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.

Comments

[kss]

"Venture capitalists are simple." NOT TRUE: No sociopath is ever "simple".

"Alas, entrepreneurs are also simple people."
NOT TRUE: Entrepreneurs are not simple, but they are often naive and ignorant of the ways of scoundrels. Scientists do not expect lies and are therefore easily lied to.

[ming666]

look - apart from money (which is a good thing!) the vast bulk of VC's offer very little in the way of post investment care and feeding other than getting in the way. you are not going to get Don Valentine on your board or that other guy, Doerr. if you have an idea that you believe is compelling then get out there and finance as much of it on your own or with the help of angels. Look at VC money as expansion money - a milestone of success. Traction is good - it is a negotiating chip. Risking your own money (or team) is good for a number of things:

1. fear is a motivating factor in success. nothing like worrying about the mortgage payment or your kids braces to get you out of bed in the morning.

2. you establish an efficient cost model from the start. you analyze every spending decision as if it was your money - because IT IS YOUR MONEY.

3. because money is time, you find innovative ways to do development, sales, marketing, etc. - because you have no other choice. this gets coded into the company dna and will serve it well if it becomes successful.

I realize that this does not work for everyone - but it probably will work for most. don't give up valuation because you want a comfortable experience. this is rough stuff - the struggle is the fun and ultimately what defines the company.

make sure you spend money on a good lawyer. somebody who can explain that "vanilla" term sheet to you and what 4x liquidation preference means - "U won't see any money."

remember they're not your friend and in most cases while they may have gone to a better school than you they probably aren't any smarter.

[Andy]

Re#2: do the "old Japanese" really say that ? I just asked a native and they said they weren't familiar with the expression. What is the original Japanese for that saying ?

[C. Enrique Ortiz]

And the question is.... How many of those have you used in the past?
:-) Wait, err... all? ;-)

ceo

[Carlos Leyva]

Nothing feels as good as honest communication! Honesty is the next killer app...

Best title for a blog that I have seen, damn funny!

[walter]

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[James Thiele]

I'm surprised that no one has pointed out that the 'V' in VC stands for 'Vulture'. VCs use multiple rounds of financing to dilute the founders' holdings and eventually drive them out. They do this by pretending to negotiate in good faith but in reality they stall untill the startup is so starved for money that it is desparate and it is too late to find other sources of money. Been there, seen that.

[Yali Friedman]

I'm at a starbucks in Hawaii reading this blog :)

[Simon Brocklehurst]

Absolutely! Great post! My single truth of VCs is that if they're not chasing you after your first meeting, you don'thave a hot deal ( http://www.psynixis.com/blog/?p=88 )

[Adam Webster]

Guy,
Your blog is a relief for those of us who have waded through the great volumes of horse poo hurled at as when we put our hands out for money.
Thankfully... EVERYONE turned us down... now we quietly harvest our nickels and grow sales at a rate that we can sustain.

[Felix Gerena]

I´ve been working with start ups for the last four years and I see most of your "lies" are true. Sometimes I have also figured out why some of these guys call themselves "venture" capitalists if they seek low risk operations.

[Wil Schroter]

I've heard all of these and believed none of them.

Playing the startup/VC game is like dating - everyone wants to hook up with that one person who will be amazing in bed, so they end up flirting with everyone until they find the right person.

If you actually believe she really likes you or that he's going to call you tomorrow you don't know what game you're playing.

[David]

Lie no. 3 isn't a complete lie. I've been in a very long first meeting with one of the Israeli partners of a well known US VC firm, where it was clear that he was interested in our deal proposal, but at the end he said "show us some market traction". Why wasn't this total bullshit? Because we're developing a completely new paradigm of solution to a problem that he acknowledges exists, but doesn't pretend to understand (the firm specialises in technology, our problem space is financial regulatory compliance, specifically anti-money laundering and counter-terrorism financing). He takes it for granted, and rightly so, that if we get a letter of intent, or a prototype agreement, or something similar, from one or more respected and serious banks, which are notoriously difficult to satisfy, then we have actually hit on something right and it's worth his firm's money.

One other firm here actually understood the proposal well enough in the first meeting to start due diligence: unfortunately, it's broken up because it couldn't raise a new fund.

[Ivan Minic]

Simply brilliant :)

[Mario]

so, the #10 is a lie?:-)

[Dorrian]

Steve Smith made me laugh out loud but I still don't like him if he's the same guy who scored on his own goal against Calgary and disrupted Gretzky's 5 cup streak.

[Jason M. Lemkin]

Simply the best VC piece ever written.

[Beef Jezos]

Great list, Guy. My mom will love it.

[Stiennon]

One more:

"Yours is the 20th plan for this concept we have seen." I got that one when we presented an e-coupon management system to Media Venture Partners.

[steve smith]

Guy

You actually told me #1 a few years ago (along with "I don't see anyone using this technology. It just isn't going to work")

Sometimes I think about our meeting on the way to the Ferrari dealership...

[Oichi]

Great article and extremely timely for me :-)

Thanks a lot ! site spurl'd

[CodeWorrier]

I wrote a short essay about this last year: please contrast my experience (as an entrepreneur) to Guy's experience (as a VC):

http://codeworrier.blogspot.com/2005/07/nothing-ventured-nothing-gained.html

[Matt]

Lie #11: There are ten lies.

[Don Shade]

Mea culpa: If St. Peter is an entrepreneur, I will see you in in Singapore Airlines first class heaven. If, however, he turns out to be a VC, we are going to be seated in coach.

I'm sure there are many exceptional VCs who don't spread these lies. At least you didn't write: all cretans are liars, all VCs are cretans, ergo ...

Thanks for helping us know what to watch out for. At least we can know an entrepreneur's VC in the absence of these lies.

Your blog has come just in time. Let the good times keep rolling Guy.

[Mike McDerment]

How about, "I'm not going to waste your time and I'll give you an answer quickly"...North of the 49th, this is a common criticism of the VC community - VCs themselves frequently admit to.