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The Top Ten Lies of Entrepreneur

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FORETHOUGHT

The Top Top Ten Ten Lies of Entre Entrepre preneur neurss by Guy Kawasaki

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FORETHOUGHT

advice

The Top Ten Lies of Entrepreneurs It’s easy to turn off prospective investors.  J u s t f e e d t h e m t h e s a m e o l d l i n e s .

by Guy Kawasaki

   E    R    I    W    E    Y    E   :    N    O    I    T    A    R    T    S    U    L    L    I

For a few few months, I’ve had a const constant ant ringing in my right ear.The condition is called tinnitus, tinnitus, and my doctors say that

least encourage them to be a little more creative.And creative. And I may just save the hearing of a few VCs.

child needs to buy two WAP phones for a company to reach profitability, profitability, something is wrong.

it can be caused by an ear infection, infection, too much salt in one’s one’s diet, a stressful lifestyle, or even a neuroma. I have a different theory. theory. I think that listening to tthe he lie lies, s, exagger exaggerations, ations, and wishful thinking of entrepreneurs has caused cau sed the ring ringing. ing. You see, I’m in the  business of helping entr entrepreneurs epreneurs raise  venture capita capital, l, and I listen to h hundreds undreds of pitches every every year year.. I hear the same fabrications and delusions over and over again.. So, as a pu again public blic se service rvice,, I am no now w going to disclose the top ten lies told  by entrepreneurs – and what investors say to themselves when they hear them. th em.

1. ENTREPRENEUR: “Our projections are conservative.” INVESTOR: “Multiply this forecast by .1 and add five years.” God bless the entrepreneur who forecasts sales sales greater greater than Exodu Exodus, s, JDS Uniphase, and Cisco and then states that the forecasts forecasts are conservativ conservative. e. Nobody  believes the financial forecasts forecasts – investors simply want to see that the entrepreneur understands understands the industry industry,, the logic involved in putting together a rea-

2. ENTREPRENEUR: “IDC (or Jupiter or Yankee Group or Gartner Group)  forecasts  foreca sts that our market market will be $50 billion by 2003.” 2003.” INVESTOR: “This is the fifth $50 billion market I’ve heard about today.”

I’m not expecting to cure entrepreneurs of lying (fat (fat chance), but I hope I’ll a att

sonable financial model, model, and how companiess grow. panie grow. If eve every ry man, woma woman, n, and

2

When every plan makes the same grandiose claims about mark market et size, investors have a hard time taking the projections seriously.Instead of trying tr ying to prove that the the mark market et will be b big, ig, enable investors to fantasize about its size.Give them the facts and the context they need

Copyright © 2001 Harvard Business School Publishing Corporation. Corporation. All rights reserved.

 

FORETHOUGHT

to understand the scale of the opportunity for themselves themselves.. For exa example, mple, if you can demonstrate that every corporate Web site on the planet needs your company’s product, product, an investor ccan an figure out that the opportunity is big.

3. ENTREPRENEUR: “Amazon will sign our deal next week.” INVESTOR: “Call me when you get Bezos’s signature.”

a similar pitch five times in the last six months is like screaming,“I am a bozo!” Bozos don’t get funded.

6. ENTREPRENEUR: “We need you to sign a nondisclosure agreement.” INVESTOR: “You’re clueless: no one signs a nondisclosure agreement.”

Investors won’t sign your nondisclosure agreement because they usually see several similar plans: what if they sign Few new economy companies ever one company’s nondisclosure agreement definitively say say no to any alliance, partand fund another? In reality, reality, the ability nership,, or off nership offer. er. They They’re ’re al alll afr afraid aid of  to implement an idea, idea, not the ability to missing missin g the Next Big Thing. Instea Instead, d, keep it a secret,is the key to a successfu successfull everyone says,“You have an interesting start-up. Investors don don’t ’t fund treasure treasure idea. We We’ll ’ll get back to you about it, it,”” maps; they fund teams that can get the and then they don’t don’t.. Unfortunately Unfortunately,, the  job done. done. If an investor is willi willing ng to sign entrepreneur entrep reneur h hears, ears, “Y “Yes, es, we we’re ’re doin doing g a nondisclosure agreeme agreement, nt, an entreit.”Never talk about a Big Deal until it’s preneur might not want his money. a Signed Deal. 7. ENTREPRENEUR:

4. ENTREPRENEUR : are set to “Key employees  join us as as soon as we we get  funded.” INVESTOR: “Give me their phone numbers so I can verify this story.”

“Cisco (or Oracle or HP or Sun) is too slow to be a  threat.” INVESTOR: “If arrogance were venture capital, capit al, your deal would would be oversubscribed.”

There’s no chicken-and-egg problem here.. The order is clea here clear: r: you get the human capital,you get the venture capital. If an entrepreneur entrepreneur can’t can’t persuade key execs to join because of the opportunity,, she probably can tunity can’t ’t entice them with big salaries. Indeed, one of the lit-

These companies didn’t get where they are by being being big, dumb dumb,, and slow slow.. I love  Innovator’s ator’s DiClayton Christensen’s  Innov lemma as much as anyone, anyone, but funding the next curve is a scary proposition. It’s even scarier when an entrepreneur dismisses the current curve’s curve’s gorillas. Show

mus tests of fundability and entrepreneurial skill is the ability to attract talent without money mo ney..

a healthy respect for the incumbents while demonstrating a compelling and  believable  believa ble way to compete with them.

5. ENTREPRENEUR: “We have no competition.” competition.” INVESTOR: “Either there’s no market or  you don’t don’t know how how to use a search engine.”

8. ENTREPRENEUR: “We’re glad the bubble has burst.” INVESTOR: “We are, are, too, because because your your valuation valuat ion just dropped 50%.”

To this day, investors get business plans for on-line bookstores claiming a firstmoverr advanta move advantage. ge. If an idea is good, five companies are already working on it. If an idea is great, great, ten comp companies anies are

Let’s be honest: no one is glad the bub ble has burst. For entrepreneurs entrep reneurs,, it’s harder to get funded, funded, valuations valuations are lower,, and due diligence tak lower takes es longer. For investors, investors, portfolios are wo worth rth a lot

working on it. Claiming that the there re is no competition to an investor who’s heard

less (and the lockup period isn’t over), and the employees of portfolio compa-

 jan uary 20 01

nies are quitting because their stock options are under water. water. Since the bubble  burst, everyo everyone ne has been trying to spin a silver lining,but the sun shines brighter and birds sing sweeter when Nasdaq is at 5,000.

9. ENTREPRENEUR: “Our patents make our business defensible.” INVESTOR: “Hire more more engineers, engineers, not patent attorneys.” attorneys.” Unless you’re a biotech or medicaldevice company company,, it’s hard to support this claim. If an idea is wo worth rth copying, there’s a will and a way to get around the patent. File all the patents y you ou like, but investors believe that what makes a company defensible is the ability to outimplement,, not out-litigate implement out-litigate..

10. 10. ENTREPRENEUR: “All we have to do is get 1 % of the market.” INVESTOR: “I want to fund a company that will get 99% of the market.” market.” I call this the “Chinese soda syndrome”: if just 1% of the people in China drink a company’s soda, it will sell a ton of soda. The problem is that getting 1 % of the Chinese to drink the company’s soda isn’t so easy. easy. Another problem is that no one wants to invest in a company that aspires to grab only 1% of the market. (It’s every investor’s dream to learn that his company is on the radar screen of the Justice Department’s Antitrust Division.) Shooting for the top-dog position is much more attractive to an investor than claiming it will take only a miniscule market share to succeed. So if you’re you’re an entrepre entrepreneur, neur, do me a favor and don’t repeat any of these whoppers in my presence presence.. If you pitch me 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 in  Silicon Valley Valley..

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