Top 10 lies investors tell entrepreneurs
Tuesday, September 4, 2012/
Last week, we outlined the top 10 lies that entrepreneurs tell investors and what was “really” being said.
But this is only half the story of the investment dance. Plenty of start-ups are fobbed off and outright lied to by investors they pitch to. But why?
Venture capital funds are an investment vehicle for those that are looking to gain potentially higher returns than they could in a traditional banking set-up.
Money can come from many different sources such as institutional investors, university endowment funds ($400+ billion in the US alone), superannuation funds or wealthy individuals, to name a few.
During the 10-year average life of each fund the management team needs to go through a period of start-up investment analysis and investment (year zero to three), pruning companies that don’t look like winners or outright fail, reinvesting in companies that look like winners (year three to seven) and finally selling off their assets to return the fund proceeds to the investors.
During this time they are investing their knowledge, connections and management skill to create as many winners as possible while killing off potential losers as early as possible in the process.
If their fund isn’t going well it will be much harder to raise fresh capital for the new fund, so most funds need to show some winners before the second capital raising window.
Many entrepreneurs often forget or gloss over the important fact that venture capitalists have to report to their investors just like the entrepreneurs do.
It is also critical to know where each fund is at in the investment cycle in order to hit the sweet spot, unless they are looking at a top up Series A/B/C round when it is less important.
Now that we have a better idea where investors are coming from when evaluating start-ups, let’s take a look at the top 10 lies told to entrepreneurs, as outlined by one of Silicon Valley’s venture capital stars, Guy Kawasaki of Garage Ventures.
I’ve added my own comments to Kawasaki’s 10 lies to help you through the bull dust and get down to what is “really being said” in the investment dance.
Here is a list of the top 10 lies investors tell entrepreneurs, and what they really mean:
1. “I liked your company, but my partners didn’t”
What this really means: This happens; VC partners don’t always agree, and don’t want to be the only one to pick a company within their own VC team. If something ever goes wrong guess where the finger points!
Start-ups should evaluate the partners at a firm just like any sales opportunity and try to win over as many high-level people as possible.
This will come in handy when the road gets rocky (which it inevitably will) and you need as many internal champions as possible to support your company rather than killing it.
2. “We are patient investors who want to help you build a great company”
What this really means: Ha ha! My fund is a 10-year closed one and I have three years to invest, three more to re-invest and four to divest – you figure out the timing.
We’re not patient, we expect you to shoot off like the rocket on the sales hockey stick you pitched us with and if you don’t we’ll end your run and look at investing in another potential winner before we run out of time.
3. “If you get a lead, we’ll invest too”
What this really means: Umm. I didn’t say I would invest with just any other lead investor, did I?
I have to like them, they have to give us favorable terms, we keep a majority stake/board seat and we want to call the shots.
Oh, did I forget? We golf on Tuesdays so the board meetings can only be Wednesdays at 3pm.
4. “There are no companies in our portfolio that conflict with what you’re doing”
What this really means: Yep, there is also this game called liar’s poker and man, are we good at it! Please come in and tell us everything you’re doing so we know what competition our current investments will face.
5. “Show us some traction, and we’ll invest”
What this really means: Can’t laugh at this one because it is fair, most of the time. But if I don’t have money to gain traction – how can I do it?
This is a really tough one for start-ups and speaks to having sales/clients lined up while you’re creating the product or service.
Find out what the sales dollar number they are looking for is, if there are specific clients you have to sell into and what time period you have to get traction in.
Then, get them to agree that if you do x, y and z they will invest in you. Don’t leave the traction question open ended, it rarely works in the start-up’s favor.