7/30/2019 Top Ten Lies Entrepreneurs

1/3

F O R E T H O U G H Tadvice

The Top TenLies of EntrepreneursI t 's easy to t u r n of f p r o s p e c t i v e i n v e s t o r s .Jus t f eed them the same old l i n e s .byGuy Kawasaki

For a few months, I've bad a constantringing in my right ear. The condition iscalled tinni tus, and my doctors say thatit can be caused by an ea r infection, to omuch salt in one's diet, a stressful life-style, or even a neuroma.1 have a different theory. I think thatlistening to the lies, exaggerations, andwishful thinking of entrepreneurs hascaused the ringing. You see, I'm in thebusiness of helping entrepreneurs raiseventure cap ital, and I listen to hundredsof pitches every year. I hear the samefabrications and delusions over and overagain. So, as a public service, I am nowgoing to disclose the top ten lies toldby entrepreneurs - and what investorssay to themselves when they hear them.

I'm not expecting to cure entrep reneur sof lying (fat chance), but I hope I'll at

least encourage them to be a little morecreative. And I may just save the hearingof a few VCs.1. ENTREPRENEUR:"Our projections areconservative"INVESTOR:"Multiply this forecast by.1 and add five years."God bless the entrepreneur who fore-casts sales greater than Exodus, JDSUniphase, and Cisco and then states thatthe forecasts are conservative. Nobodybelieves the financial forecasts - inves-tors simply want to see that the entre-preneur understands the industry, thelogic involved in puttin g toget her a rea-sonable financial m odel, and how com-panies grow. If every m an, wom an, and

child need s to buy two WAP phones foa company to reach profitability, something is wrong.2. ENTREPRENEUR:"IDC (or Jupiter orYankeeGroup orGartner Group)

forecasts that our marketwill be $50 billion by 2003."INVESTOR:"This is the fifth $50 billionmarket I've heard abouttoday."When every plan makes the same grandiose claims about market size, investors have a hard time taking the projections seriously. Instead of trying to provethat the market will be big, enableinvestors to fantasize about its size. Givthem the facts and the context they need

7/30/2019 Top Ten Lies Entrepreneurs

2/3

F O R E T H O U G H Tto understand the scale of the opp ortu-nity for them selves. For examp ie, if youcan demonstrate that every corporateWeb site on the planet n eeds your com-pany's product, an investor can figureout that th e oppo rtunity is big.3. ENTREPRENEUR:"Amazon wi l l s ign ourdeal next week."INVESTOR:"Cal l me when you get Bezos'ssignature."Few new economy companies everdefinitively say no to any alliance, part-nership, or offer. They're all afraid ofmissing the Next Big Thing. Instead,everyone says, "You have an interestingidea. We'll get back to you about it,"and then they don't. Unfortunately, th eentrepreneur hears, "Yes, we're doingit." Never talk about a Big Deal un til it'sa Signed Deal.4. ENTREPRENEUR:"Key employees are set tojo in us as soon as w e ge tfunded."INVESTOR:"Give me their phone numbersso I can verify this story."There's no chicken-and-egg problemhere. The order is clear: you get thehum an capital, you get th e venture cap-ital. If an entrepreneur can't persuadekey execs to join because of the oppor-tunity, she probably can't entice themwith big salaries. Indeed, one of the lit-mus tests of fundability and entrepre-neurial skill is the ability to attract talentwithout money.

5. ENTREPRENEUR:"We have no compet i t ion."INVESTOR:"Either there's no market oryou don ' t know how to use asearch engine."To this day, investors get business plansfor on-line bookstores claiming a first-mover advantag e. If an idea is good, fivecompanies are already working on it.If an idea is great, ten companies areworking on it. Claiming that there is nocompetition to an investor who's heard

a similar pitch five times in the last sixmonths is like screaming,"I am a bozo!"Bozos don't get funded.6. ENTREPRENEUR:"W e need you to s ign anondisclosure agreement ."INVESTOR:"You're clueless: no one signs anondisclosure agreement."Investors won't sign your nondisclo-sure agreement because they usually seeseverai similar plans: what if they signone company's nondisclosure agreem entand fund anoth er? In reality, th e abilityto implement an idea, not the ability tokeep it a secret, is th e key to a successfulstart-up. Investors don't fund treasuremaps; they fund team s that can get th ejob do ne. If an investor is willing to signa nondisclosure agreement, an entre-preneur might not want his money.7. ENTREPRENEUR:"Cisco (or Oracle or HP orSun) is to o slow to be athreat ."INVESTOR:"If arrogan ce were venturecapital, your deal would beoversubscribed."These companies didn't get where theyare by being big, dum b, and slow. I loveClayton Christensen's Innovator's Di-lemma as much as anyone, but fundingthe next curve is a scary pro position. It'seven scarier when an entrep reneur dis-misses the cu rrent curve's gorillas. Showa healthy respect for the incumbentswhile dem onstrating a compelling andbelievable way to compete with them.

8. ENTREPRENEUR:"W e're g lad the bubblehas burst."INVESTOR:"We are, too, because yourvaluation jus t dropped 50%."Let's be honest: no one is glad the bub-ble has burst. For entrepreneurs, it 'sharder to get funded, valuations arelower, and due diligence takes longer.For investors, portfolios are wo rth a lotless (and the lockup period isn't over),and the employees of portfolio compa-

nies are quitting b ecause their stock op-tions are und er water. Since the bub bleburst, everyone has been trying to spina silver lining, bu t the sun shines brigh terand birds sing sweeter when Nasdaqis at 5,000.9. ENTREPRENEUR:"Our patents make ourbusiness defensible."INVESTOR:"Hire more engineers, notpaten t attorneys."Unless you're a biotech or medical-device company, it's hard to supportthis claim. If an idea is worth copying,there's a will and a way to get around th epatent. File all the patents you like, butinvestors believe that what makes acompany defensible is the ability to out-implemen t, not out-litigate.10. ENTREPRENEUR:"All we have to do is get 1 %of the market ."INVESTOR:"I want to fund a company tha twill get 99% of the market."I call this the "Chinese soda syndrome":if just 1% of th e people in China drink acompany's soda, it will sell a ton of soda.The prob lem is th at g etting 1% of th eChinese to drink the company's sodaisn't so easy. Anothe r problem is that noone wants to invest in a company thataspires to grab only 1% of the market.(It's every investor's dream to leam tha this company is on the radar screenof the Justice Department's AntitrustDivision.) Shooting for the top-dogposition is much more attractive to aninvestor than claiming it will take onlya miniscule market share to succeed.So if you're an entrepreneur, do me afavor and don't repeat any of thesewhoppers in my presence. If you pitchme and I turn my bad ear toward you,I'm trying to tell you something.Guy Kawasaki is the CEO of Garage.com,a venture capital investment bank based inSilicon Valley.

Reprint FOIOIBcontinued on page 26

7/30/2019 Top Ten Lies Entrepreneurs

3/3