Guy Kawasaki Dishes Out the Top Ten Lies of Venture Capitalists

1. “I liked your company but my partners didn’t.” In other words, no. The venture capitalist who is saying this is telling you that he’s the good guy, the smart guy, and the guy who gets it; the “others” didn’t, so don’t blame him. This is a cop-out; it’s not that the other partners didn’t like the deal as much as the sponsor wasn’t a true believer. A true believer would get it done.

2. “If you get a lead, we will follow.” In other words, no. As the old Japanese say, “If your Aunt had balls, she’d be your uncle.” She doesn’t have balls, so it doesn’t matter. The venture capitalist is saying, “We don’t really believe, but if you can get Sequoia to lead, we’ll jump on the pile.” In other words, once you don’t need more investors, the venture capitalist would be happy to invest. What you want to hear is, “If you can’t get a lead, we will lead the deal.” That’s a believer.

3. “Show us some traction, and we’ll invest.” In other words, no. This lie translates to “I don’t believe your story, but if you can prove it by achieving significant revenue, then you might convince me. However, I don’t want to tell you no because I might be wrong, and by golly, you may sign up a Fortune 500 customer, and then I’d look like a total orifice.” As opposed to bull shiitake, this is chicken shiitake.

4. “We love to co-invest with other venture capitalists.” Like the sun rising and Canadians playing hockey, you can depend on the greed of venture capitalists. Greed in this business translates to “If this is a good deal, I want it all.” What you want to hear is “We want the whole round. We don’t want any other investors.” Then it’s your job to convince them why other investors can make the pie bigger instead of reconfiguring the slices.

5. “We’re investing in your team.” This is an incomplete statement. While it’s true that they are investing in the team, you are hearing, “We won’t fire you-why would we fire you if we invested because of you?” That’s not what the venture capitalist is saying at all. What she is saying, “We’re investing in your team as long as things are going well, but if they go bad we will fire you because no one is indispensable.

6. “I have lots of bandwidth to dedicate to your company.” Maybe the venture capitalist is talking about the data line into his office, but he’s not talking about his personal calendar, because he’s already on ten boards. Including board meetings, an entrepreneur should assume that a venture capitalist will spend five hours a month on your company. That’s it. Deal with it and don’t be fooled.

7. “Do you mind if one of our associates accompanies me to your board meetings?” This isn’t a lie per se, and it looks like a harmless request. However, it isn’t what you might delude yourself into thinking: “These guys are so interested in our company that they want two people helping us.” If you agree to the request, your board meetings will become a training class for an MBA who knows nothing about running a company but will nevertheless be offering his learned opinion.

8. “This is a vanilla term sheet.” There is no such thing as a vanilla term sheet. Do you think corporate finance attorneys are paid $500/hour to push out vanilla term sheets? If venture capitalists insist on using a flavor of ice cream to describe term sheets, the only flavor that works is rocky road. This is why entrepreneurs need their own $500/hour attorney, too-as opposed to Uncle Joe the divorce lawyer.

9. “We can open doors for you at our client companies.” This is a double whammy of a lie. First, a venture capitalist can’t always open up doors at client companies, because the management of that company may hate him. The worst thing in the world is a referral from him. Second, even if the venture capitalist can open the door, you can’t seriously expect the company to commit to your product-that is, something that isn’t much more than a slick pitch.

10. “We like early-stage investing.” Venture capitalists fantasize about putting $1 million into a $2 million premoney company and end up owning 33 percent of the next Google. That’s early-stage investing. Do you know why we all know about Google’s amazing return on investment? The same reason we all know about Michael Jordan: Googles and Michael Jordans hardly ever happen. If they were common, no one would write about them. If you scratch beneath the surface, venture capitalists want to invest in proven teams (for example, the founders of Cisco) with proven technology (for example, the basis of a Nobel Prize) in a proven market (for example, growing 30 percent per year) with no competition. They are remarkably risk averse, considering it’s not even their money.

What should you do when you hear these lies? First, for lies 1, 2, and 3, when a venture capitalist is telling you “no”, you should move on. A venture capitalist is either performing due diligence (calling references, talking to your customers, and meeting more of your team), or she isn’t interested. If she isn’t interested, don’t waste your time or hers. Second, for lies 4-10, understand that when a venture capitalist tells you what a wonderful, supportive investor she’ll be, she’s lying. Truly, she may not even realize she’s lying, but she is. The game shouldn’t work like this, but it does.

SOURCE: "Reality Check: The Irreverent Guide to Outsmarting, Outmanaging, and Outmarketing Your Competition" ISBN:978-1-59184-223-1 Pages 40-43