10 Lies Never to Tell Investors
Serial entrepreneur and VC Guy Kawasaki recently wrote a post listing the 10 lies entrepreneurs tell investors. These are classic lines that he hears in virtually every company pitch he sits through. I've added my own analysis below as to how they translate to investors' ears:
- "Our projections are conservative." If you were really conservative with projections, you'd see that conditions could be bad enough to cause your venture could fail. When you pretend that failure is not an option, investors know that you haven't done your homework.
- "Jupiter says our market will be $50 billion in 10 years." It doesn't matter what any analyst says. Their projections are often wrong. (How many times have they predicted the paperless office?) Even if they aren't, that doesn't mean you'll get any slice of the eventual market size. A handful of giants might split it and leave you with nothing.
- "Several Fortune 500 companies are set to do business with us." Either companies have signed a contract or they haven't. If they haven't, then they are at best a prospect. Hyping sales efforts is a bad habit to get into.
- "No one else can do what we’re doing." No one and nothing is irreplaceable. You will have competition and you have to assume that they will be good.
- "Hurry up because other investors are about to do our deal." If they're about to do a deal, why do you have to talk to these people?
- "Our product will go viral." Everything says their product will go viral. Almost none do. The odds are heavily against you—even if your mother likes your product or service.
- "The large companies in our market are too big, dumb, and slow to compete with us." Large companies have enough money to crush you at the start, should they choose to. There are reasons those giant competitors grew to their present size.
- "Our management team is proven." As your venture is new, no one has proven that he or she can make it work. Otherwise you wouldn't still need funding. You'd be Charlie Sheen and winning.
- "We filed patents so our intellectual property is protected." If you don't have the money to sue other companies for infringement, then the number of patents doesn't matter. If someone can design around your patent, they don't even need to infringe.
- "All we have to do is get 1 percent of the market." If everyone who sought "only" one percent of the market actually got it, markets would be 10 million percent in size.
Such lies, whether intended to be or not, are proof that you're unrealistic and may not have the experience to succeed. When you're trying to sell an investor on your start-up, assume that they've heard anything you could say a thousand times before.
Kawasaki's advice is to at least tell investors new lies. You could say that he's jaded, but that reaction is indicative of how thoroughly and often entrepreneurs fool themselves.
You don't need to make up new lies. Try these 10 alternatives that will make you stand apart and appear competent and business-like:
- Instead of "conservative" projections, provide three options: a truly conservative one where things don't go your way, a second that is realistic, and an optimistic third. Better to surprise investors with eventual good news.
- Look at projections from several analyst firms, but discount the numbers. Instead, present their rationale of why this particular market is likely to grow.
- If you have actual customers, show the contracts and disclose overall revenue. If not, then explain your sales funnel. Instead of blowing smoke, you're showing a grasp of marketing and sales.
- Acknowledge that you will have competition, indicate from where it's likely to come, and discuss your strategies for dealing with the threat.
- Ask the investors about their overall strategy, what they look for in a company, and how they prefer to work with entrepreneurs. You're interviewing them as much as they're interviewing you. Good potential investors will appreciate that.
- Discuss your social networking strategy. How do you plan to use Twitter, YouTube, Facebook, Google+, and other sites to raise awareness of your product and company and build relationships with potential customers? How do you plan to measure the success of these efforts?
- Explicitly name the large companies that you think pose a threat and review their strategies in the same market. Explain any realistic potential for a partnership or acquisition.
- As they say in fiction: Show, don't tell. Mention the successes that your management team have had in past ventures. (If you have a hard time making a list that doesn't sound silly, then you know you have a problem.) Describe how those backgrounds offer particular strengths for this venture. Acknowledge where you need additional management depth.
- Describe your patent strategy and how you have approached protecting your IP. Explain how you can protect several aspects of the business, like manufacturing techniques, that would provide additional barriers to entry.
- Get to hard numbers. How much will it take to establish the company and how that translates into a sales and prospect funnel? Demonstrate that you know how much you need to make to succeed.
There's no guarantee that this approach will win over every investor, but it will make you stand out from the crowd. Plus, pulling together the information will make you think your business over in a new way, and that's always a positive experience.
ERIK SHERMAN | Columnist
Erik Sherman's work has appeared in such publications as The Wall Street Journal, The New York Times Magazine, and Fortune. He also blogs for CBS MoneyWatch.