On other points I don’t agree with everything he says. I think that the entire process – the initial pitch and the subsequent negotiations – are necessary and, perhaps most importantly, generate assumptions that oblige both parties to think and rethink the project. Without thinking it over, we can’t understand it.

It’s in many of these assumptions that the “lies” that Guy refers to are born.

We also shouldn’t forget that the majority of the lies are nothing more than responses to the investor’s own questions, which leads me to think that a lot of the time, those questions are badly phrased.

1- “Our projections are conservative”

Here Guy warns us that the projections of an Entrepreneur are never conservative.

I’d put it another way: an entrepreneur’s projections don’t need to be conservative. In general, as Guy says, the entrepreneur has no idea what the market turnover will be the. Similarly, the venture capitalist has no idea of market size, sales volume or related information.

If an investor asked me if the projections are conservative, I’d probably think that he doesn’t know much about risk capital.

The projections are nothing more than the starting point for deeper discussions. The help the investor get an idea of where he’s investing his money.

When we talk about projections, we’re talking about the assumptions on which the projections are based.

When an investor and entrepreneur talk about projections, the only thing they need to discuss is whether or not these assumptions are relevant. This is where an experienced investor can benefit an enterprise the most (apart from introducing the company to the right people later on).

The majority of the times, the decision to invest or otherwise in a project doesn’t come from the projections, but from the investor’s own judgement in detecting an unsatisfied need, a good business.

2- “(Big name research firm) says our market will be $50 billion in 2010.”

Guy says that all the entrepreneurs boast that their market is huge, independent of the project’s potential.

As with the first point, I think it is so difficult to define this that I can only think that the investors ask the wrong question. An investor that asks “What is the value of the market?” leaves themselves open to lies.

In innovative projects, the market value might be 50 billion if it becomes a world standard or 0 if no one shows any interest in the product.

The key question is not “What is the market value?” but “What is the chance that this project is a success?” or “what is the chance that this group of people are able to satisfy the market need?”.

3- “(Big name company) is going to sign our purchase order next week.”

Guy says that you shouldn’t play this card if you’re not sure you’ll close the order.

I agree. I think there’s nothing more shameful than an entrepreneur that lies about this.

The variation “we’re in negotiations with (Big name company)” is valid but these have to be real negotiations. I think it’s important to mention such discussions but not to make this the foundation of your project.

From my experience with Negonation, I can say that there are many meetings and negotiating sessions before closing the first sale. In the majority of cases, the sale is not completed until a while after the close of the first round of financing.

4- “Key employees are set to join us as soon as we get funded.”

Guy states that you have to ensure that the ‘key’ people confirm this information to the investor.

I think that the key people should be in the founding team.

A founding team with the key people can accomplish anything, including adding many more key people to the group.

I think that the most intelligent strategy is to demonstrate that the entrepreneurs are the key people and to not expose the need to add key people to the team.

It’s always better to visit the investors with the key team formed and not with promises to form it in the future.

5- “No one is doing what we’re doing”.

In this case, Guy says that no one is doing it because there is no market or because the entrepreneur is so lost that they cannot discover their competency.

I think that in this case Guy over-generalizes the issue. Following his reasoning, innovations would not exist, nor revolutionary ideas. Industrial secrets and confidentiality agreements would also be unnecessary.

To me, stating “no one is doing what we’re doing” is pretentious and arrogant, although it is possibly true.

In my experience with Negonation, during the development of Tractis, I’ve seen many projects that try to solve the same problem as us but in none of these cases do they have the same focus.

6- “No one can do what we’re doing”.

Guy states that arrogance is worse than stupidity…

I agree that saying this makes an entrepreneur look stupid. You just need to know that there are 6.7 billion people in the world to understand that humility and precaution are better allies.

7- “Hurry because several other venture capital firms are interested”.

Guy says that very few have the luxury of pressuring venture capitalists this way.

This is probably true but, all the same, I would never fail to mention to a venture capital firm that I’d visited others.

I wouldn’t do it with the intention of pressuring anyone, I simply believe that it’s better to have things clear from the start.
I think it’s worse that an investor finds out at the last minute that we didn’t close the deal with him because we signed with someone else. Even Guy should agree with this.

8- “Oracle is too big/dumb/slow to be a threat”.

Here guy compares the private jets and boats of the owners of the world’s largest IT companies with the budget airlines in which the entrepreneurs travel. And he uses this to demonstrate that it’s impossible to compete with the giants.

I don’t think that this is the most appropriate comparison. In the first place, the personal fortune of a shareholder, owner, CEO etc. has nothing to do with the company to which they are linked. Although there may be a correlation, it’s often not the case.

It’s also true that a big company is much slower than a smaller one. Anyone who’s worked in a multinational and a small or medium-sized business can tell you that.

But it is not enough to assume that we can ‘beat Oracle’ merely because we have a more flexible company.

The entrepreneur and the mega-company play a poker game knowing that the mega-company has the best hand. It’s a question of playing the cards at the right moment. It’s not impossible to win but it is very difficult.

9- “We have a proven management team”.

In this section, Guy ridicules those that state that their management team is experienced.

I wouldn’t be so quick to ridicule. In the first place, I think it shows a lack of respect. The entrepreneur is doing everything in his power to reach an agreement and start a business. On the other hand, the investor wants a solid team. It’s obvious that the entrepreneur will try to ’sell’ his team.

This is just selling. Even Airbus plays up the advantages and plays down the disadvantages when selling planes.

All experience is relative. And therefore, open to subjectivity.

Guy also comments “If they were that experienced, they wouldn’t be asking for money”. Well, I know many people with a lot of experience that would move a project forward but simply don’t have the money to do it because they are young or because life itself is full of surprises.

10- “Patents make our product defensible”.

Guy says that using this statement too much may make the company seem too dependent on patents and that this, in reality, could be a weakness.

I agree with this point of view. The strengths of the project should be, primarily the group of people and secondly the idea. The rest is complementary.

11- “All we have to do is get 1% of the market”.

In this bullet, Guy says that no investor wants only 1% of the market and that it’s not that easy to even get that 1%.

Such graphic statements are nothing more than a catalyst for later reflection and discussion.

Throughout the growth of the company, 1001 such phrases and projections will be made.

With time, the numbers will start to consolidate and the moment will arrive in which the experience, time that has passed, and milestones reached will allow you to plan and project scientifically instead of predicting the future.

What is certain is that to move forward with a project and successfully close negotiations with investors, on one hand you need a first class group of people and on the other an investor with a lot of vision.

Cremades & Calvo Sotelo and Negonation have signed an agreement to collaborate in the design of Tractis Premium (btw…I’m really thrilled to announce this!). Cremades & Calvo Sotelo is one of the most prestigious Spanish law firms, a “delicatessen” group of 50 highly specialised lawyers whose practice in new technologies and telecommunications is internationally recognized. The agreement was signed in “The Digital Office” (photos), a novel leading initiative by this firm, designed to fuse the latest in technology, architecture, automation and ergonomics. The objective is to make the employee’s life easier, create a space in which productivity and quality of life are maximised.

Cremades & Calvo Sotelo will legally advise Negonation in the design of “Tractis Premium“, the most complete version of our service which will include advanced functionality such as multilateral negotiations, file encryption, locking documents at team level, multiple document negotiation and semantic validation of signatures (DNIe – Electronic Spanish ID card – included). From the Negonation point of view, the agreement with Cremades is an excellent opportunity to get very valuable legal advice in the complicated intersection of law and technology and, at the same time, a challenge. Cremades will put Tractis to work in situations where confidentially is critical and the value of the transactions is in the order of millions of euros.

The Reasons

Tractis is aimed at web designers, programmers, lawyers, translators, integrators, consultants, companies on the net, journalists, estate agents, agencies, individuals and professionals that offer and acquire products, services and content over the Internet… we want to become your standard for reaching online agreements. We’re conscious of the fact that we’re a recent start-up and that there’s a “mental barrier” that we need to overcome. Obviously, it couldn’t be any other way: We all take our respective businesses very seriously. Our reasoning is the following: “If we’re capable of demonstrating that the most prestigious companies confide in Tractis to perform high value transactions, we will dispel any doubts and win your business”.

I couldn’t be happier to announce Cremades & Calvo Sotelo as the first law firm to use Tractis. Their philosophy, focus, mentality, resolute attitude, attention to detail…they’re the perfect partners. They are a brave company that leads by example and backs up their ideas with actions. Many talk of being at the leading edge of technology to give better customer service or of the importance of treating employees well to increase their productivity. Cremades has spent 3.5m euros. They’ve transformed their head office into a place where you want to work, that feels like home. On a personal level, my most sincere thanks to Javier Cremades, Guillermo Medina, Oscar Prieto and, especially, Miguel Larios for taking a chance on us and making this collaboration possible. We will be equal to the challenge.

Most of us don’t mind buying something on eBay for 20, 30, 40, or 50 euros/dollars but when it’s more than that…we think it twice. The reason is because we know that if something goes wrong, there’s little we can do about it. We don’t know the other party’s identity, where they live or the law in their country. And even if we knew, we’d probably do nothing about it. We live in a world of legislative islands. Traditional justice is slow, expensive, and complex. It is an inefficient system. No wonder why so many people think it’s not worth facing such a nightmare to recover such sums. Fear, lack of recourse… the end result is that millions of transactions every year never actually happen. The hidden treasure of eCommerce. An unrealised potential. eCommerce, as we know it now, is a shadow of what it really could be.

We have been talking about this problem for ages, however an answer has never been found yet. It’s a hairy problem with different names and different faces: authentication, lack of recourse, non-legally binding contracts and, lately, identity 2.0. People mistake contract validity with contract enforcement. Anyone can open an e-mail account with Yahoo and click on the “I accept Terms and Conditions” button. It’s a valid contract, but you are going to have a hard time trying to enforce it in the real world, in front of a real court of law. Who clicked on the button? From where? Was it you from this particular IP, or was it someone else surfing via a proxy? That’s not a contract, it’s a joke!.

At Tractis, we believe that slow, expensive and complex justice is not real justice. A world of legislative islands is OK for big companies with strong international presence, loads of time, money and expert lawyers; but it’s useless for an individual or SMB. We believe that when online agreements become a joke, you are losing business and money. We’re committed to find a solution. Tractis allows you to negotiate and sign online contracts that you can actually enforce in the real world.

Interfacing technologies and legislations

Tractis technology is capable of processing digital certificates issued by any certification authority, it being a government (i.e: spanish national ID card), a private company (i.e. Verisign), or a professional association (i.e. Bar Association). And we are not only talking about PKI, we’re actually opening Tractis to any authentication method: mobile authentication, OpenID, PGP, Biometric, or one-time-tokens to name a few.

And yes, Tractis is much more. It allows you to easily navigate and edit contracts, make public or private comments that only your negotiation team can read, lock a contract until you finish your changes, review and compare old versions, invite team members to join you, perform multilateral negotiations and grant permissions at an individual level (administrators, editors, readers, invisible?, signer?). Very soon you’ll be able to visit Tractis library, a library of contracts and clauses shared by the community so you can choose a template and start negotiating right away.

What I would like you to keep in mind is that most governments around the world grant the same validity to digital signatures than to their handwritten counterparts. This isn’t only happening in all European Union countries, but also in countries such as US, Canada, China, Brazil, Argentina, etc. In other words, a Tractis contract is valid and enforceable in all those countries.

Think about it. Contracts are everywhere. Software licenses, rental agreements, warranties, broadband Internet, financial services, used-goods auctions… you name it. Once you have an online contract that you can enforce, a world of possibilities opens to you, such as worldwide arbitration with legally binding decisions, or micro-insurance – “buy on eBay with Tractis microinsurance, pay us 5 dollars and, if the other party rips you off, we’ll give you your money back” (and we’ll recover the debt from the other party by enforcing the contract in his/her jurisdiction). Sounds interesting? It is. Tractis solves a very real problem that has been with us for years.

Justice is ripe for disruption

We’ve got as far as we can with informal means: e-mails, pseudo-anonymity, reputation systems. They are fine. But at Tractis we are focused on the formal communications, the 100 euros/dollars barrier where the parties take very seriously things such as authentication, proof-of-content, receipt, delivery, contract enforcement. Think real estate, cars, industrial machinery, jewellery, collectibles… high-end categories that amount for 40% eBay’s GMV last year. We mean real business.

It’s a big problem. It’s an enormous task. But it can be done. In the same way that Skype uses an open, independent and decentralised network to bring the telcos to their knees, Tractis uses the internet to compete with traditional courts and insurance companies where they can’t follow. We are interfacing technologies as much as we are interfacing legislations.

As we speak, we’re working on finishing Tractis and we hope to launch in the first half of 2007. We want Tractis to provide you with the tools to enable a low-cost, simple and fast international system of justice. Justice for, from and by the Internet nation.

Happy new year. It’s gonna be great. Help us to spread the word!

Four years ago, Yochai Benkler, a Law Professor at Yale University, wrote an essay providing an answer to that question. The essay was called Coase’s Penguin, or, Linux and The Nature of the Firm and it captured many people’s imagination, including mine. The answer was “Yes”.

Production modes

Until now, we knew of two ways on how to organize production: markets and companies:

Markets are formed by individuals and coordinate production based on a price system. In other words, individual A says “if you want me to do that, you’ll have to pay me so much” and individual B responds “that’s too expensive, I can find someone cheaper“. In the end, an agreement is reached so that A produces (or not, and another task is sought). Markets suffer from high “transaction costs“: ask freelancers how long and how much money they use to define and ensure that each client meets their commitment.

Companies are formed by employees and coordinate production based on an order system. The manager says “I’ll pay you a salary. Do this” and the employee says “OK“. There was already an agreement at the time of hiring, the employee produces (or not, and seeks another job). Companies suffer from high “organization costs” as a result of coordinating several people in a hierarchical, centralized way.

The third way

However, the success of open source cannot be explained using either of those models. Open source projects produce the highest quality code that can make monopolies tremble. Yet they do not coordinate based on a price system or a hierarchical managerial structure. This indicates the existence of a new production method which Benkler calls “Commons-Based Peer Production” (CBPP), of which open source is one example (the most visible one) but not the only one (wikipedia, digg, blogosphere, etc.).

Benkler goes even further and states that CBPP is a better system than the other two when (a) information or culture is to be produced in large-scale projects, and (b) the necessary resources (computers, telecommunications) are widely distributed. If those two requirements are met, CBPP is superior for two reasons:

1. Lower transaction costs: Even if you allow a large number of contributors to collaborate, transaction costs are minimal. By eliminating property, no contracts are needed.
2. Lower organization costs: The costs of allocating human capital to production processes are lower because people “self-allocate” and choose where they want to contribute (what wikipedia article to improve, what news item in Digg to vote, what post to write, etc.).

Doubts and mistrust

What production method can we choose? Easy: the one that, after subtracting costs, provides greater profits. If you set up a company that provides services via the Internet, you’re producing information (software). If you do this at a large scale and believe what Benkler says, the answer is clear: CBPP is the way.

What is CBPP’s weakness? Although it’s true that, by eliminating property and hierarchy, transaction and organization costs fall, it is also true that, if profits cannot be allocated to anyone, there won’t be any motivation to participate, and that if, noone coordinates, there won’t be any organization and the system will fail. Benkler’s response is that motivation is very complex, many people participate because of social and/or psychological motivations unrelated to money. Regarding organization, the secret lies in establishing microtasks that require little motivation for completion (granularity), where each module can be completed independently, incrementally and asynchronously (modularity), and where there’s a cheap mechanism to integrate the competent contributions (a quality code that does not violate property laws).

Can CBPP be harmonized and make money? I mean real money. The same as, or more than, any other competitor that uses the company’s traditional method. And, if possible, outside the open source production for the stack (operating systems such as Red Hat, databases such as MySQL). This is the one million dollar question (I couldn’t have said it better) which Negonation will try to answer in practice.

In my next post, I will comment on our experience and difficulties in implementing CBPP. If this is not clear, I am using and will use free software and open source indistinctly. I have also deliberately left out any type of philosophic or moral consideration when commenting on the various systems. My aim is to assess and demonstrate the usefulness of CBPP in “business” terms because this is the only way that “business” people will take this seriously.