This busy Tuesday morning, I am persuaded to make a short post provoked by — of all things — a bumper sticker I came across this weekend on the back of a race car ahead of me at Sears Point Raceway (aka Infineon). 

On first read, the bumper sticker alluded to the obvious trade-offs weekend racers must continually make in the delicate balance of speed, performance and safety. More broadly, however, it speaks to the management of risk and reward in a world tightly governed by constraints — constaints made by physical laws (pretty much non-negotiable), those constraints that are financial in nature (what economists would call scarcity), and those having to do with sheer will, nerve, or guts. As the sticker laid bare, one almost never gets all three at one time. Which two one wishes to have at any one point is the ultimate decision a company leader (or race car driver, for that matter) must make, and make time and again.

In the start-up world, the parallels are fairly obvious: Start-ups teams typically eat, breathe and sleep constraints of some form or another. Some believe this need to manage constraints is a rite of passage and focuses the mind of management teams to develop their core products and services without distraction and temptation brought about often by too much available capital, too many idle resources, and too many chefs in the kitchen. As an early mentor — a renown venture investor in his own right — taught me years ago, start-ups rarely fail from being too focused. Indeed, it is often the distraction and the temptation to ‘boil the ocean’ that gets young founders and their companies into trouble. Awash in opportunity, management teams can fall victim to wanting to pursue every initiative, every possible new revenue line item, every new partnership possibility, at the risk of diluting the company’s core focus and value proposition.

Cheap, Fast, Reliable - Pick Two. The key point here (and, hence, the irony) is that most emerging growth companies will ultimately never survive in the long term without possessing all three characteristics in their business model and processes. How to reconcile the Catch-22 depends upon how a management team makes the key early decisions about what is most important to focus on, and when it is most important to focus it there. Does being the low-cost provider make the most sense at launch, or should one launch with a bullet-proof product that is fast and responsive, build a customer beach-head, and then drop prices as volume increases? Then again, will the focus on building a bullet-proof, fast and responsive product take so much development time and so many resources that one will miss the window of entry and end up playing catch-up to a cheaper, inferior product that launched earlier and is now far ahead in terms of users/customers and is rapidly erecting switching costs around that user base? Tough questions.

Clearly, there is no uniform right answer. Each market is different, there are different issues and drivers at play, and one can rarely plot a strategy from a conference room table and execute it by rote without regard to how quickly the sands shift. Management teams (and their advisors and venture investors) must be supremely flexible in the current environment and be able to navigate a world where one rarely has everything one needs when needed. Some technologists are loathe to release any product that is not perfect. Some investors think it’s anathema to launch certain initiatives without a full team in place ready to manage the onslaught of orders, press inquiries, resumes, etc. The truth is that those proclivities on the part of certain leaders and investors are something of a luxury. One reads often in the business and trade press about risk management and personnel management. A less well-trodden subject that is arguably even more relevant for start-up management teams is, for lack of a more pithy term, “constraint management.” How a team manages being deprived of resources for long stretches of time can be the difference between an ultimately successful large enterprise, or another start-up bust. In future posts I will endeavor to spend more time on the issue of the unique stresses start-up founders and their teams must face and overcome in order to be successful. If you have interesting stories of your own challenges and stresses experienced in the pursuit of building your companies, I’d like to hear them.

Fellow venture blogger Fred Wilson and his colleagues at Union Square Ventures opined in recent posts about a correlation between an entrepreneur’s “openness” and that particular venture’s eventual success or failure. The discussion and reader comments that ensued spurred some dialogue internally here as well. Some months ago I posted about my (and virtually every other VC’s) discomfort with signing NDAs and my sometime annoyance with the entrepreneurs that insist upon them. My reasons were pretty well itemized in the relevant post, so there’s no purpose in rehashing them here.

While I have yet to unearth any solid evidence that supports the point, anecdotally I am fairly convinced that ‘openness’, in almost all its forms, has a direct and positive impact on a start-up’s long-term success. The openness I refer to is most obviously witnessed in the manner in which the founding team deals with investors and, to a lesser extent, with strategic partners and potential customers. But openness connotes quite a bit more than that. Openness is quite frankly a state of mind, an attitude, and a modus operandi for many highly successful entrepreneurs. Some of the most successful entrepreneurs I have come across in my career were irrepressible in their enthusiasm for what they were doing. As such, you sometimes could not shut them up about their companies and what it was they were seeking to do. Their excitement was infectious. Often times, that infectiousness is what drove some investors to set aside minor flaws or ambiguities in the business plan and move forward with the investment. This occurred often because the investors felt so drawn to the entrepreneur’s vision that the belief was quickly formed that the knits and knats of things would ultimately get sorted out. Yes, the devil is in the details — the thinking sometime goes - but without a compelling vision and a charismatic entrepreneur able to articulate that vision, getting caught up in the details is somewhat academic.

But there is something beyond simply being chatty with investors that has bearing upon a venture’s eventual success. In recent years it has become abundantly (and, for many investors who suffered through the 2001-03 tech bust, painfully) clear that ideas, in isolation, have little value. Execution and strategy is what is most important. The old “where the rubber hits the road” cliche comes to mind here. Secondly, ideas are typically dynamic. Like a block of wood being whittled into a fine instrument, the idea takes shape over time and with constant refinements made by outside forces. What make up those outside forces are the innumerable conversations an entrepreneur will have with venture investors, partners, colleagues, industry experts and others about his or her idea. This process of learning and refining is critical, we have found. Few successful companies launched with the original idea as its core business proposition. More often than not, the business that ultimately launched was quite different from the original concept pitched by the entrepreneurial team those many months before. In some cases, so many refinements were made due to the feedback and learning process inherent in all those conversations, that the eventual business was almost unrecognizable from the initial idea pitched to the early investors.

Some may regard these wholesale changes to a business concept as a bit of a failure, or as “mission creep.” In fact, I submit that these refinements to a business concept, when done in a methodical, rationale way, is what is healthy and, ultimately, what is rewarding. Moreover, I am nowadays more concerned when I see very little pre-launch modifications to a business because it indicates that there has not been sufficient data gathering and ongoing conversations up until this point with customers, partners and others that will ultimately determine the fate of the business.

Like anything else, there are exceptions to adopting a culture of openness. Clearly, one-on-one meetings with direct competitors about the core concept of the eventual business is typically ill-advised as would be speaking with the press or others when there are no clear rules on what is confidential and what is not. Setting those instances aside, my view is that the benefits of being open about your business and seeking input from others far outweigh the potential costs and risks of doing so. Being secretive has its place, but very few great companies were launched without a lot of input from outsiders and a LOT of discussions with customers and partners. Cutting yourself off by imposing restrictions on what is discussed or demanding NDAs from people who are genuinely interested in helping is a good way to cripple a promising company.

David Mamet fans will recognize the title from one of the more memorable lines in Alec Baldwin’s “pep talk” speech to a slumping sales team in Glengarry Glen Ross. I bring this up in the wake of sitting through back to back pitches this week where companies failed to make evident what was being sought from the discussion. As Fred Wilson discussed in his recent post on the subject, it is critical for start-up teams to, for lack of a better term, ’ask for the order.’

Asking for the order simply means laying out for investors what you are asking of them. One would be surprised at how many flashy, full-color presentations a venture investor receives in a given week where what is being sought is not made clear in the materials. Countless hours are invested by a management team in a good set of investor documents. In many cases, a full set of integrated financial statements, an exhaustive analysis of the competitive landscape, and projections so detailed that the itemization of the number of staplers for the admin pool in the year 2011 is provided. Unfortunately, what is often omitted in all this superfluous detail is how much in funding the company is seeking, in what form, and how those funds will be allocated.

Every 8th grader remembers the building blocks of English Composition. Every course inevitably presented a maxim that, broadly speaking, went something like this: Tell them what you’re going to tell them; tell them; then tell them what you’ve just told them. Tangential to this maxim was the part in every good term paper that was referred to as the ‘Call to Action.’ What is it, dear author, that you are requiring of your reader? What are you asking of them?

These same principles, although admittedly a bit broad and simplistic, still apply in a general sense to a good investor presentation. Re-inventing the wheel is not necessary. Some of the best presentations I have ever seen were less than ten slides and had no whiz-bang graphics. Indeed, I have come to believe that longer presentations are not at all desireable unless there is a very specific reason when a longer presentation is necessary. Few companies meet that criteria.

So, in summation, I recommend that before start-up teams send off their documents or book a meeting with an investor, be sure that what is being sought is made abundantly clear in the documents.  Most likely, it took you a great deal of time and effort to get an all-hands meeting at that venture capital or angel fund. Don’t blow it - as they would say in the newspaper business —  by “burying the lead.” Put yourself in the place of a venture investor and ask yourself the following: How much are you seeking? How did you arrive at that number? What will that capital allow the company to accomplish? How far will it take the company? What are the milestones tied to that capital? [i.e. how will I, the investor, know that you have met your projections and objectives?]

Clearly, investors will have a great many more questions, but be sure that, at a minimum, the above questions are clearly addressed. Closing a round requires many elements too numerous to itemize and address in a single post. That said, no closing is likely to occur when the objective is vague and the path forward muddled and undefined.

Loosely translated, this Latin maxim means “He who remains silent is understood to consent.” As maxims go, it will not be compared anytime soon to Google’s “Don’t Be Evil”, but the power of such a creed — the power to motivate, inspire, etc — at an emerging company can be significant.

These words were scrawled on a yellowed piece of Legal pad paper and taped to the door of the Frigidaire in the office pantry at my first company. The author never revealed him or herself and, frankly, it never really mattered. The motto became a defining statement for our company in the months to come. People would mutter it under their breath at board meetings when difficult decisions had to be made and not everyone was clearly on board (but few voiced their opinions to the contrary.)

The point was a simple one, and one that was particularly poignant at a company founded and run by then-twenty-somethings who were doing things for the first time (and often doing it badly): Speak up. If you are uneasy with decisions by superiors you need to voice that. Too often in early stage companies, people nod when they should ask questions; people are mute when problems are beginning to surface; and people avoid confrontation when a confrontation is exactly what needs to occur.

Forget about what it says on the business cards. CEOs at start-up companies — particularly the first kind ones — are often terrified every moment of the day with what to do. They have been told enough times by self-help manuals and pop psychology business books, however, never to project that uncertainty or insecurity for fear it will unsettle the troops and telegraph weakness. This is sometimes decent advice, but too often it brings unwelcome outcomes. The net result is that people swagger and feign confidence when they should be asking for help and guidance. True, sometimes it’s best that that help come from outside the company — from board directors, investors and advisors — rather than from employees and direct reports, but sometimes even that external help is too late to save a company. Too many promising companies have run aground because a proud founding team waited too long to seek help. They then make the all-too-familiar and fatal mistakes of (1) surpising their board with bad news — NEVER a good idea; and (2) they wait so long that the board can rarely do much to save the company once the problems are finally aired openly.

I raise this issue now for a few reasons. There has been an unpleasant rash of reports in the business news and international wires recently about former CEOs CYA’ing themselves over earlier deeds at their former companies, or about now-retired military men and former cabinet officials airing their views on military misteps in the Iraq matter. What is oddly convenient is the timing of these revisionist histories. Regardless of one’s opinion on the Iraq War, as one example, the time to raise issues is at a time when those opinions could have been of value. Watching Jack Welch second-guess GE’s Jeff Immelt, or hearing Paul Volcker castigate Alan Greenspan over Greenspan’s swipes at Ben Bernanke is distasteful and sophomoric.

Unfortunately, the venture/start-up community is not immune from such CYA behavior. The old saw that JFK re-popularized after his own Bay of Pigs fiasco, “success has a thousand fathers, but failure is an orphan,” could be elaborated upon to suggest that failure may not have a thousand fathers but it can have a thousand Monday Morning quarterbacks who have strongly held opinions about why the failure occured. The catch, however, is that those opinions come with 20/20 hindsight and were never aired when it could have helped matters.

The message inherent in this post, for early stage founders, is to do your best to instill at your companies a strong sense of openness and communication that is unfettered by policies or reporting bureacracies or misaligned incentives that would impede candor from those you need input from. Don’t just issue the standard ”my door is always open” drivel. Make it a part of the culture. Succeed in creating that kind of enterprise and you will find problems when they can be nipped in the bud and not stamped out in a flurry of litigation months later when an irate and blind-sided board has to step in. 

Jeremy Liew of Lightspeed Venture Partners posted recently on five things that startups should not scrimp on. I agree with most of his recommendations, but one area where I have no equivocation is around securing good, competent legal counsel…and doing so as early as practicable.

This seems fairly common-sensical, I’ll grant you. However, I am endlessly amazed at how many startups mishandle this critical step. As any experienced entrepreneur will tell you, building a startup is inarguably front-loaded and all-consuming. Things are bound to slip by the wayside. Family vacations and anniversaries get postponed, clothes remain at the dry cleaner for weeks, the cleaning lady quit three months ago and you just noticed, that carton of Szechuan Shrimp with Snow Peas in the back of the fridge now looks like something in the bar scene from Star Wars. Many of us have been there.

However, the decision and the timing for engaging a law firm can have deep and lasting implications for a young company. Many startups, in an admirable concern for being cost conscious, make the false economy of putting off engaging with competent legal counsel until an issue arises that requires immediate attention. Unfortunately, by that point precious time may have been lost and the company may already be in a disadvantaged position.

It’s fair to say most startup CEOs don’t jump at the idea of bringing on an outside law firm. The costs can seem outrageous for a startup team having to make do with using old doors as desks and living off a steady diet of double espressos and Pop-Tarts. There is also the inbred culture in many startups of wanting to be intimately involved with every aspect of the company and not to outsource such an essential element as the company’s legal and documentation requirements until absolutely necessary. This has the effect of fostering procrastination when it comes to selecting corporate counsel.

When that decision to bring on counsel is made, however, I find that too often it falls into one of two buckets: Throw money at the problem; or, go for the cheapest counsel you can find. Not surprisingly, both scenarios can bring poor outcomes.

Going the cheap route, as Jeremy explains well, can often result in less-experienced counsel that are not as current on market terms as a more established, recognized firm. This can cause unecessary bickering among attorneys over points that will eventually be negotiated away or are not meaningful to the matters at hand. Another aspect that I have witnessed first hand is that attorneys at smaller firms sometimes bring with them a bit of an inferiority complex. This sometimes means they feel the need to argue more than is constructive in order to demonstrate that they are ‘looking out’ for their clients. In my mind, this equates with ‘make work’ and can unecessarily poison the atmosphere between the parties concerned. The sign of a successful negotiation (and good attorneys) is that both sides feel their interests were suitably represented without unecessary rancor.

Throwing money at the problem, on the other hand, has its drawbacks beyond simply the cost argument. Prestige has a role to play in this industry as in most. For a start-up management team there can sometimes be enormous pressure to bring on a name-plate law firm to represent it. Having a marquee name doing your company’s legal work can sometimes have intangible benefits in terms of credibility for the company itself and imbue a sense of confidence that the prestigious firm knows what it is doing and can avoid costly mistakes. There is also the implied belief that a renowned firm will help with investor introductions, though this belief is too often misplaced.

One common misperception among first-time entrepreneurs, however, is the idea that the charismatic partner at Big Name Law Firm that initially wooed them will be handling their day-to-day needs. Not very likely. As is common at many professional services firms (law firms, consulting firms, investment banks, etc) senior partners often take on a more business development role, not a day-to-day management one. While it’s true that many senior partners (especially those specializing in arcane areas like tax or patent law) are still actively involved in client matters, often times as a partner’s seniority increases his or her direct compensation becomes tied to bringing in new clients, managing those client relationships, and on other affairs not tied to the dry, quotidien legal work that goes on at the lower rungs at a large law firm.

For this reason, a startup CEO should expect that, while a partner may oversee and sign off on key documents, most of his company’s legal work will be executed by Associates and Principals at the larger firms. Indeed, it will often be that the Associate is the CEO’s direct pointperson in most, if not all, of the company’s legal affairs.

To be fair, most Associates and Principals at the renowned firms are very competent and do excellent work. That said, Associate-level work is still very expensive at a name-plate firm (on the order of $400-500/hr) and there is an increased risk at large firms that overworked Associates can make expensive mistakes or do things inefficiently that a more experienced resource at a smaller firm simply will not.

At the end of the day, however, selecting corporate counsel is a highly personal decision and a startup CEO has to balance many interests — not simply name recognition and cost considerations. In a legal crisis or a financing, the CEO and the legal counterpart at his or her law firm will spend many hours together. As such, the personal connection, rapport and confidence that must exist between them is paramount. However, like a bad hiring decision, if the relationship becomes fractured or if there is a troubling loss of confidence, the startup management team must act quickly to make changes and bring in alternate counsel. Loyalty is a noble thing, but continuing to retain a law firm — regardless of its prestige – in the face of a loss of confidence or poor performance can be very destructive to a young company.

Finally, to reiterate my earlier point, I strongly encourage startup CEOs to invest early in the company-law firm relationship. Make time to get to know the people you will be interfacing with. As I have stated in earlier posts, when things happen they tend to happen quickly. This applies to financings as well as to other matters of a legal nature that are time-sensitive. [Are there any legal matters that are not time-sensitive?] Laying a foundation within the firm that represents your company will grease the wheels enormously when the time comes to pull together a deal team or other group of legal experts to help you navigate your particular situation.

David Hornik, the August Capital partner and a prominent VC blogger, is not quite a colleague; but, on the matter of persuading entrepreneurs to wean themselves off flowery language and superlatives in their investor materials, we are kindred spirits. David’s post on the idea of stripping adjectives from VC pitches is well worth reading. I am not entirely sure how well that idea in practice would turn out (kind of like reciting the Gettysburg Address without using prepositions) but I am in full support of the spirit behind that suggestion.

Every decent treatise on the subject of pitchcraft will make some mention of ‘knowing your audience.’ Well said. Venture investors are tired of being told in pitch meetings of the promise of the internet and how it has changed our day-to-day lives. We get it. Move on. A topic less well-trodden, that Dave raises in his post, is that of taking the Joe Friday approach and stripping your presentations of superfluous adjectives and other superlatives that serve to muddle the overall message and just sticking to the facts….ma’am.

Granted, this is easier said than done. I understand that some entrepreneurs will feel that VCs are asking them for competing things. On the one hand, we want to see real passion and excitement from the entrepreneurial team about the opportunity and the road ahead. That passion needs to come through in the pitch and in the investor collateral. How, then, can there not be a lot of ambitious, adjective-heavy language in the presentations? On the other hand, we are saying we want presentations (or reports to the board of directors) stripped bare of flowery, superfluous language. Are there competing interest to juggle here? Not really. Basically, the idea is to be rigorous and ruthless in editing the materials you are sending to prospective (or current) investors. The passion should still come through.

Michelangelo was once asked how he carved a horse from a massive chunk of marble. He famously replied that he chipped away anything that did not look like a horse. Do likewise. Before hitting that Send button, print out all your documents, break out the red Sharpie, and really have at it. As best you can, try to look at things with fresh eyes and cut away any descriptive language, figures of speech, hyperbole, or other things that might detract from what you are trying to communicate.

This does not mean dumb down your materials. Simply limit yourself to details that support your conclusions without just providing your conclusions. As Dave Hornik states properly in his post, don’t tell me you just hired a “fantastic” sales guy, tell me why he’s fantastic. What has he done? Has he blown out the quarterly number the last three years running at his last position? Great. But let me be the one who determines that he is, indeed, “fantastic.” Depending on my experience hiring and evaluating sales people, we may have different hurdles for what constitutes “fantastic.” The same goes for insipid assessments like “collossal growth”,”exponential user traffic” and the like. These phrases communicate nothing. Let the facts speak for themselves. With any luck, the facts will support such hyperbole and the investors will come to their own frothy conclusions. It will then seem like it was ‘their’ discovery that things are so “spectacular” at the company. I think that is another one of those well-worn car salesman maxims, by the way: let the customer convince himself that it was his idea to buy the car. Now, that’s a neat trick.

The venture industry is famous - nay, infamous - for the long goodbye. As a group, we venture capitalists typically squirm in our Aeron chairs at the idea of giving a firm NO to a company we choose not to fund. There are myriad reasons for this–some sensible, some less so. The most cited justification for the “squishy no” has to do with the fear that that entrepreneur may come up with something better on his or her next go-round and, God forbid, said venture investor might miss out on the next Google/YouTube/Skype/insert-your-startup-home-run-deal-here investment.

To be truthful, this is not that bad of a justification, to which any venture investor who has given a firm ‘No’ to an entrepreneur can attest. Rejection can be a hellish blow. No matter how couched it can be in constructive and measured language, it’s difficult to de-couple the personal rejection from the one aimed solely at the company seeking funding. After all, one of the key assets of any venture deal is the team itself; so, how then can one reject an investment in a company and there not be an implied rejection of the team inherent therein?

A decision was made long ago that, as a firm, we made it a point to offer prompt responses to pitches and submissions from entrepreneurs–particularly when that submission involved an in-person meeting, call or referral. We try to be as disciplined with cold, over-the-transom submissions, but the sheer volume of those requests are harder to sort through. I think I speak for most venture investors in that regard. We try, but we do not always succeed.

On balance, I think it’s been the right decision but it’s not been smooth sailing. There have been more than a few occasions when I penned a long email to an entrepreneur calmly explaining my firm’s position not to move forward only to receive a rant about my “not getting it”, casting aspersion as to my lineage, my intelligence, and basically insinuating that my parents commingled with livestock. Serves me right, I suppose. While there has been some blowback to our Radical Honesty-esque approach, I think the decision to lay out the rationale for where, when and why we might invest in a company has led to many more referrals from grateful entrepreneurs than sour grapes from those that couldn’t handle it. What sustains me is the notion that offering clarity, and some honest advice, to an aspiring entrepreneur is a function of what a good venture investor should do. Capital is but only one tangible aspect of what a good VC offers. The intangibles include relationships, advice, support, and a host of other things.

All this being said, the truth is that entrepreneurs are too often insulated from some uncomfortable realities about the fundability of new enterprises. Put simply, the vast majority of companies seeking funding will not be successful in attaining that funding. Those companies will fail. Frankly, most of those companies should fail. It is the nature of things and has been a central aspect of venture capital since the very beginning.

For entrepreneurs seeking funding, it behooves one to keep in mind the old car salesman axiom that deals happen within the first 48 Hours or they typically don’t happen at all.

While there are always exceptions to every rule, I find that maxim to be fairly accurate and directly applicable–not simply for raising venture rounds, but for life in general. The 48 Hour rule applies equally to job interviews, mortgage applications, and–dare I say it–even dating. [If you have doubts, think about the last few jobs you were offered. I would wager that those employers moved quickly. You may not have had an offer in 48 Hours but more likely than not, you heard something within 48 Hours of the interview indicating things were moving forward.]

So, if you are an entrepreneur and if you’ve pitched a venture investor and he (or his firm) has not gotten back to you in 48 Hours with some response (next meeting scheduled, due diligence questions, follow up questions, requests, etc) he’s not interested. Move on.

Again, refer to the 48 Hour rule. Human nature would appear to dictate that something that stirs the imagination would compel action within a short time frame. A venture investment is an undertaking. There is a process involved. It’s laborious. That would necessitate pushing other things off his or her desk and making time for you. This does not happen lightly.

Remember: when things happen, they tend to happen quickly. If a venture investor has not decided in 48 Hours if he or she even wants to take a next step, he doesn’t. Inaction is a form of action. In other words, doing nothing is doing something–namely, nothing.

For entrepreneurs, the issue is how to handle the “No response response.” Grit your teeth, take it as a ‘No’, and move on. Resist the urge to send a flame mail. Sure, it might feel good for about 10 minutes, but once you hit that Reply button, those sentiments will go away quickly, and there will be a nasty, petty email floating out there for eternity replete with all your rawest emotions on full display, and that display is a 60″ LCD Flat screen. You really don’t want that.

Just slightly less annoying than the “no response response” to many entrepreneurs is the “kick the can down the road” response. It usually contains the phrase “keep us posted on your progress” and gives a vague suggestion that the firm might invest at a later stage or round.  Truth be told, this can often be an honest assessment. We have seen many deals that we liked but, for stage and development reasons, were not appropriate for us. We liked the companies and genuinely wanted to stay in touch. Don’t misread these signals. While it is an impossibility to delineate those firms who truly want to stay in the loop on your company’s progress from those that are simply passing without clearly articulating that, the best strategy is to do precisely what the venture firms ask: keep them posted.

A final point is to embrace these tendencies in venture circles as something a startup team needs to come to terms with. I have seen some start-up CEOs adopt the tactic of trying to “respond in kind” by being, well, taciturn jerks with venture investors. Bad idea. While this post is about the value of understanding the 48-Hour rule, there is also something known as the Golden Rule–he who has the gold makes the rules. At the end of the day, venture investors control much of the capital that you need to take your company to the next step. Being openly hostile to venture investors or imposing false time constraints on them — i.e., “you need to let me know today if you’re funding us…”etc — rarely works. Better to be accommodating and take on a positive demeanor. After all, the venture investors are looking at you as a possible partner and if they already get a sense that you will be difficult, a prima donna, and an overall pain in the arse, the pitch is over before it even began.

As I once said to a ‘difficult’ start-up CEO who tried to impose false time constraints on his deal: “Hey, who died and made you Sergey Brin…”

Like most of my peers, I spend a good deal of my time looking for innovative companies that are not only pursuing big, attractive markets, but that also possess those critical, ’holy grail’  elements that can enable those companies to erect barriers and garner sufficient runway to achieve the scale they need to become dominant, market leading companies. This trail is well-trodden and never-ending.

In recent weeks, however, I have noticed an interesting trend emerging in the business models of some in my current batch of startup company prospects. As yet, I have not heard anyone on my side of the desk come up with a pithy, clever term for this business model structure, so I am just (temporarily) calling it the Luddite Tax approach. It is by no means a “new” way to generate revenue from customers — heck, the government has been doing this for years — but it is beginning to gain in popularity and acceptance as a bona fide business model strategy. I find it clever, timely and quite powerful when done properly.

Unlike other approaches, the idea is not to “impose” a cost on a consumer or to ever “force” one to convert. Indeed, the notion is very much to give something away for free (or at very little cost) at the initial stages. Like the concept of Network Effects, the point is to build traffic first and foremost. The comeuppance is that eventually that tidal way of traffic creates a self-sustaining and self-fulfilling gravitational pull that brings aboard all users into a pay scheme. Sound familiar? It is. The Luddite Tax is in evidence in a number of everyday situations. You probably do it already in your daily commute if you are a FastTrak customer.

FastTrak is actually a great example. To the uninitiated, FastTrak is a program whereby residents sign up for an account with their local municipality to receive a “transponder”, a plastic device the approximate size of a garage door opener. The transponder is mounted to a vehicle and a signal is transmitted between the transponder and a receiver placed on a toll bridge or other toll-taking infrastructure for the purpose of collecting a toll. The toll is collected by either debiting the customer’s bank account or by having an account set up with the municipality where funds are deposited in advance and periodically replenished. Having a transponder permits the driver to use dedicated FastTrak Only lanes — which are unmanned toll booth lanes where one can drive through at up to 25 miles an hour — thereby saving time during peak commute hours by avoiding the typical manned booth lanes often clogged with drivers handing over their dollar bills the old fashioned way. As an added incentive, municipalities often charge a slightly lower toll fee to a transponder user than for one paying cash. [However, don't expect this discount to last. See why below.] 

Everybody wins, right? The municipality gets traffic moving faster and saves costs on having to retain toll takers for the toll booths. Transponder users get to fly by toll booths and save commute time. The planet benefits from there being fewer vehicles clogging roadways burning fuel as they sit in long toll booth lines. 

The catch is that the government is careful to never force anyone to become a FastTrak user. Indeed, they do not need to. People who wish to pay tolls in cash can always elect to do that - probably forever as there will always be tourists, etc whose vehicles are not (and needn’t be) transponder equipped. They will need to pay in cash.

The rest of us have a decision to make: We can be one of the “I don’t want Big Brother in my car”contingent and refuse to be joiners. That will guarantee us many hours of sitting in overheating cars each morning (and sometimes each afternoon) rummaging for loose change in our glove boxes. Sure, we can say we are “bucking the system”, but at a cost that soon becomes pretty unbearable, particularly each time a Lexus whizzes by us in the next lane over on its merry way through a FastTrak lane.

Municipalities, therefore, are enforcing a kind of compliance by letting the “old system” become so unbearable that, in time, virtually all drivers with the exception of once-in-a-great-while drivers, tourists, and hard-core “off the grid”-type anti-government activists will yield and get a FastTrak. This is the municipalities’ design all along, but they choose to reach their goal by letting a “reverse Network Effect” do the work for them. That reverse Network Effect is that as users gravitate to a new, pay system, the old system becomes increasingly chaotic, outmoded, inefficient, and downright painful. While it’s not quite the “upgrade or perish” business model of many software applications, it is decidedly a “migrate or wallow” business model of sorts. You won’t perish if you stick with the old system; you’ll just sometimes wish you did.

Another example of this – only now emerging – is around the burgeoning area of “smart” thermostats.  California recently added a regulation, temporarily sidelined, that would have mandated all new construction to have installed a communicating thermostat that could receive messages from the utility companies. The core purpose of this is for the power companies to better manage power usage and requirements in the event of power emergencies like those that afflicted California in the summer of 2001. [Clearly, it is only a matter of time before these communicating thermostats will be remotely adjustable by users -- "Honey, I forgot to lower the heat before we left on vacation! Let's do it from my laptop or cell phone!" -- and before they will be able to communicate with other smart devices in your homes.]

Predictably, privacy advocates threw a fit insisting that this was a thinly veiled attempt by the state to take over your thermostat. The dust hasn’t settled on this, but it is already appearing that there will be an element of Luddite Tax in the model that will ultimately emerge in this initiative. Existing structures will be grandfathered. As such, homeowners will not be required to upgrade their thermostats with the the new, smart communicating devices. However, as communicating thermostats become ubiquitous, having an “old school” thermostat that is not remotely adjustable by either the homeowner or the power company will become inefficient, costly, and perhaps dangerous.

Tech companies thinking of pursuing this kind of approach would do well to closely examine some of the ways government agencies are embracing the Luddite Tax model to get apathetic citizens to adopt new ways of interacting with government. Believe it or not, startups can learn a lot from watching government work. Wait a second! - Looking to local government for innovative ideas?? In my years in the technology and venture environment, I truly never thought I would ever find a rationale for saying that…

Several times a month an entrepreneur I am intending to meet with hits me with an NDA demand. Often this happens over email so I find myself tapping out a reply where I itemize the reasons why I (and most of my venture colleagues) rarely sign NDAs, and why, in most cases, an entrepreneur should not even ask for one. I have tapped out the same ‘why I don’t sign NDAs’ content so many times that I now simply dig through my Sent Items folder and locate the most recent response I sent on this topic to the last entrepreneur who asked for an NDA, and I cut and paste it into my current reply.

What I find interesting is that there is a veritable banquet of information online and in book form for entrepreneurs about the mechanics of launching a start-up. Indeed, folks like Guy Kawasaki, have almost carved out an entire cottage industry of How-To manuals and seminars on navigating the rocky shoals of entrepreneurship successfully. I think highly of Guy and others like him who have laid a foundation of good insights and information for entrepreneurs to leverage. With all that information, however, the NDA question seems to come up more than most. As such, I thought a post on this subject was in order.

Foundry Group’s Seth Levine covered this subject recently, as have many VC bloggers over the past few years. Their posts are worthwhile reading. That said, here are my specifics in layman’s terms on why entrepreneurs should think carefully about bringing up this subject next time a meeting with a venture capitalist is in the offing.

1. The Urban Legend issue. I am not sure where this all started, but there remains a persistent fear among some entrepreneurs (usually the first-timers) that VCs steal ideas from entrepreneurs with abandon. For some entrepreneurs, this paranoia is so palpable that they simply cannot get past it. Unfortunately, this unhealthy pre-occupation ends up precluding them from getting any help from potential advisors, investors, and others who might actually like the idea and help the entrepreneur become successful. Too often, the end result is that the idea dies, unfunded and unrealized due to irrational fear and paranoia.

Have their been occasions in the past when some VCs have behaved unethically or inappropriately with sensitive information imparted by an entrepreneur? I am sure that there were such occasions, but I have never seen it on my watch, I have never heard any verifiable accounts of any note, and I doubt highly that it goes on nowadays with the many firms I collaborate with on investments, ideas or due diligence.

For one reason, it’s a career killer. VCs live and die in large part based upon their reputations in the community. Good reputations breed good relationships with fellow VCs, entrepreneurs, and partners. Those good relationships then breed good deal flow and a network of people to collaborate with on other investments. One clumsy attempt to ’steal’ an idea from an entrepreneur will all but assuredly kill that venture investor’s career and virtually anything he or she touches. In short, it would be an absurdly dumb move.

Secondly, most venture capitalists are simply too busy working with their portfolio companies, managing their limited partner relationships, and balancing hectic lives to simply run off and start a company. Last I checked, a career in venture, if you are fortunate enough to build one, has a lot to recommend it. I love what I do and would wager that I speak for many of my colleagues in that regard. I, for one, certainly have no intention of leaving everything I have built over the past 15 years to steal someone else’s business idea, no matter how compelling. It would be much better to find a way to partner together and see this idea to fruition.

2. The Liability issue. For most venture investors, signing NDAs can only expose us to liability.  I probably meet with 200 companies a year and review investor collateral for another 200 or so. That figure is probably typical for a partner at an early stage venture fund. If I signed NDAs for every entrepreneur that requested one, I would never get anything accomplished. Simple numerical probabilities dictate that eventually I am going to meet with another company that is intending to do something similar to a company that I have met with previously. [There are few "truly" original ideas out there, the saying goes.] Should I decide to subsequently invest in that company, then I and my fund would be exposed to litigation by an entrepreneur who’s appeal for funding I may have earlier spurned and/or who is now convinced that I either stole his idea outright or I am using the “confidential” information he shared with me with the new company we just funded. In either instance, my fund and I now have an expensive lawsuit to grapple with, regardless of its questionable merits.

3. The Adverse Selection problem. We call this the “adverse selection” problem because oftentimes the companies that seek an NDA from us most aggressively are the ones that usually ”have” very little–hence, their perceived compulsion to protect their largely unprotectable idea. The question it begs here is that ‘if your idea is that easy to steal, then there probably wasn’t much there of interest to us anyway.’ This is a subtle but important distinction for entrepreneurs to understand. Any experienced professional investor knows that if a portfolio company begins to gain traction, competition is a given. Indeed, in so many markets, competitors are almost literally lurking in the shadows watching while the early entrants validate the market and (hopefully) stub their toes. In short order, the marketplace is teeming with me-too companies and other competitive threats. If a portfolio company’s business is so easily stolen in such an eventuality, then someone wasn’t during their homework at the venture fund.

Now, to be sure, there are times and circumstances where NDAs are absolutely a requirement and where they should come into play. Meetings with potential joint venture partners and/or certain vendors is one obvious place where NDAs should be considered. Another circumstance would be when a company has very specific and very sensitive technologythat could be enormously compromised by its disclosure. Truth be told, we see perhaps three or four companies a year where the technology is in such a state that an NDA would be appropriate. The rest of the time, the NDA request only serves to send the wrong message to investors and bogs down the process.

Like in most circumstances when pitching businesses to investors, your mileage may vary. In other words, a good entrepreneur needs to assess the circumstances he or she is operating within and decide what demands and burdens he wants to place on his prospective investors. Too many, and he sends the message that he is a naive entrepreneur that has both failed Entrepreneurship 101 and will likely need a lot of hand-holding down the road. Given how busy most of the good venture investors are already with their existing commitments, that alone can sink a prospective investment.

Brad Feld penned a quick post recently on the inanity of certain wanna-be (or, perhaps, shouldn’t-a-been or never-will-be) entrepreneurs who insist on sending out ‘hey, I’m leaving my job at BigCompany to launch my startup and change the world’ emails…….from their BigCompany corporate email accounts! Hello? Is the caller there?

Brad lays out his case for the abuse that should be heaped upon said offenders, so no sense rehashing it here. My only rejoinder in this space is that I wish to go one better. Mr. Feld and others have opined that with the proliferation of free email accounts, sending any sensitive emails from corporate accounts is positively inexcusable. Little argument there. However, if it is the sender’s intention (as is often the case) to be taken seriously by a possible future investor, partner or employee, a free email domain just doesn’t cut it anymore in 2008.

The truth of the matter is that investors (and, to a similar extent, partners and potential employees) want to see real commitment. Let’s face facts: free domain email accounts are pretty lame. There, I said it. Like it or not, we are painted with the brush of the email domains we use. What, it’s 2008 and you are still sending out email from an AOL.com account? What are you, a grandmother with blue hair and a busted hip from Toledo? And, to add insult to injury, you are trying to persuade me about your technical savvy….from your AOL.com account? Really?

The Yahoo.com and Hotmail.com offenders are a little better, but not by much. A Yahoo.com or Hotmail.com account tells the recipient you either just got fired, just quit, are chronically unemployed, or are just really lazy about getting something more permanent for yourself. Also, the old excuse that Yahoo and/or Hotmail accounts are web-based and, thus, more accessible doesn’t wash anymore — not since most everyone is getting POP3 email on their phones nowadays and/or can easily access that POP3 email by going in through a Gateway from any terminal with an internet connection.

Do I have a Hotmail or Yahoo account? Sure, I do. What do I use it for? For sweepstakes promotions and registering new products I buy, purchasing things on eBay, Craigslist postings and responses, Evite stuff, and other things that I know will result in a torrent of new spam. But that’s it. No serious personal or business stuff is being transacted there.

So, if you are starting a company drop the $19.95 a month and register a domain name with 5-7 mailboxes. Go ahead, it’ll be OK. You don’t even need to get a website going just yet; just the email account in the name of your company will suffice. Got that? Great. Now, get down to Kinko’s and have some cards done. $60 should get you about 500 four color jobbies. Ok, not exactly the watermarked, embossed cardstock the Sand Hill Road guys are using but they are functional and look a lot better that the old former employer corporate cards you were handing out with all the contact info crossed out and written on the back in Bic pen blue.

There, now you’re an entrepreneur. No, I won’t fund your company any faster, but I will think more highly of you as will (I would suspect) most of my colleagues who are all similarly afflicted with short attention span disease when it comes to clearing out email inboxes and, unfortunately, passing judgment on unsolicited messages from those seeking to meet me and/or my partners. In this time compressed world we inhabit, when there is so little information to go on, the information that does exist has that much more influence. Make sure the impression you make is the right one; if it isn’t, make the fix and make it promptly.