It goes beyond startups finding their feet with investors or exploring strategic and merger deals and affects even the largest – for example trying to break into China, corporations have to commit to transfer of intellectual property.
It is clearly marked and expected corporations will try and reverse engineer another’s products or copy successful launches but bait-and-switch corporate venturing tactics is unsavoury and risks destruction of a unit’s only real asset: its reputation.
Bad money quickly pushes out good – as its cost of capital is underpriced and return expectations are often different – and so the Wall Street Journal’s longread on how “some companies regret sharing information with tech giant [Amazon] and its Alexa Fund; ‘we may have been naïve’” is an important article and follows on from Harvard Business Review’s earlier piece by former Prof Thales Teixeira.
Amazon clearly told the WSJ the company does not use confidential information that companies share with it to build competing products but with dozens of entrepreneurs, investors and deal advisers telling the journal they felt otherwise there is enough alleged smoke to cause concern in the wider community.
The timing of the piece is especially awkward for Amazon as a highly anticipated antitrust hearing including its top executives along with peers from Apple, Facebook and Google was originally set for today but has been postponed.
A notice filed by the House Judiciary Committee set no new date for the hearing, “Examining the dominance of Amazon, Apple, Facebook and Google”.
As lawyer Dror Futter in a blog post following the WSJ article noted: “Assuming the accuracy of this article (and I am reasonably familiar with one of the cases discussed), this is the nightmare scenario of working with a strategic investor or potential investor.
“You would like to think that reputational risk would prevent this type of behaviour, but the reality is that the prospect of gaining an Amazon-level investor or strategic partner may cause many ventures to ‘take their chances’.
“The article also highlights that contractual protections are only as good as your ability to enforce, as several ventures acknowledged that they did not have the resources to fight Amazon for breach of their confidentiality agreement.
“Although there are no guarantees, ventures talking to strategics in their space should try to get a sense of the ‘walls’ that CVCs have put in place that govern sharing of information with their business units.”
Entrepreneurs have to ask the tough questions of all potential investors and find ways to fight back if they can – as Jim Clark did at web browser developer Netscape when software company Microsoft tried to browbeat it into submission and investment in the mid-1990s. Netscape still struggled (it lives on through Firefox) but Microsoft arguably allowed Apple and Google to survive as it dealt with antitrust actions in the wake of Clark’s lifting the lid.
But prevention is better than cure and for the industry as a whole this is no time to hide its head in the sand if there are challenging practices out there. Sadly, too few CVCs are prepared to go through the development or have the support of C-suite and business units to operate as professionally as the managers would often like.
It has been great to see so many new and existing CVCs step up through the Covid-19 crisis and support portfolio companies and do new deals but there are no short cuts to long-term support to the entrepreneurs otherwise reputations can be broken in days.
