Guys Kawasaki, Apple’s famed ex-evangelist, is well known for his top 10 lists. He published his Top Ten VC Lies earlier this year. There is no such thing as "No" in the VC business, just indefinite "Maybe’s". While somewhat tongue and cheek, these should help shed some light on interpreting VC talk.
The Top Ten Lies of Venture Capitalists
Venture capitalists are simple people: we’ve either decided to invest,
and we are convincing ourselves that our gut is right (aka, “due
diligence”) or there’s not a chance in hell. While we may be simple,
we’re not necessarily forthcoming, so if you think it’s hard to get a
“yes” out of venture capitalist, you should try to get a conclusive
“no.”
This is because there’s no upside to communicating a negative
decision. Entrepreneurs will simply hate us sooner–instead the game is
to string along entrepreneurs in case something miraculous happens to
make them look better. (An example of a miracle would be Boeing
approving a $5 million purchase order.)
Alas, entrepreneurs are also simple people: If they don’t hear
a conclusive “no,” they assume the answer is yes. This is an example of
the kind of breakdown of communication between venture capitalists and
entrepreneurs that causes much pain and frustration for entrepreneurs.
To foster greater understanding among the two groups, here is an exposé of the top ten lies of venture capitalists.
- “I liked your company, but my partners didn’t.” In other words,
“no.” What the sponsor is trying to get the entrepreneur to believe is
that he’s the good guy, the smart guy, the guy who gets it; the
“others” didn’t, so don’t blame him. This is a cop out; it’s not 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. - “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.” Well,
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 the entrepreneur doesn’t
need the money, the venture capitalist would be happy to give him some
more–this is like saying, “Once you’ve stopped Larry Csonka cold,
we’ll help you tackle him.” What entrepreneurs want to hear is, “If you
can’t get a lead, we will.” That’s a believer. - “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.” - “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 entrepreneurs want to hear is, “We want
the whole round. We don’t want any other investors.” Then it’s the
entrepreneur’s job to convince then why other investors can make the
pie bigger as opposed to re-configuring the slices. - “We’re investing in your team.” This is an incomplete statement.
While it’s true that they are investing in the team, entrepreneurs 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 is, “We’re investing in your team as long as
things are going well, but if they go bad we will fire your ass because
no one is indispensable.” - “I have lots of bandwidth to dedicate to your company.” Maybe the
venture capitalist is talking about the T3 line into his office, but
he’s not talking about his personal calendar because he’s already on
ten boards. Counting board meetings, an entrepreneur should assume that
a venture capitalist will spend between five to ten hours a month on a
company. That’s it. Deal with it. And make board meetings short! - “This is a vanilla term sheet.” There is no such thing as a vanilla
term sheet. Do you think corporate finance attorneys are paid $400/hour
to push out vanilla term sheets? If entrepreneurs insist on using a
flavor of ice cream to describe term sheets, the only flavor that works
is Rocky Road. This is why they need their own $400/hour attorney
too–as opposed to Uncle Joe the divorce lawyer. - “We can open up doors for you at our client companies.” This is a
double whammy of lie. First, a venture capitalist can’t always open up
doors at client companies. Frankly, he might be hated by the client
company. The worst thing in the world may be a referral from him.
Second, even if the venture capitalist can open the door, entrepreneurs
can’t seriously expect the company to commit to your product–that is,
something that isn’t much more than a slick (10/20/30) PowerPoint
presentation. - “We like early-stage investing.” Venture capitalists fantasize
about putting $1 million into a $2 million pre-money company and end up
owning 33% 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 (eg., the founders of Cisco) with proven
technology (eg., the basis of a Nobel Prize) in a proven market (eg.,
ecommerce). We are remarkably risk averse considering it’s not even our
money. - I’m at a Starbucks in Hawaii writing this blog. I’ve been at it for
ninety minutes. I don’t have my charger with me. My PowerBook is out of
gas. You’re going to have to be happy with the top nine lies of venture
capitalists until “Dear God” ships the PowerBook Vaio.