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January 05, 2006

The Top Ten Lies of Venture Capitalists

Venture capitalists are simple people: we've either decided to invest, and we are convincing ourselves that our gut is right (aka, “due diligence”) or there's not a chance in hell. While we may be simple, we're not necessarily forthcoming, so if you think it's hard to get a “yes” out of venture capitalist, you should try to get a conclusive “no.”

This is because there's no upside to communicating a negative decision. Entrepreneurs will simply hate us sooner--instead the game is to string along entrepreneurs in case something miraculous happens to make them look better. (An example of a miracle would be Boeing approving a $5 million purchase order.)

Alas, entrepreneurs are also simple people: If they don't hear a conclusive “no,” they assume the answer is yes. This is an example of the kind of breakdown of communication between venture capitalists and entrepreneurs that causes much pain and frustration for entrepreneurs.

To foster greater understanding among the two groups, here is an exposé of the top ten lies of venture capitalists.

  1. “I liked your company, but my partners didn't.” In other words, “no.” What the sponsor is trying to get the entrepreneur to believe is that he's the good guy, the smart guy, the guy who gets it; the “others” didn't, so don't blame him. This is a cop out; it's not the other partners didn't like the deal as much as the sponsor wasn't a true believer. A true believer would get it done.
  2. “If you get a lead, we will follow.” In other words, “no.” As the old Japanese say, “If your aunt had balls, she'd be your uncle.” Well, she doesn't have balls, so it doesn't matter. The venture capitalist is saying, “ We don't really believe, but if you can get Sequoia to lead, we'll jump on the pile.” In other words, once the entrepreneur doesn't need the money, the venture capitalist would be happy to give him some more--this is like saying, “Once you've stopped Larry Csonka cold, we'll help you tackle him.” What entrepreneurs want to hear is, “If you can't get a lead, we will.” That's a believer.
  3. “Show us some traction, and we'll invest.” In other words, “no.” This lie translates to “I don't believe your story, but if you can prove it by achieving significant revenue, then you might convince me. However, I don't want to tell you 'no' because I might be wrong and by golly you may sign up a Fortune 500 customer and then I'd look like a total orifice.”
  4. “We love to co-invest with other venture capitalists.” Like the sun rising and Canadians playing hockey, you can depend on the greed of venture capitalists. Greed in this business translates to “If this is a good deal, I want it all.” What entrepreneurs want to hear is, “We want the whole round. We don't want any other investors.” Then it's the entrepreneur's job to convince them why other investors can make the pie bigger as opposed to re-configuring the slices.
  5. “We're investing in your team.” This is an incomplete statement. While it's true that they are investing in the team, entrepreneurs are hearing, “We won't fire you--why would we fire you if we invested because of you?” That's not what the venture capitalist is saying at all. What she is saying is, “We're investing in your team as long as things are going well, but if they go bad we will fire your ass because no one is indispensable.”
  6. “I have lots of bandwidth to dedicate to your company.” Maybe the venture capitalist is talking about the T3 line into his office, but he's not talking about his personal calendar because he's already on ten boards. Counting board meetings, an entrepreneur should assume that a venture capitalist will spend between five to ten hours a month on a company. That's it. Deal with it. And make board meetings short!
  7. “This is a vanilla term sheet.” There is no such thing as a vanilla term sheet. Do you think corporate finance attorneys are paid $400/hour to push out vanilla term sheets? If entrepreneurs insist on using a flavor of ice cream to describe term sheets, the only flavor that works is Rocky Road. This is why they need their own $400/hour attorney too--as opposed to Uncle Joe the divorce lawyer.
  8. “We can open up doors for you at our client companies.” This is a double whammy of lie. First, a venture capitalist can't always open up doors at client companies. Frankly, he might be hated by the client company. The worst thing in the world may be a referral from him. Second, even if the venture capitalist can open the door, entrepreneurs can't seriously expect the company to commit to your product--that is, something that isn't much more than a slick (10/20/30) PowerPoint presentation.
  9. “We like early-stage investing.” Venture capitalists fantasize about putting $1 million into a $2 million pre-money company and end up owning 33% of the next Google. That's early stage investing. Do you know why we all know about Google's amazing return on investment? The same reason we all know about Michael Jordan: Googles and Michael Jordans hardly ever happen. If they were common, no one would write about them. If you scratch beneath the surface, venture capitalists want to invest in proven teams (eg., the founders of Cisco) with proven technology (eg., the basis of a Nobel Prize) in a proven market (eg., ecommerce). We are remarkably risk averse considering it's not even our money.
  10. I'm at a Starbucks in Hawaii writing this blog. I've been at it for ninety minutes. I don't have my charger with me. My PowerBook is out of gas. You're going to have to be happy with the top nine lies of venture capitalists until “Dear God” ships the PowerBook Vaio.

Written at: Starbucks Ward Center, Honolulu, Hawaii.

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Comments

Nice informative article. thanks for sharing and keep sharing such kind of articles, as these articles really helpful for experienced and new comers.
Revenue Sharing Articles / Blogs Directory

I totally agree with "NEWS"...been there done that, got the Tee Shirt and now writing the book...
Sharks in Angels Clothing!
VCs as well as so-called Angel Investors are not about assessing your plan, or your ability to execute. They are merely pretending they're interested in investing, as they begin calculating how much it will cost them to Steal your Ideas and / or your Company!!!
I think we are here on this Earth to learn how to advance our spirits. Although during this process and with these crucial lessons of Life, it seems so unfair and often cause us deep anxiety and depression, as we enrich our Souls. Learning is everywhere and in every situation with open eyes. Learning is not better or more meaningful if it is painful or requires more effort. Do you need a quadruple bypass to change your eating habits or can you begin eating healthier foods and exercising right now without all the pain? Most of us do need a serious wakeup call. Must you give your business away, to finally learn how to fund your business? These messages and lessons just seem to get louder and harsher until we finally get it. If you learn immediately (and that means apply the knowledge), there is no reason to increase the pain and agony. If you continue making the same mistakes…. Do not expect a different result!
What no one will ever tell you is…they're ways of launching your Business, without ever having to talk to a single Investor!

These comments have been invaluable to me as is this whole site. I thank you for your comment.

What the hell is "vanilla term sheet"?????

Cool list, quite funny!

I went to attend a presentation by David McMeekin chairman of "The Capital Fund", "London Technology Fund" and "Company Guides" in London a couple of days ago. David seems very sincere and honest. I must say I was tempted to go home write my business plan and apply.

However after reading your post and some of the comments, I am not so sure. Is it still possible to make money from ideas? Or do you need to be (already) wealthy to attract money?

Translation finally available in french... And more "10 lies" to come !
http://www.gestiondeprojet.com/blog/

La traduction enfin disponible en français, et d'autres séries de "10 mensonges" à venir...

[...]The Top Ten Lies of Venture Capitalists[...]

What about news reporters & companies who project themselves as VCs but are not one? Michael Arlington of Techcrunch is one such example.

This is a great article. I am new to your blog and i like what I see. I look forward to your future work.
Thanks Guy!

Interesting article.

That you write that funny. It was very interesting to me to read. Though if I am fair with you do not absolutely agree. You are not consecutive, though are clever. In general my friend soon a doomsday, about about it it is necessary to think and write.

Once did not think written of you, after perusal I shall necessarily write clause article in The newspaper "Washington Post"

Well, maybe you can't take a VC's remarks verbatim, but what about an MC (Mentor Capitalist)?

I was reading "Wise Words: Lessons in Entrepreneurship and Venture Capital" and it explains a bit about what an MC does (http://www.seanwise.com/ under "What exactly is a Mentor Capitalist?") maybe an MC is better to pitch to? (They might be a little more direct since they're not actually managing the funds or making direct investments).

I know CBC's Dragon's Den has an MC working with both the VCs and entrepreneurs for the new series coming out this fall; maybe it's a good intermediary? (http://www.insidethedragonsden.com/)


That's an old Russian saying, not Japanese! My husband uses it often, though he talks about "grandma" becoming a "grandpa".

--------------------------

Maybe my mother was Russian and she never told me...

Guy

Andreas,

Sorry for the spelling error. Cannot say if all Cretins are liars either...

Don

Don Shade, I am a Cretan. I believe I speak on behalf of all of us in the island of Crete when I say I resend the denigrating terms associated with us, Cretans.

Then again, we are often being mistaken for the Cretins, who descent from the island of Creti. Oh well, such is life.
:-)

- Andreas

VC = Very Conservative

I'd like to see this whole racket change. Micro VCs or micro-leading even in Silicon Valley would tone down the hype and make VCs more friendly beast. Wouldn't they? Why aren't they more friendly by the way?

Hey Guy:

could you post some wisdom about building boards - both directors & advisory? also opinions on care and feeding. both as a pre-funding strategy as well as maintaining a healthy relationship (albeit) lopsided relationship once the "marriage" contract has been signed. What do you look for, beyond the obvious stuff, in the BOD process & relationship with management?

re: stupid guy's #1

i have noticed a number of "venture partners" (u know rich guys who provide money and "experience" to the vc team) who fall squarely into that category. as part of my pre-meeting dd i always check out these characters - especially if they are going to be at a pitch meeting. I find they ask questions which all revolve around a sort of daily self-afirmation and rarely bear any relevance on the conversation at hand. sort of like drunk hecklers in a comedy club. You either a. decide up front that this group may not be for you or try to answer politely and navigate forward. in any event the 10/20/30 rule that Guy talks about is best way to mitigate. Hold your temper - the whole room may think that he/she is an idiot, but remember he/she is their idiot.

The Top Ten Lies Of Business Gurus!!!

1. I'm successful because I'm brilliant. Never mind that I sold a money-losing piece of crap to a dot-com at the height of the internet madness. You should listen to me for my brilliant insights.

2. I'm not ‘successful’ because I happened to be in the right place at the right time. No sir re, that had nothing to do with my success.

3. If you follow my advice, you’ll be successful too! Just wait till the next irrational exuberant thing comes along.

4. I never “drank the punch” during the dot-com era. I always told everyone that the dot-com bubble was going to burst.

5. Just give me your money and I’ll show you how to raise more. Honest.

6. Oh, I know at least THREE companies that are doing what you are doing. If not, I’ll tell them your ideas so they can get started.

7. You don’t need a direct revenue model. Just aggregate eyeballs and you’ll find a way to make money.

8. I STRUGGLED to make myself a success. Never mind my wealthy parents and Ivy League education.

9. You have to have BALANCE in your life. That’s why I divorced my old wife and took up with a young hottie after I sold my company.

10. I so successful I don’t need to work. That’s why I fly all over the country charging business wannabes $1000 to attend my seminars.


Guy -

I put the following "Top Ten" list together following one of your presentations. Enjoy!

Top Ten Slogans Rejected by Venture Capitalists-

10. “If you’re looking for an Angel, try Anaheim”

9. “Nothing ventured, no one arraigned”

8. “We were first when the bubble burst”

7. “Olympic-sized option pools!”

6. “Home of the Post-Revenue Major Market Third-Round NanoBioQuantumPolycarbonate accelerator fund”

5. “Sign on with the Sopranos or soon you’ll be singing like one”

4. “It used to be your stock. Now come vest with the rest”!

3. “We bring so much value-add, you’re still on your own for cash”

2. “Zero percent of something beats 100% of nothing”

1. “We put the Fun in Funding”

Hey Guy

Loving this and the entrepreneurs follow-up post...work for an EU VC mag and have given those links to the editor to peruse...

One other thing...perhaps as a Starbucks fan you might be interested in the Starbucks Challenge?

http://cityhippy.blogspot.com/2005/12/news-starbucks-challenge-30-demand.html

Either way

Namaste

Al

Kinda like #1 but for sales: "We loved your presentation, we love you, but we gave the business to your competitor..."

I want to hear : "We hated your presentation, we hate the way you dress, you smell bad, BUT, here is the business..."

RAUL

Wondering if these are same "lies" the institutional investors use when a VC go pitching for funding...

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