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

Comments

[Paul Manning]

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[x7.com]

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[VentStation.com]

Very entertaining!

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[Cemis Kezek]

Dear Guy,

This is a great list for those of us who are venturing into the world of VCs for the first time. However, even a better list would be "top ten to-do's" for entrepreneurs. For instance, you talk about the fact that if we have an good idea 5 firms are doing it, and if we have a great idea 15 other firms are doing it. The question then becomes what qualities do VCs look for in potential investments? Any top 10 lists for those?

best,
Cemis

[Gerard Kennedy]

Very entertaining issue. I haven't heard of this one. It will be necessary to visit you on a thicket!
Congrats Guy!

Best,
Gerard
http://racemotion.org

[Vic]

Hey Guy,

All the lies of VCs and entrepreneurs make for very interesting and informative reading and so do many of the relevant comments.

However, what's with the comment spam? This severely dilutes the value of the useful comments.

Can you not do something to keep this in check?

[jenny]

Hi! Thanks for the useful information and it can be a lot of help!!!GREAT!!!

[sohbet]

Guy, your comments on entrepreneurs' biggest lies are all fine and dandy, but, all this just tells us that you VCs only invest in your 'buddies'. So, what good are you VCs anyway? Does it feed your ego?
Maybe you should pull your head out of the clouds and/or your butt and realize that people don't need VCs.
Good luck on your next entrepreneurial venture -- one of your closer friend's, that is.

[albornoz]

Thanks you for your site. Many thanks. Superb. I am glad.

[christina]

I'm starting to learn that the reason entrapreneurs make those lies is because VC's teach them to do it. It seems to be all part of an orchastrated dance.

[Richie Hecker]

So very true, how about adding in the product is 99% complete, just needs a little funding to finish it?

Richie Hecker
http://www.bootstrapper.com

[stjepan]

>> Second, you could have a perfectly great business that totally viable. it could still not be "VC fundable." For example, a web design company could be humming along doing $25 million in fees, but is it a VC deal? Probably not.

Guy,
The entrepreneurs and venture capitalists obviously don't speak same language. As a starter that looks for money I just don't understang: What is "VC fundable"? My projections are modest (one million in third year), but you're talking here about 25 mil business that is not for VC. So, maybe the definiton of VC should be "a billionaire that lends to other billionaires", or I'm getting something wrong?

Of course there are some lies from both sides, but after reading your article, getting money look to me like Mission: Impossible. So, is a "garage start" the only way?

[Todd]

Regarding #2, Guy, I can understand your point about people who dedicate an entire slide to “industry” data, for example, online advertising spend in the US is a $26B opportunity by 2010 according to Forrester, as if to imply that the start up will capture a significant percentage of it.

But as we create The Problem slide you recommend in your 10/20/30 entry, how should we substantiate any claim to a problem without this kind of market research?

[happicat]

“Too little will make my deal uninteresting; too big, and I'll look hallucinogenic.”

You meant hallucinatory, right? Because being hallucinogenic could be really profitable... That's a great way to make money, especially if all it takes is making too high a guess (too HIGH a guess? hee!)

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[jim Forbes]

“(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.
>> Typically, the number is from the opening page of an analyst's web site and the entrepreneur isn't a paying client.

Jim Forbes
written from my outside office on top omy little mountain in rural northern San Diego County.

[wholesale dvd players]

yes,the entrepreneur is under a lot of pressure .

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[John Doe]

Guy, your comments on entrepreneurs' biggest lies are all fine and dandy, but, all this just tells us that you VCs only invest in your 'buddies'. So, what good are you VCs anyway? Does it feed your ego?
Maybe you should pull your head out of the clouds and/or your butt and realize that people don't need VCs.
Good luck on your next entrepreneurial venture -- one of your closer friend's, that is.

[rickfeynman]

Don't misunderstand me, Guy, these are *my lies*. What I think is funny is that the time I don't construct the lies, I am explicitly asked for them. So no, no one in your firm lied. Just asked to be lied to.(and I'm not sayin' who)

Furthermore, it was legit feedback! If I can't even make up the market size, what good am I?

Now that I think of it, the genesis of most of the lies on the VC-lies list are probably because the entrepreneur wants to hear them...

[rickfeynman]

Let me tell you an ironic story, Guy. I've pitched countless venture presos for several companies over A,B,C and recap rounds. Every single time, when crafting the pitch, we sit in a room and make up lies number 1 and 2. You hit the nail on the head. But, c'mon... Why do we do this?

Recently, I've started my own company. We're rolling along nicely, sales are starting to come in, technology is solid. We have no overhead. I start thinking about expansion capital; maybe I'll test the waters with the venture guys. We're niche focused and highly targeted. I'm coming in from a position of strength, I don't need the cash. So I lay out my pitch. 10 slides. I describe the size of my market niche and the revenues we see we'll be able to get. I am truthful, because frankly I don't need to blow any smoke this time - I'm not really expecting anyone to give me cash right away, I'm really listening to the smart guys I can find.
So I take my preso to a VC pitch. The partner is insightful, questions are strong, I feel like this partner is sharper than the average bear. Great meeting. Exactly what I want to accomplish.

The feedback?
- "you know, we really need to see a couple billion dollar market before we invest. You need to demonstrate that to me."
and
- "we need to see revenues that will enable IPO. Are your projections high enough?"

The firm? You guessed it. Garage.

This is an absolutely true story, the quotes are nearly verbatim. BTW - its exactly the same feedback from other vcs I've met with. That's specific feedback and I work to improve my pitch. Ironic how the lies get pulled out by the audience.

**************************

Ricky,

This isn't necessarily ironic. First, I didn't say that we don't lie. :-) Second, you could have a perfectly great business that totally viable. it could still not be "VC fundable." For example, a web design company could be humming along doing $25 million in fees, but is it a VC deal? Probably not.

Still, I hope it wasn't me that told the lies. :-)

Thanks,

Guy

[Mehmet Subasi]

A very useful article. But I would like to include a disclaimer to the beginning:
There are three groups of venture capitalists. For the first group don't use any of these lies, for the second group use at least three lies, and for the third group use all eleven lies in your presentation.
the VC groups are explained below:
1) a savy VC in an established VC firm
2) a non partner VC employee at an established VC firm
3) small or VC wanna be firm executive

[Paul manning]

Hi Team

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perhaps we can work together?