PITCH-DECKS & IP
How founders can protect their business ideas; and how investors protect their reputations
You’re a founder with an interesting business idea. Like a lot of new ventures you require some outside funding to develop a proof of concept or, better yet, a commercial product from your solution. So you dedicate countless hours to making the perfect pitch deck. You send it to countless investors, use it for endless applications to accelerator programs. You get through the early review stages with some of these potential investors, maybe you even get a term sheet or some funding; or you are rejected at every turn. Then you find one of these investors has invested in a company that is “using your idea”. You’re angry. You speak to lawyers but their opinions aren’t satisfactory. You feel powerless. What else can you do? You take your phone, log in to a popular website and eloquently vent your anger in a series of posts that trend due to the feelings of injustice that the musings about your predicament have elicited.
The above describes what is an increasingly common phenomenon in startup ecosystems from Africa to Silicon Valley. And the instance that sparked recent discussions on these issues has raised some important considerations for both founders and investors. For founders, it has made them consider and understand where the real value lies in their business ventures and how best they can protect that value. For investors, it has incentivised them to ensure that founders and the wider ecosystem are better educated on these issues in order to protect their goodwill in an age of social media-driven brand risks. Name and reputation matters as much as returns and exits in startup investing. Given how intra and inter-connected startup ecosystems are globally, it’s not difficult to see why this is the case. Additionally, an investor or accelerator’s deal (sourcing) flow is strongly correlated with, or some may argue is a function of, its reputation amongst the founder community and fellow investors.
This is the context in which Founders Factory Africa, where I work as Head of Legal, has been developing a strategy to engage with the African startup community on these questions. Questions such as: what is IP? Is my pitch deck IP? Will an investor sign my NDA before I pitch my business? Can my investors invest in a competing business with mine? Can an accelerator that rejects my venture application /pitch deck incubate or invest in a competing business? These, and similar, questions are important for the ecosystem to collectively address as the discourse around this topic gains traction. So let’s go through some of these questions and briefly discuss the legal positions and business best practices related to each.
WHAT IS IP?
Intellectual property (IP), refers to legally recognised assets created from ideas. However, ideas in and of themselves are NOT a legally recognised or enforceable asset. Ideas must be acted on to gain legal protections. Depending on the idea and the way it’s acted on, these legal protections can be copyrights, trademarks, patents and such. They could also be trade or business secrets. These consist of uncommon information that a business generates/has/uses that drives its success.
Whilst copyrights, trademarks, patents etc are rights protected under the statutes of various countries, trade secrets are protected through contracts (eg NDAs etc). Having set this context, the question then becomes whether a pitch deck is IP?
IS MY PITCH DECK IP?
The legal answer to this is yes. Yes, because a pitch deck, like any document, is a ‘literary work’ within the context of copyright law in most countries. Copyright simply refers to a bundle of exclusive rights to use a particular work, and which are automatically created once the work comes into existence. These rights generally revolve around the use work for commercial purposes or gain. The author of the work is regarded as being first owner of these bundle of rights under most copyright laws - unless there is an agreement otherwise. This means that, generally speaking, the author of a pitch deck owns the copyright to that pitch deck; and consequently, for anybody else to copy or otherwise use it for commercial gain, they must first get permission (ie a licence) from the author to do so.
WILL AN INVESTOR SIGN MY NDA?
So, a pitch deck itself is a form of IP; specifically, copyright. But is a description of a business idea or solution that’s in a pitch deck also IP? The answer to this is no. A business idea in and of itself is generally not recognised as a legally enforceable asset. Sure, it is possible to try and protect a business idea via NDAs and confidentiality agreements, but: investors generally do not sign NDAs (given that the average VC receives hundreds if not thousands of pitch decks annually); and NDAs cannot prevent others from having the same idea and commercially acting on it anyway. Think about it, if others could be stopped from acting on a business idea because someone already had /started it, that would effectively mean that there could be no market competition. Once a venture is established to solve a particular business problem or provide a particular business solution, then no other business would be entitled to do the same - without first getting permission from the founders of the first business (given that they had the idea first). LOL!
The best way for founders to protect their business ideas is to execute them better than anybody else can/will, and to protect the internal business knowledge and information that gives them the competitive advantage to do so. This is the belief of a majority of investors a founder will come across, and hence why most investors do not sign NDAs before reading or hearing a pitch from a founder. It’s expected that a founder should be able to describe their venture in a succinct and general manner that would entice an investor to want to dig deeper. Digging deeper is usually in the form of due diligence which is only conducted by an investor AFTER a term sheet (that usually contains mutual confidentiality provisions) has been signed. A founder that cannot adequately pitch their venture (without having to divulge commercially sensitive IP or information) will usually struggle to get past initial discussions with most investors.
CAN MY INVESTORS INVEST IN A COMPETING BUSINESS TO MINE?
Given that one is generally not legally able to stop another person from starting a competing business to theirs, by extension it is generally also not legally possible to prevent an investor from investing in competing businesses. However, this is where industry practice - in order for investors to protect their goodwill - very much comes into play.
As mentioned earlier, an investor’s deal flow is somewhat linked to their reputation amongst founders and the investor community within a particular region’s startup ecosystem. If an investor were to suffer an undesirable reputation with these stakeholders - as a creator/abuser of conflict of interest situations with its portfolio companies - word would quickly spread and founders would not want to work with such an investor. If an investor is blacklisted in the founder community, other investors (particularly lead investors) would not invite such an investor to co-participate in rounds for fear of poisoning the deal for founders.
It’s for these reasons that it is extremely uncommon for investors to invest in competing businesses or have competing businesses in their portfolios. In the rare situations that they do, best practice involves extensively discussing and working out modalities (such as internal “Chinese Walls” or restricted information rights) to give the founders comfort. But what is meant by “competing businesses” is also an important question in this regard. For example, would it apply to businesses in the same sector, or only those in the same sector and geographical territory? If the latter, would a startup aiming to service a global market affect the definition? These are some of the considerations that would determine the aforementioned modalities that would be required in such instances.
Additionally, investors in early stage startups invest in the FOUNDER more than (or at least as much as) the business idea/venture. Accordingly, there are numerous instances where an investor may agree that the business idea is potentially viable, but only with a different founder. This could be because the investor feels the current founder does not have sufficient experience or lacks certain key skillsets, or simply a concern about the founder’s personality or history. But this notwithstanding, it is very rare for an investor to invest in two companies in the same line of business in the same territory - particularly where such investor is a board member of, or has other means of access to sensitive commercial information about, both companies. To underscore this point, in developed startup ecosystems such as Silicon Valley, it is a known practice for startups to target investors for funding (even where they may not need said funding) so that competitor startups are unable to secure investment from said investor(s) - due to this practice.
CONCLUSION
It’s important that despite their general concerns around these issues, founders must understand that the execution of their business ideas is what ultimately matters and not the ideas themselves. Of course, where in the course of executing their business ideas they develop valuable IP or trade secrets, they can and must protect these and enforce them to ensure they maintain whatever competitive advantage those assets convey.
This post is the first in a series of community engagements and information sharing activities that Founders Factory Africa will be conducting this month to help facilitate discussion around these questions within the African tech startup ecosystem. Follow Founders Factory Africa’s twitter handle (@FoundersFFA) for more information on these engagements.