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For entrepreneurs,paranoia might be wise

For technology entrepreneurs, the old line may be true: It's not paranoia if everyone really is out to get you.

Brian Barth is an MIT alum who, in 1999, started SideStep out of his house in Palo Alto, Calif. The company developed a downloadable ''toolbar" that allowed travelers to search dozens of websites simultaneously to find the best air fares, car-rental deals, and hotel rates. More than 8 million people downloaded it.

Barth isn't a vitriolic guy, and so in a matter-of-fact, ''nice weather today" sort of way, he related a story to me last month that would cause most entrepreneurs' blood to boil.

In 2003 and 2004, Barth had a series of more than 10 meetings and phone conversations with partners at General Catalyst, a Cambridge venture capital firm. (Barth remembers three meetings with Joel Cutler, a founder of General Catalyst, and three with Terry Jones, a partner at the firm who was formerly the chief executive of Travelocity.com.)

Barth says that Cutler and Jones never told him they were working on a travel idea of their own, even when he asked them directly about a rumor he'd heard through the grapevine. (In their version of the story, Cutler and Jones were simply meeting with Barth to explore the possibility of investing in SideStep, or possibly buying the company.) A month after the last conversation Barth had with Jones, in March 2004, General Catalyst announced it was investing $6 million in a company that it had helped to form, Kayak.com, to help travelers search many travel sites simultaneously. (Kayak.com wasn't an idea brought to General Catalyst by an outside entrepreneur.) Jones would be chairman, and Steve Hafner, a cofounder of Orbitz, would be the chief executive.

It brings up a question that's constantly on the mind of an entrepreneur: How much do you reveal about your business plan, and to whom? How much entrepreneurial paranoia is healthy -- and at what point does coyness and secrecy start to make you look like a nutcase with a PowerPoint deck?

There are plenty of things for entrepreneurs to worry about. A venture capital firm might decide not to invest, and either develop a company of its own or fund one of your competitors. An important prospective business partner, like IBM or Oracle, could decide to develop a product just like yours after lengthy discussions. In one case that involved a local company, Thomson Financial, which was an investor and had two seats on the board of Boston-based CCBN, decided to start a competing business, and allegedly used information from CCBN board meetings to compete against it. (The suit was resolved last year when Thomson decided to buy CCBN.)

Some entrepreneurs believe that you can't be too careful. When Jonathan Gaines and Joseph Spadea were working on SquareAnswer, an anti-spam company in Westwood that was launched recently, they sent each other encrypted e-mails. They watermarked and numbered each business plan that they distributed, so that if one was photocopied, they'd have a shot at knowing who had done the copying. Later, their attorney asked them for a list of all the people who knew about their product, to make sure that everyone on the list had signed a nondisclosure agreement. Spadea's parents hadn't signed one.

''My mom and dad looked at me kind of funny," he says, but they complied.

But other entrepreneurs believe too much paranoia can backfire. Dev Ittycheria is chief executive of BladeLogic, a server management software company in Waltham. Many entrepreneurs ''come across as too amateurish," he says. ''They don't want to share any information. It's like pulling teeth. That's a mistake, because a partnership has to be built on trust."

But Ittycheria says it is important to know about the reputation of the investor or prospective partner you're dealing with. With partners, information exchange needs to take place on an I'll-show-you-mine-if-you-show-me-yours basis.

''If you think the idea you have can be protected by an NDA, I don't want to invest in it," says Bo Peabody, an entrepreneur-turned-venture capitalist, using the abbreviation for nondisclosure agreement. ''Ninety percent of success is about how you execute on your idea." Peabody's first book, ''Lucky or Smart? Secrets to an Entrepreneurial Life," was published this year.

I bumped into Peabody last week at the Mount Sunapee Ski Area in New Hampshire, where entrepreneurs and venture capitalists were schmoozing with one another on the slopes as part of the Start-Up New Hampshire Business Plan Competition. Entrepreneurs there were exhibiting no reluctance -- as usual -- in talking about their ideas with VCs on the lifts; in the money game, it's VCs who hold the cards and can establish whatever rules they want.

While it would clearly be unethical for a VC to hand over documents from one company to a second company she'd decided to fund, nothing prevents VCs from sharing with that second company what they've learned from the five or 10 companies they've had meetings with that occupy that same industry niche. Peabody and Ittycheria both say it's standard operating procedure.

''Our investors have said, 'Here's how Company X thinks about this problem, and here's how they're going to solve it. Here's how they're going to build the distribution channel,' " says Ittycheria. ''That's pretty useful information for us as the recipient."

To my eternal dismay, some entrepreneurs are paranoid about talking to the press.

''There's no benefit of broadcasting your plan, so why do it?" asks Mort Rosenthal, an entrepreneur who is working on a top-secret new company called imo, with backing from Highland Capital Partners. ''There's a risk that someone else will start something similar, and a risk of creating expectations you can't meet."

James Perkins, who was up at Mount Sunapee last week -- but not skiing -- is the chief executive of Accentus, a New Hampshire start-up that sells software to stock traders that can translate the twitches of the Nasdaq into auditory cues.

Perkins told me he'd been paranoid about having discussions with potential customers like Goldman Sachs and Bloomberg LP. Many potential customers had in-house software developers who attended meetings, and Perkins was concerned they might try to create their own version of Accentus's product. Patent protection was important, Perkins says, as were NDAs.

So back to SideStep and Kayak. Was Barth being naïve, or were the General Catalyst partners being devious?

Cutler at General Catalyst says that he and the SideStep team in Silicon Valley simply couldn't come to terms on what the company was worth, and so General Catalyst didn't invest. Jones emphasizes that at the time, SideStep was a downloadable application, and what General Catalyst felt was needed was a system that travelers could use on the Web.

''We weren't satisfied with what was there," Jones says. Since Kayak's beta launch last year, SideStep has begun offering Web-based search.

''SideStep has morphed into Kayak," Jones argues.

Cutler adds: ''We have a huge amount of integrity here."

After our initial conversation, Barth told me he didn't want to talk anymore about the past. But Phil Carpenter, the vice president of corporate marketing at SideStep, says, ''They did a lot of poking around to help educate themselves. It did not seem to us to be entirely aboveboard." (SideStep eventually raised $8 million from Connecticut-based Trident Capital.)

I doubt we'll ever know what actually happened: Was General Catalyst doing detailed research for its own purposes, or is Barth just upset about having a well-funded new competitor to deal with?

One thing's certain, though: Barth will be a little more paranoid the next time around.

Scott Kirsner is a contributing editor at Fast Company. He can be reached at skirsner@verizon.net. 

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