Guy Kawasaki Dishes Out the Top Ten Lies of Entrepreneurs

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 her most conservative projections. Generally, an entrepreneur has no idea what sales will be, so she guesses: “Too little will make my deal uninteresting; too big, and I’ll look delusional.” The result is that everyone’s projections are $50 million in year four. As a rule of thumb, when I see a projection, I add one year to delivery time and multiply by 10 percent.

2. “(Big name company) is going to sign our purchase order next week.” This is the “I heard I have to show traction at a conference” lie of entrepreneurs. The funny thing is that next week, the purchase order still isn’t signed. Nor the week after. The decision maker transferred to a different department; the CEO got fired; or there’s a natural disaster. The only way to play this card is after the purchase order is signed, because no investor whose money you’d want will fall for this one.

3. “Key employees are set to join us as soon as we get funded.” More often than not when a venture capitalist calls these key employees, who are vice presidents at Microsoft, Oracle, and Sun, he gets the following response: “Who said that? I recall meeting him at a cocktail party, but I certainly didn’t say I would leave my cushy $250,000/year job at Microsoft to join his startup.” If it’s true that key employees are ready to rock and roll, have them call the venture capitalist after the meeting and testify to this effect.

4. “No one is doing what we’re doing.” This is a bummer of a lie, because there are only two logical conclusions. First, no one else is doing this because there is no market for it. Second, the entrepreneur is so clueless that he can’t even use Google to figure out he has competition. Suffice it to say that the lack of a market and cluelessness are not conduciveness to success. As a rule of thumb, if you have a good idea, five companies are doing the same thing. If you have a great idea, fifteen companies are doing the same thing.

5. “No one else can do what we’re doing.” If there’s anything worse than the lack of a market and cluelessness, it’s arrogance. No one else can do what you’re doing until the first company does it, and ten others spring up in the next ninety days. Did anyone else run a sub-four –minute mile after Roger Bannister? (It took only a month before John Landy did.) The world is full of smart people, so you’re kidding yourself if you think you have a monopoly on knowledge. And on the same day that you tell this lie, the investor met with another company that’s doing the same thing.

6. “Hurry, because other several other venture capital firms are interested.” The good news: At any given time there are one hundred entrepreneurs in the world who can make this claim. The bad news: The fact that you are reading this book means that you’re not one of them. As my mother used to say, “Never play Russian roulette with an Uzi.” For the absolute cream of the crop, there is competition for a deal, and an entrepreneur can scare other investors to make a decision. The rest of us cannot create a sense of scarcity when it’s not true.

7. “Oracle is too big/dumb/slow/ to be a threat.” Larry Ellison has his own jet. He can keep the San Jose Airport open for his late-night landings. His boat is so big that it can barely get under the Golden Gate Bridge. Meanwhile, you’re flying on Southwest and stealing the free peanuts. There’s a reason why Larry is where he is and you are where you are, and it’s not that he’s big, dumb, and slow. Competing with Oracle, Microsoft, and other large companies is a very difficult task. Entrepreneurs who utter this lie look at best naïve. You think it’s bravado, but venture capitalists think it’s stupidity.

8. “We have a proven management team.” Says who? Because the founder worked at Morgan Stanley for a summer. Or McKinsey for two years? Truly “proven” in a venture capitalist’s eyes is founder of a company that returned billions to its investors. But if you were that proven, then you (a) probably wouldn’t have to ask for money and (b) wouldn’t be declaring that you’re proven, because it would be obvious. A strategy for you is to state that (a) you have relevant industry experience; (b) you are going to do whatever it takes to succeed; (c) you are going to surround her with directors and advisors who are proven; and (d) you’ll step aside whenever it becomes necessary. This is good enough for a venture capitalist who believes in what you’re doing.

9. “Patents make our product defensible.” The optimal number of times to use the P word in a presentation is one. Just once, say, “We have filed patents for what we’re doing.” Done. The second time you say it, venture capitalists begin to suspect that you are depending too much on patents for defensibility. The third time you say it, you are holding a sign above your head that says, “I am clueless.” Sure, you should patent what you’re doing-if for no other reason than to say it once in your presentation. But at the end of the day, patents are mostly good for impressing your parents. You won’t have the time or money to sue anyone with a pocket deep enough to be worth suing.

10. “All we have to do is get 1 percent of the $x billion market.” There are two problems with this lie. First, no venture capitalist is interested in a company that is looking to get 1% of the market. They want their companies to face the wrath of the antitrust division of the Department of Justice. Second, it’s also not that easy to get 1 percent of any market, so you look silly pretending that it is. Generally, it’s much better for you to show a realistic appreciation of the difficulty of building a successful company.

What do investors do when they hear these lies? There are three kinds of investors. First, some investors are too dumb to know that they are lies. You should avoid them. Second, some understand that you’re lying, but are so used to it that they don’t care, because they are going to pass on your deal anyway. You should learn what you can from this investor and write off this meeting as a learning experience. Third, some confront you, because they are actively engaged in the meeting and can’t stand being lied to. This is the investor that might invest and might even add value to your company. Don’t get me wrong: I’m not suggesting that you lie in order to see investor reactions. In the best case, you should tell no lies. Incidentally, telling a lie that you don’t realize is a lie is still lying. At the very least, tell new lies. If nothing else, it will be a more interesting meeting.

SOURCE: "Reality Check: The Irreverent Guide to Outsmarting, Outmanaging, and Outmarketing Your Competition" ISBN:978-1-59184-223-1 Pages 45-47