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INNOVATION
& DESIGN Home Page Architecture Brand Equity Auto Design Game Room SMALLBIZ Smart Answers Success Stories Today's Tip INVESTING Investing: Europe Annual Reports BW 50 S&P Picks & Pans Stock Screeners Free S&P Stock Report SCOREBOARDS Hot Growth 100 Mutual Funds Info Tech 100 S&P 500 B-SCHOOLS Undergrad Programs MBA Blogs MBA Profiles MBA Rankings Who's Hiring Grads | | DECEMBER 29, 2000 VENTURE CAPITAL Lies to Make a VC Groan Looking for startup funding? Try these lines at that all-important meeting -- and you'll likely be shown the door instead of a check
One thing to keep in mind: Due diligence is now measured in weeks or months, rather than hours. And VCs, along with other investors, now cast a skeptical eye on many of the same claims that once sent them scrambling for their checkbooks. What follows is a guidepost of sorts, a half-serious, half tongue-in-cheek list of assertions entrepreneurs would do well to avoid. Dubbed The Top 10 Lies of Entrepreneurs, it was compiled by Guy Kawasaki, CEO of Garage.com, a Palo Alto (Calif.) company that sifts through 12,000 business plans a year and helps promising startups find early-stage funding. Speaking at a recent forum in New York sponsored by the AngelSociety, Kawasaki advised investors to be wary of the claims. Entrepreneurs, he quips, should "write down the lies that are always heard and tell new lies." Here is an edited version of Kawasaki's "Top 10 Lies of Entrepreneurs": Our projections are conservative. Entrepreneurs, by nature, are optimists. But sometimes that upbeat attitude can go a bit too far. It's not uncommon, for instance, for founders of startups to claim they'll generate $75 million in revenue in their third year -- even as they insist their numbers are "conservative." "When we hear this lie, we multiply the number by 0.1 and add three more years," says Kawasaki. "That seems to be about the right financial forecast." A consulting firm (Yankee Group, Jupiter, IDC...take your pick) predicts our market will swell to $50 billion by 2003. Such studies have become commonplace. And given the downturn since March, many of the industrywide predictions now appear unrealistic. A better tactic: Refrain from giving numbers, and let investors weave their own fantasies about the potential market. Amazon (or Oracle, or AOL, or another huge company) is about to sign a sales contract with us. With such a premium placed on partnerships in today's business environment, it's often tough for companies to say "no." As a result, it's easy for startups to misinterpret a polite rejection as true interest. "Will you please send us more information?" becomes, to an entrepreneur, "We're going to do the deal!" Kawasaki's response? "Call us when you have Jeff Bezos' signature on the dotted line." Key employees will join our startup as soon as we get funded. This is an easy lie to expose. VCs need only pick up the phone and call the prospective employees. It also overlooks just how much the requirements for funding have changed. Before the Internet bubble burst, the money typically came first. These days, VCs want to see the management team in place before they cut the check. Entrepreneurs who can't attract talent on the strength of their vision aren't likely to get funded at all. We have first-mover advantage. Yes, this claim still appears in business plans. Kawasaki's reaction? First-mover advantage doesn't matter, the real key is "first to scale." Second, few companies really have the head start they claim -- and it's easy to find out. "When I hear this, I just want to tell people, 'We know how to use Google. Do you know how to use Google?'" Several VCs are already interested. Another claim that's easy to check. If, after a quick phone call, it's clear the statement isn't true, the entrepreneur's credibility is blown. Also, an investor may learn that the VC said to be interested in the deal has, after due diligence, opted to pass. Oracle (or Microsoft, or some other big company) is too slow to be a threat. Innocence or delusion? At the very least, it shows a lack of market awareness. Startups should view any of the blue-chip technology companies as potential threats. "There's a reason Larry Ellison has a private plane and you and I fly coach," says Kawasaki. "It's because Larry Ellison has a killer company." We're glad the bubble has burst. C'mon. This is spin, pure and simple. Nobody is really glad the days of easy money are over -- even if the shakeout has brought a more rational approach to investing and eliminated a lot of dot-coms that consisted of little more than catchy URLs. Our patents make our business defensible. Another sign of naÏveté. With the exception of medical devices and biotechnology, patents mean very little. Anything worth copying will be copied. What separates strong companies from weak ones is implementation. "What most people are thinking when they hear this is: 'Instead of hiring more patent attorneys, why don't you hire more engineers?'" says Kawasaki. All we have to do is get 1% of the market. This claim is also known as the "Chinese soda analogy." If a company can get just 1% of the people in China to drink its soda, it'll be selling a ton of soda. This is true. At the same time, it glosses over the difficulty of getting 1% of any market to use a particular product. Moreover, this statement turns off investors. "You want to find a company that wants to get 99% of the market," says Kawasaki. If the company has a fear, it should be the Justice Dept. Antitrust Div. -- not the hurdle of capturing 1% of a market.  By Julie Fields in New York Edited by Robin J. Phillips  | | |
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