In a disturbing blog post from Josh Kopelman, the Managing Director for First Round Capital, he explains the tumultuous story of how Best Buy sought access to the analytics model developed by First Round funded TechForward only to employ a similar system in their in store operations. TechForward had developed an analytics tool that allowed big box customers to be guaranteed a certain trade in value of electronics products at the time of purchase. There was always a green pitch to this program since it encouraged electronics recycling.
Best Buy loved the idea because it encouraged customers to lay down cash for a new purchase, knowing they could trade in that flat screen or laptop at a later date for a guaranteed in store credit. In order to execute such a program, detailed analytics of how the system would work, how to value products at future dates were likely needed.
After meeting with Best Buy and showing the company the analytics model, Best Buy soon rolled out its own program. TechForward wound up in a cash crunch and the assets were sold off. Except one asset—the rights to the lawsuit against Best Buy, claiming Best Buy had stolen TechForward’s proprietary technology. Those the board hung onto as did VC firms NEA and First Round.
Best Buy had signed a confidentiality agreement in order to see the software tools, and the lawsuit turned up some incriminating internal emails, including language such as “…I’m not convinced we’d be able to organically duplicate Tech Forward’s model in a reasonable period of time…” and that the company “…wanted an opportunity to peek under the hood a little bit at their [Tech Forward’s] modeling…”
TechForward was just awarded $27 million after winning the lawsuit. Sure it’s a win for the little guy, but it’s also strangely a win for the VCs, which retained rights in the lawsuit. $27 million is still a small sum for Best Buy, which despite losing money, is still paying out over $200 million a year in dividends to its shareholders. The real value of the lawsuit is for startups to understand that they have to be careful sharing proprietary information with corporations that can afford lawsuits. Since we’re increasingly seeing from the patent wars that IP and litigation is less a moral questions for CEOs than merely a question of strategy and costs.