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

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[K]

Of course, you could skip the whole VC idea itself, and build it all up from scratch! And then possibly go seek VC funding.

[Mr. Boo]

I love Guy Kawasaki so much. Wow, the genius of our time. I'm going to start my own blog called, Guy Kawasaki - Living Legend. These nuggets of wisdom are priceless to all blog fanboys, and boy do we love posting links to them.

[Melinda]

Any recommendations to a person wanting to start manufacturing product; has a great job but is bogged down with paying back student loans?

I do alot of the research to the point where my social life is nil - there is lots of crap to filter through. Can anybody suggest the best place to find interested partners/sponsors for inventions and ideas?

[Rajesh]

May be these are the reasons I never wrote a plan so far??!!
If I write the truth, VCs do not like it. If I write the possibilities they cannot believe it :-)

Just do it, Guys, and that's entrepreneurship!!

Cheers,

Rajesh
http://www.samooha.com

[Quadszilla]

I landed here from sugarbank (of all places!). There is no real VC in adult because everything should be making money right out of the gate.

Most people don't realize how difficult it must be to be a VC. What are the odds that any of the people that NEED your money can actually hit it big? If they were that good or proven - they certainly wouldn't want to involve VC sharks.

I read one of your posts before about presentations, but this time you've made it to my bloglines sub.

Great post!

[Tony Comstock]

No one else is doing what we're doing.

[Gary]

Great post Guy. One of my concerns for years, in business and investing is the promises and hype that is made and promoted at the expense of the recipient.

It's great to show some of the nonsense so people in different fields can remember that if something is too good to be true, it always is.

[Wezee]

As an old saying in the REAL world goes: “the game is sold NOT told” but in order to sell in this type of world we live in embellishment seems to be the rule of thumb…just have SOMETHING that can back it up.

#6 strikes me most because “there is NOTHING new under the sun”! That’s why I don’t waiste time trying to reinvent the wheel…neither did Bill Gates if you ever studied his beginning moves…and I’m sure all of us wouldn’t mind having the type of success he’s having.

I feel the need to repost this whole thing on my blog so my readers can peep this out…but I don’t know how Guy would feel about that. This stuff is a “trip”!

[Andrew Batchelor - PrivateEquityChina.com]

Lie (or delusion) number 11 can be the undoing of a venture heading into the China market. The fallacy is to take the market size (which is huge) and then 'forecast' acheiving just 1% market share (making the underlying assumtion that hitting 1% is going to be acheivable), they then multiply by unit price and bingo you have a hockey stick.

This weak minded type of analysis totally overlooks the time, expense and difficulty of execution. Its all about the execution.

This might apply to a start up or can equally apply to ventures entering the China market with an established brand, product or service.

If end purchasers just dont want the product then you'll never get even 1% of the market.

Some entrepreneurs get 'blinded' by the market sizing and jump over the vital steps of moving from concept/protoype to actual sales (or traction as our American friends like to call it).

Doing that in any market will kill you, especially China.

PrivateEquityChina.com

[Owen G]

has ever given you credit for its success, although you claim to be one of the people responsible. Your subsequent record is mediocre at best. You really should not criticize entrepreneurs and reduce their enthusiasm to dishonesty.

[Ray]

It is easy to diss entrepreneurs for their unrealistic projections. But if projections are always exaggerated, why do investors insist on seeing them. You are forcing us to, in some cases, pay for market studies that we cannot afford, to prove that a market exists. It is also not fair to call them lies. Unrealistic, overly enthusiasic, perhaps. Lies? That's not fair.

[C Bennett]

Do a series on lies acquirers tell their target acquisition. They are very similar. From (unfortunate) experience, I know these:

-- we don't want to change a thing, we love you just the way you are [then buy our stock, not us]
-- Our projections are conservative (of what our company will do once we are acquired) [they don't include negative, which is what 2/3rds actually do, so they can't be conservative]
-- we have a big client ready to sign a PO once you're on board [we know our business better than they do and we don't know this client]
-- with our capital and connections, you'll be ten/hundred times your current size in 4/10 years [burn rates that no one has ever seen]
-- You can't grow on your own and no one else sees your potential [can't grow? you love us like we are?]
-- better hurry, we've got ten other targets we're looking at and we have to move by the end of the month/quarter/year/period [unfortunately true and shows the motivation is acquisition, not value]
-- we have a proven M&A management team [not identified yet but when they find out they'll be glad to do this]
-- all we need to do is help you get 1% of our (bigger than yours) market to make this a blockbuster [still don't know the market]
-- you've got ten times the upside for your career with a company our size [an aside, private wink, sucker-bait; never in writing]

You'd know many more.

[big al]

laughed very loud when I read this, great piece of work, heard all these things myself from people...I was thinking that it was only me that thought this way !

[steven streight aka vaspers the grate]

Here's a lie for you:

"Ship shoddy, but ship first"
aka
"Don't worry, be crappy"

That's consumer fraud, you charalatan loser.

[Scott Stirling]

Great writing, Guy. These lies are also perpetuated and retold to potential employees in hiring and to customers and partners when selling. Basically, most of these "lies" could be called (less pejoratively) "rhetorical techniques" used by businesses and individuals in varying stages of development (even well-established ones) to persaude others of the value of a new idea, product, strategy, etc.

[Martin-Éric]

Your 10 points make absolutely perfect sense. However, what the above fails to address is, why do people feel that they have to exagerate or downright lie to get invesments? Could it be that VC themselves have something to do with it? Could it be because VC dream of astronomical ROI that most startup simply won't be able to give them, because startups thend to have average, not fantastic, sales figures?

[Ebrahim]

"Only an MBA bozo, who speaks their lingo and con them would get funded. Most VC only like to see the big sure returns and then call you a Liar. If by chance, if your technology becomes successful, they will take all the credit."

Thats so true! These lies maybe true to some extent, but they can't be used to success.

[John]

It clearly shows why this Guy can never scores BIG and he is a mediocre arrogant MBA thinks he knows every thing. This explains why VCs could never fund cure for AIDS or any technological breakthrough. They will call you a Lier and say NO, as soon as some you say there is no one has cure for AIDs.

If it were not 1999, Google may never get funded. These guys are too lazy and incompetent to validate the proof. The Silicon Valley venture crowed never going to fund next great technological break through (e.g. a revolutionary user interface or a real artificial intelligence). They are too busy chasing some dotcom business models, and don’t even know such things are possible. Name one such funding is the past 20 years? Aren’t the VCs who invented the get rich quick dotcon schemes in the first place?

They hire even more incompetent consultants to evaluate the breakthrough technology. Even, if they are convinced that it works and technology is revolutionary, instead of appreciating the invention and try to help them, they would say Microsoft (or some big company) steels their technology and kills them. The patents are useless and give an example of how Microsoft crushed some small company, you never heard about (who owns some submarine patents). These guys are clueless about Patents. There are good genuine inventions (unique revolutionary breakthroughs that are easy to defend) and there are submarine patents (or incremental improvements in a crowded area that are hard to defend), but think know every thing by just reading an article in Mercury news.

Aren’t they supposed to assess and take such calculated risks, if somebody comes to them to bring the cure for AIDs or cancer? If they have a bit commonsense, we would have solutions for many problems, such as, power-crisis (e.g. cheep solar power) or artificial intelligence. The MBA bozos are too busy calling the real technologists Liers, instead knowing his passion for technology and lack of conning skills of an MBA.

My suggestion to technology inventors, do it yourself if you can. Only an MBA bozo, who speaks their lingo and con them would get funded. Most VC only like to see the big sure returns and then call you a Liar. If by chance, if your technology becomes successful, they will take all the credit.

[rich]

I have four simple comments. Forget the Power Point slides; don't go to VC's; ask the potential investors their three most important issues; and respond with compassion and honesty.

Only the top quarter of VC's do better than the S&P. On average they get 5000 business plans a year, maybe they invite in 200 or so for presentations, and they make maybe 4-6 investments. They spend the vast majority of all their time finding reasons to say "not interested". When a great idea comes along, they just can't see the value since they are brainwashed day in and day out to say "not interested".

My last piece of advice, get to the money before it gets to the VC, it can be done and those people treat you allot better and more professionally than the VC's.

Rich

[melissa]

You've got a dead ringer on #3 in fact this happened to me, though I wasn't the one saying the deal was about to happen, I did get the pink slip...

“(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. "

I think you're pretty close to real on all of these! Thanks for the laugh!

[Steve Dispensa]

re 1: if you recognize that nobody has any clue about sales forecasts, what do you suggest? What kind of approach do you think works well?

[GMars]

Well, I guess you are telling me to QUIT NOW!
Am I to believe that all the time, research, diligence, effort, experience, work, sacrifice, money, creative thought, analysis, sleepless nights, and pure passion my team and I have poured into our start-up venture are viewed by the venture community as merely hyperbole and inflated projections? I have never encountered such a concentration of arrogance.
Not every start-up is two guys in a garage with a dog, a Power Point deck and a set of projections.
Sure entrepreneurs exaggerate, but how else can one stand out from the extraordinarily crowded field of start-ups seeking funding. I am relatively new to the process of seeking venture funding, and YES we have stated some variation of a few of the claims considered LIES by Guy and the others.

BUT we can PROVE our claims and we can back them up with EVIDENCE!

As an entrepreneur, all I am looking for is a qualified audience for our pitch. It has been my experience that getting a QUALIFIED audience is the biggest hurdle.
You can tell us we are full of s**t (which I am certain will not be the case), after you have heard our pitch and done some due diligence.
If you do not believe our business proposition is viable after you have invested the time to hear our pitch, that is your prerogative. You have the money.
We only have the idea and the research to back it up.

Let’s face it. A pitch is exactly that a PITCH.
You know it and we know it.
Think of it as a commercial. Does a Gillete Sensor razor really work as advertised?
Can the Jeep that drives effortlessly through the Alaskan Tundra really do that?
What percentage of people REALLY found their soul-mate on eHarmony.com?
Do you think that I Can’t Believe It’s Not Butter REALLY tastes like butter?
Come on guys, keep it in perspective.
What sales process is completely honest? Tell me?
IT IS YOUR JOB to separate the wheat from the chaff.

[Nathaniel Smith]

Amuzing way to state the facts. As I have not only run a startup without the venture capitalist investments but am now in the process of trying to capture real market share and now persuing it, I can say that these lies are easy for someone to make if they don't do their homework. It is imperitive to know what you are trying to accomplish and tell you investors exactly where you stand. I have found that I get a lot more respect from my investors when I simply open up and am honest with them. Good point with this article.

[John]

I think many items in the list are wrong. For example, If you invented cure for AIDS and can prove it beyond any doubt, you can be pretty safely say number-5 and number-6.

Likewise, you could patent the cure. Then you could say-10. Patents are basis for most big drug companies to recover their huge investments. Look at numerous lawsuits, patents collecting millions from Microsoft, HP, Google and RIM. US Supreme Court normally won’t pre-certify the Patent surviving for 20 years, therefore there is some risk that VCs supposed to assume, which VCs could asses when valuing the company.

As per-8, look at the statistics; what are the odds of next great invention coming from any one of them (i.e. BIG companies like Microsoft or Oracle)?

Buy the way; I am an entrepreneur working on one such invention for three years (full time). I am going to say, if I strongly believe that is true. I will be announcing my technologies in few weeks (as soon as my layer finish failing my latest patent).

This kind of arrogant prejudice comments from VCs turn me off years ago and decided to do it on myself with out any VC funding, so I don’t need your money any more.