- Marc Halpin's Chicago startup, Ka

- Marc Halpin's Chicago startup, Kapow Events, raised $700,000 from VCs and angel investors. - John R. Boehm
Photo by John R. Boehm Marc Halpin's Chicago startup, Kapow Events, raised $700,000 from VCs and angel investors.
Almost by instinct, entrepreneurs jealously guard their business ideas. But today's tech innovators are under pressure to open up about their secrets.

In an era of social media and online app development, startups seeking capital face an uncomfortable reality: the need to disclose details of their plans to investors without assurances of confidentiality. But investors aren't the only inquiring minds prying for details nowadays: As the startup cocktail circuit heats up around Chicago, entrepreneurs are increasingly expected to banter about their concepts with staffers, peers and rivals.

So what's an entrepreneur with a relatively healthy degree of paranoia to do?

There is almost no such thing as a first-mover advantage in the hyper-speed age of 21st-century digital development, and that's especially true in Chicago's relatively small tech startup community, people in the arena say. It's a mantra that entrepreneurs eager for financing have had to accept amid intense competition for limited venture capital and angel investor dollars.

“It's much less about confidentiality now than it used to be,” says Jeffrey Hechtman, an attorney who advises entrepreneurs and investors at Chicago law firm Horwood Marcus & Berk.

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Very few venture capitalists in Chicago and elsewhere will sign nondisclosure agreements, mainly because they review many plans and it would make them susceptible to all sorts of legal actions, they say.

When you first start talking to investors, you tend to be protective of your new business ideas, says Marc Halpin, who just raised funds for his second startup, Chicago-based Kapow Events Inc.

“Knowing that you need their money—you have to sell the idea,” says Mr. Halpin, a co-founder and CEO of Kapow. “That instinct kind of takes over.”

quote|Kapow Events' Marc Halpin
' Knowing that you need their money — you have to sell the idea. That instinct kind of takes over.'
In recent meetings with about 15 venture capitalists in Chicago and on the West Coast, there were only one or two situations where Mr. Halpin says he felt uncomfortable sharing some information, suspecting it could be passed along to a competitor.

Knowing the other companies a venture capitalist has invested in and being strategic about which VCs to approach reduces that concern, Mr. Halpin says. Kapow last month raised $700,000 from Chicago-based I2A and Firestarter funds as well as some angel investors.

“One needs to do a lot of due diligence on a potential investor before showing up and laying out something that the entrepreneur considers to be confidential,” says Dan Hess, founder and CEO of Chicago-based deal-shopping tools company LocalOffer Network, which has raised money from local investors. “That said, any investor that's been around for any extended period of time, generally speaking, has done so because of their integrity in dealing with entrepreneurs.”

FINDING FEEDBACK

A greater threat to a fresh idea may be the information passed among entrepreneurs themselves at the many networking events catering to the tight Chicago community, Mr. Halpin says.

“We're all hungry for information,” he says.


Shawn Carpenter, CEO of online investment tools company YCharts Inc. Photo: Erik Unger

Shawn Carpenter, CEO and co-founder of Chicago-based financial information charting company YCharts Inc., says he has found that sharing information tends to be more helpful than hurtful.

“I quickly realized the more feedback I got, the better the chance of the idea working,” Mr. Carpenter says.

The idea itself is “a small fraction of what we're doing,” he says, contending that picking the right team and executing the idea well are more important in the long run. Last November, YCharts raised $3.3 million from an investment group led by Chicago-based Morningstar Inc.

To be sure, some entrepreneurs nurturing new ideas are still leery of disclosing too much too soon. Nicole Apple, a Chicago entrepreneur, worked for more than a decade in the dog-eat-dog advertising world, and she's keeping her business idea for a digital women's fashion aid under wraps.

“I've been really protective of the idea, and that's hard to do in technology because there's such a culture of openness and collaboration,” says Ms. Apple, who left her post as a client account director at Ogilvy & Mather this year to devote herself full time to developing her idea (and raising her three young kids). “There's such a huge value in ideas, and when you have a unique idea you want to protect it.”

Ms. Apple is working with two partners, but anyone else who works for the business has to sign a nondisclosure agreement; she's inclined to ask future potential investors to do so, too. She hopes to have a beta test of the business by year-end and will make a final decision on how to approach funding after that dry run.

NEEDED: UNIQUE IDEAS

Skokie entrepreneur Jeff Hyman, who's building his second online business—a weight-loss management company called RetrofitMe LLC, after selling his first online recruiting business in 2005 to executive search firm Spencer Stuart—gets that sentiment.

“It's their baby, so there's a lot of emotion around it,” he says. He felt much the same way in his first round of fundraising in California, as he pitched investors on Silicon Valley's renowned Sand Hill Road.


Skokie entrepreneur Jeff Hyman, founder of weight-loss management company RetrofitMe LLC
Photo: John R. Boehm

After five rounds of fundraising for his two startups, he says he has met some unscrupulous people in the investor ranks. Still, he has concluded there's no way to keep your business a secret if you want it to succeed. The trick is to share information selectively, with people you've researched and trust, Mr. Hyman says.

“There's no such thing as a unique idea anymore,” says Michael Marasco, director of the Farley Center for Entrepreneurship and Innovation at Northwestern University and an investor with the school-affiliated Wildcat Angels.

He points to his student Nikhil Sethi as an example. Mr. Sethi wanted to create a social media consultancy that sold its services to major advertising firms. That's not an original idea, but he had a very specific strategy in mind for pursuing it, Mr. Marasco says.

Mr. Sethi moved to New York from Evanston to get a job with an agency that he knew eventually could connect him to potential customers and raised money from people associated with major brands. In 2010, he co-founded Adaptly, and he raised $10.5 million in May after landing $2.7 million earlier.

Steve Kaplan, a University of Chicago professor who has overseen the school's New Venture Challenge—where students compete to raise money for their concepts—says he has rarely, if ever, heard of a good idea being stolen.

What may look at first blush like stealing may simply be coincidence, he says, as many individuals rush to fulfill similar unmet needs in the marketplace. “The fact is, other people are doing the same business model,” Mr. Kaplan says. “They're not all going to succeed.”