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

[Adam]

I think #10 was lie #10.

[Steve Goldstein]

In most things in life, "I don't know" means NO.

[D]

This is where a sales technique called an up-front contract is very useful. It's not just VCs who hate to say "no." *Everyone* doesn'hates it. If you make it easier, you'll get to end the of the cycle sooner and with less stress.

http://www.askderekscruggs.com/slow-turndowns-bad-up-front-contract.html

http://www.askderekscruggs.com/up-front-contracts.html

[dhmspector]

Hi Guy,

Actually, although the other points are certail true, #9 is the crux of the biscuit. VCs will only invest in people they know. The number of VC investments in truely first-time entrepreneurs can probaby be counted on less than 1 hand.

Whats worse is VCs often invest money in firms where the founders do not need the VC cash - the poster child for this is Dean Kaman and the Seque. Kleiner & Co. put ~37MM into a project that could have been funded with the pocket change of its inventor/founder who is himself a billionaire. What makes this even more annoying is that any 10 year old could see that the product that was doomed from the start because of liability concerns -- a 200+ lb seque clocking some granny is a liability concern for every municipality on the country, and IN FACT the Insurance Industry Association has refused all but limited liability insurance for US towns and cities stating that the danger of the seque outwieghs any benefits it could have.

How many actual innovations could have been funded with the money wasted by Kliener on the Seque? We'll never know becuase the VC industry isn't actually interested in innovation, rather they want sure-things. If you want a an investment that's a sure thing get a pass-book savings account or buy a T-Bill. The operative word in "Venture Capital" is "venture."

Now, thanks to their greed, fear, duplicity and short sightedness, China, India and others are replacing the US as world innovators.

Oh, well.

[Flint]

Here's a good #10: "We bring a lot more than money to the table." Still waiting for the VC who bring's just money to the table.

[Decio]

#2: Italian version: "If my grampa had six balls, he'd be a pinball".