Tuesday, June 21, 2011

Top 10 Lies Venture Capitalists Know You Are Telling

Lies, Lies, Lies!

In the quest for capital, many entrepreneurs stretch the truth. One venture capitalist calls them out.

As a venture capitalist, I get pitched dozens of times every year, and every pitch contains at least three or four of the lies below. Are you guilty?

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 their most conservative projections. As a rule of thumb, when I see a projection, I add one year to delivery time and multiply by 0.1.

2. “(Big-name research firm) says our market will be $50 billion in 2010.” Even if the product is bar mitzvah planning software, every entrepreneur claims the market potential is tens of billions. Do yourself a favor: Remove any reference to market size estimates.

3. “(Big-name company) is going to sign our purchase order next week.” Only play this card after the purchase order is signed, because no investor will fall for this one.

4. “Key employees are set to join us as soon as we get funded.” When a venture capitalist calls these key employees, he usually gets the following response: “I recall meeting him, but I certainly didn’t say I would leave my $250,000-a-year job to join his company.” If key employees are ready to rock ’n’ roll, have them call the venture capitalist and confirm it.

5. “No one else is doing what we’re doing.” Well, either there’s no market for it, or you’re so clueless that you can’t use Google to figure out you have competition. Neither a lack of a market nor cluelessness is conducive to securing an investment.

6. “No one else can do what we’re doing.” The only thing worse than cluelessness and the lack of a market is arrogance.

7. “Hurry, because several other vc firms are interested.” There are maybe 100 entrepreneurs in the world who can make this claim. The fact that you’re reading this article means you’re not one of them.

8. “Oracle is too big/dumb/slow to be a threat to us.” There’s a reason Larry Ellison is where he is, and it’s not that he’s big, dumb and slow. Entrepreneurs who utter this lie look naive at best, stupid at worst.

9. “We have a proven management team.” If you were that proven, you wouldn’t be asking for money. A better strategy: State that you have relevant experience, you’ll do whatever it takes to succeed, you’ll surround yourself with proven advisors and you’ll step aside whenever it becomes necessary.

10. “All we have to do is get 1 percent of the market.” First, no venture capitalist is interested in a company that wants just 1 percent of a market. Second, it’s not easy to get even 1 percent, so you look silly pretending it is. Instead, show an appreciation of the difficulty of building a successful company

Chris Benjamin, Rogue CFO

1 comment:

RichCappy said...

Chris, very sound advice. Most entrepreneurs that we engage start with a majority of these mistakes in their Exec. Summaries, but mostly because they believe what they say.

Would you mind commenting on two questions:
1. On the second point, most VCs require a number on market size. I know many request it as a test to understanding the team's mindset. We advise to find the most cerdible third party source, put a disclaimer on it, and highlight the subsegement they will attack first. Any other advice presenting market size?
2. Relative to the last point - top-down market share projections as a base for revenue projections are one of the first signs that a business does not have a realistic view of what it will take to make a business truly successful (maybe Interent and apps are exceptions). Do you agree that the bottom-up syummary specific actions and the assumed results of those actions are the best way to present revenue projections? When a company does this, do you reduce your discount assumptions?