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January 08, 2006

The Top Ten Lies of Entrepreneurs

(Since I've antagonized the venture capital community with last week's blog, I thought I would complete the picture and “out” entrepreneurs to begin this week. The hard part about writing this blog was narrowing down these lies to ten. Luckily, my partner, Bill Reichert, had already documented this list of the top ten lies of entrepreneurs.)

We get pitched dozens of times every year, and every pitch contains at least three or four of these lies. We provide them not because we believe we can increase the level of honesty of entrepreneurs as much as to help entrepreneurs come up with new lies. At least new lies indicate a modicum of creativity!

  1. “Our projections are conservative.” An entrepreneur's projections are never conservative. If they were, they would be $0. I have never seen an entrepreneur achieve even her most conservative projections. Generally, an entrepreneur has no idea what sales will be, so she guesses: “Too little will make my deal uninteresting; too big, and I'll look hallucinogenic.” The result is that everyone's projections are $50 million in year four. As a rule of thumb, when I see a projection, I add one year to delivery time and multiply by .1.
  2. “(Big name research firm) says our market will be $50 billion in 2010.” Every entrepreneur has a few slides about how the market potential for his segment is tens of billions. It doesn't matter if the product is bar mitzah planning software or 802.11 chip sets. Venture capitalists don't believe this type of forecast because it's the fifth one of this magnitude that they've heard that day. Entrepreneurs would do themselves a favor by simply removing any reference to market size estimates from consulting firms.
  3. “(Big name company) is going to sign our purchase order next week.” This is the “I heard I have to show traction at a conference” lie of entrepreneurs. The funny thing is that next week, the purchase order still isn't signed. Nor the week after. The decision maker gets laid off, the CEO gets fired, there's a natural disaster, whatever. The only way to play this card if AFTER the purchase order is signed because no investor whose money you'd want will fall for this one.
  4. “Key employees are set to join us as soon as we get funded.” More often than not when a venture capitalist calls these key employees who are VPs are Microsoft, Oracle, and Sun, he gets the following response, “Who said that? I recall meeting him at a Churchill Club meeting, but I certainly didn't say I would leave my cush $250,000/year job at Adobe to join his startup.” If it's true that key employees are ready to rock and roll, have them call the venture capitalist after the meeting and testify to this effect.
  5. “No one is doing what we're doing.” This is a bummer of a lie because there are only two logical conclusions. First, no one else is doing this because there is no market for it. Second, the entrepreneur is so clueless that he can't even use Google to figure out he has competition. Suffice it to say that the lack of a market and cluelessness is not conducive to securing an investment. As a rule of thumb, if you have a good idea, five companies are going the same thing. If you have a great idea, fifteen companies are doing the same thing.
  6. “No one can do what we're doing.” If there's anything worse than the lack of a market and cluelessness, it's arrogance. No one else can do this until the first company does it, and ten others spring up in the next ninety days. Let's see, no one else ran a sub four-minute mile after Roger Bannister. (It took only a month before John Landy did). The world is a big place. There are lots of smart people in it. Entrepreneurs are kidding themselves if they think they have any kind of monopoly on knowledge. And, sure as I'm a Macintosh user, on the same day that an entrepreneur tells this lie, the venture capitalist will have met with another company that's doing the same thing.
  7. “Hurry because several other venture capital firms are interested.” The good news: There are maybe one hundred entrepreneurs in the world who can make this claim. The bad news: The fact that you are reading a blog about venture capital means you're not one of them. As my mother used to say, “Never play Russian roulette with an Uzi.” For the absolute cream of the crop, there is competition for a deal, and an entrepreneur can scare other investors to make a decision. For the rest of us, don't think one can create a sense of scarcity when it's not true. Re-read the previous blog about the lies of venture capitalists, to learn how entrepreneurs are hearing “maybe” when venture capitalists are saying “no.”
  8. “Oracle is too big/dumb/slow to be a threat.” Larry Ellison has his own jet. He can keep the San Jose Airport open for his late night landings. His boat is so big that it can barely get under the Golden Gate Bridge. Meanwhile, entrepreneurs are flying on Southwest out of Oakland and stealing the free peanuts. There's a reason why Larry is where he is, and entrepreneurs are where they are, and it's not that he's big, dumb, and slow. Competing with Oracle, Microsoft, and other large companies is a very difficult task. Entrepreneurs who utter this lie look at best naive. You think it's bravado, but venture capitalists think it's stupidity.
  9. “We have a proven management team.” Says who? Because the founder worked at Morgan Stanley for a summer? Or McKinsey for two years? Or he made sure that John Sculley's Macintosh could power on? Truly “proven” in a venture capitalist's eyes is founder of a company that returned billions to its investors. But if the entrepreneur were that proven, that he (a) probably wouldn't have to ask for money; (b) wouldn't be claiming that he's proven. (Do you think Wayne Gretzky went around saying, “I am a good hockey player”?) A better strategy is for the entrepreneur to state that (a) she has relevant industry experience; (b) she is going to do whatever it takes to succeed; (c) she is going to surround herself with directors and advisors who are proven; and (d) she'll step aside whenever it becomes necessary. This is good enough for a venture capitalist that believes in what the entrepreneur is doing.
  10. “Patents make our product defensible.” The optimal number of times to use the P word in a presentation is one. Just once, say, “We have filed patents for what we are doing.” Done. The second time you say it, venture capitalists begin to suspect that you are depending too much on patents for defensibility. The third time you say it, you are holding a sign above your head that says, “I am clueless.” Sure, you should patent what you're doing--if for no other reason than to say it once in your presentation. But at the end of the patents are mostly good for impressing your parents. You won't have the time or money to sue anyone with a pocket deep enough to be worth suing.
  11. “All we have to do is get 1% of the market.” (Here's a bonus since I still have battery power.) This lie is the flip side of “the market will be $50 billion.” There are two problems with this lie. First, no venture capitalist is interested in a company that is looking to get 1% or so of a market. Frankly, we want our companies to face the wrath of the anti-trust division of the Department of Justice. Second, it's also not that easy to get 1% of any market, so you look silly pretending that it is. Generally, it's much better for entrepreneurs to show a realistic appreciation of the difficulty of building a successful company.

PS: here is an interesting commentary on this blog by Jason Fried.

Written at: Vallco Shopping Center, Cupertino, California

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Comments

Brickred is leading offshore software product Development Company having development center in India, product development and software product testing are core activity of company.

man dude thats true but many people fall for it

So true, So true! I just finished a short stint with a start up and I swear they you hit it on all 10 points! If they had read this blog entry they may have gotten funding!

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

USA Federal Government is licensing patents to R&D companies. USA Federal Government is waiting for your recommending some real "pocket deep" in your item 10.

Now getting that Big Name Company onboard is always the cream on the cake but from our experience you just have to build up the business bit by bit from the bottom up. You need more than mates saying how smart you are and patting you on the back. Sales are king…..even just a sales record moving on the up does it for me. Now the big players generally take forever to sign off on a urgent project and only jump onboard when you gain critical mass. Sounds like many of these companies did not learn from the dot com days.
I also like the fact that in the blog it points out that these guys think just because they have some funding they will sign the big names…..very shallow thinking and not too strategic from a business point of view. Just finding the right guys here in Australia regardless of the massive money you can pay, and finding the right team players is like getting blood out of a stone.
I love the response no one is doing what we are doing…..if only…..I also would love to get a dollar for every time I hear that response, but it really just comes down to perceptions and the market will make that judgment at the end of the day. Further, where you have a big company competing for the same business as you then this may be true but these big players just set up a side project and this project could trump you in the end.
In regard to proven management teams…well you are as good as the current job and it is no good talking about your success in the past as this does not generate future revenue….and well patents are just great but sales revenue is better ………. Look!.... at the end of the day if you all have the passion and drive and ability to make it happen, you will be successful. Success breeds success! If you are in it for the short term and lack commitment then you will fail.

Reality check..........

I dont understand why dont people write such a lucrative blog like this one...great work dude

gret blog...!!

Guy

It was a pleasure dining with you and hearing your presentation the next day at BGSU. Could you please offer your thoughts on when a boot-strapping entrepreneur should entertain bringing in major investors. Is it based on missed opportunites, potential ramp-up for scalability, or other? Your thoughts?

Warm regards,

Dan Boos
President/Managing Principal
Gorillas & Gazelles LLC
http://www.gorillas-gazelles.com

Ok I am a 'bit' late joining this discussion but simply put : great article. It made me laugh. I think every management team should have these 'misconceptions' pinned on a wall with the picture of a monkey.

Hilarious list - and so true. I particularly liked the one about - "nobody is doing what we do". I spoke to someone with who'd bought a pretty average service business a few months ago, and she told me she had few competitors, and the ones she had were rubbish!

Why are some business owners so naive when it comes to competition? And why do some of them seem to think their only competition is businesses that offer the same products or services? Consumers who have money to spend will usually spend it on whatever they like.

Interesting article. :)

Too funny...Reminds me of 1999

First, I must say I love this big box to reply into. Most boxes are too small and cumbersome, so I feel very happy to leave a message, kudos for thinking of the viewer. Well, in reading your list. I would have to say I agree and get so tired of the BS. Additionally some of these new resumes that say things such as;

"Assisted in compiling a committee to establish a record breaking team which increased customer satisfaction by 44.8% in under three months"

Well, I just get so tired of the BS. "assisted" on making a committee? Oh please, why is this stuff on people's resumes? Look, weakness is not a human trait, and this PC "new wave" resume writing is just a bunch of hokum. Why not just say, you were fired from your last job because you didn't do jack?

So, the amount of embellishment out there is way over the top and I am happy to see Guy Kawasaki, simply stating it like it is. Oh sure your potential market is 100 Billion? That's what they all say? And some of these proformas, give me a break, WTH are they thinking? "Have Calculator will Travel" to Jupiter? No doubt. Ha ha ha. This was a great post Guy, keep it up. Hammer em' they deserve it.

Either you, the entrepreneur, are a winner or you are not. If you are you have previous wins in the future, if you are not faking it or using trickery or coloful brochures, big words and large pie in the sky numbers won't cut it. It's clearly about performance. Do you have what it takes or don't you. Show me.

Dear Sir
I am an inventor and I have designed many products that would be of benefit to mankind and to the earth. I have one product on the world market. and you come out with such jibberish as you have put down. I think that you are talking out the top of your head. from what you have said it is obvious that you have never been clever enough to invent a new product and then by yourself try and get it on the sales market place. If yo have you would know about all the barriers that an inventor has to go through and all the tough regulations that his and every new invention has to go through just to get a patent.every step is against the inventor from start to finish. I have designed quite a nuumber of new products. some are most beneficial to the earth and combat global warming. help provide energy and power to the ordinary person and a number of other projects. You seem to be living on a different planet. if you think it's easy try it yourself.
Sincerely
Kenneth Taylor (Lord Plug)

Guy, Great list! - I'd add the one where they say they know that due diligence usually takes 6 months but they need to be the exception to the rule since they "really need the funds now".

A large Israeli news site took this blog entry, translated it, and posted it here:
http://www.ynet.co.il/articles/0,7340,L-3374221,00.html

I hope you gave them permission.

Hi Guy,
It reminds me the joke of Snowhite and Pinochio. Snowhite sat on Pinochio's nose and bagged "Lie to me Pinochio, Lie to me".
Enjoy it, buddy.

Guy, minority of your claims are common knowledge and the rest are simply un-wise. You sound realy snob, try meditation. I hope for you that you don't behave this way in real life.

Boolshit. The author seems to be one of those people who think they know everythin and can advice to everyone just because in the past they made some money. Well, the author is wrong about many things.

VCs and other investors DO require potential huge markets, dream team for management, and all the other things that the author consider as lies.

I would completely agree with you but actually that's winning philosophy from my point of view. You need to check it out if you don't believe it.

For the reason of #5, I created my own site and sponsor a group that will hopefully remember I kept my promise when they develop their business savvy.

Hi Guy,

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

This is exactly what Steve Jobs said when he introduced the iPhone in Jan this year. It seems he is still a pure entrepreneur at heart who hasn't given up on lying!

I wonder if you would read a comment on an year old. I really would appreciate if you could comment on this.

Hi guys! I am just ina very good mood because i have been searching the net for my favourite song and could not find it anywhere, but now i have downloaded it from http://billboardmp3.org/
and am very happy, now i just want everybody to know that i have the best day!!:)
Have the greatest day everybody:):):)

Funny!!!

And great insight. I thought that I was the only one that didn't believe the marketing types (some of us call it lying!!!- Imagine that.). Having grown up as a scientist I have a some respect for the truth. Finally someone that can let a group of people know that we are not impressed with the lies. Guy, thanks for making the lies funny.

From one of the first 60,000 to buy a Mac 128 in Dec. 1984. When can I get an iPhone and get rid of my Treo 650???

g

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