let's take a look at Facebook. Originally, it was based on well-known ideas that were easily describable in a one hour lunch. Plus, Facebook had a few well-established direct competitors.
Did Facebook have deep technological know-how behind its idea? No, at least not at the beginning. Did it become successful where others failed due to some "one hour know-how" ideas? Apparently not.
Yes, Facebook had some good ideas, but its success came not from its ideas but from its brilliant EXECUTION. And this you can't replicate in a one hour lunch.