The 10 lies every Entrepreneur tells Investors

Read this before pitching investors.

image: Why we lie

This post is an adapted transcript of a lecture given by Bill Reichert (Managing Director and co-Founder at Garage Technology Ventures) at Stanford (see the video).

My job is to help early stage startups to raise funds at Nyuko. In this post I share the most common lies entrepreneurs end up telling investors, without necessarily meaning them. Hopefully this will avoid an awkward moment next time you’ll pitch.

Lie #1: “Our projections are conservative.”

Your projections cannot be conservative, simply because you’re an entrepreneur. And entrepreneurs by definition, are not conservative. The reality is that everyone is missing on their projections. The point of projections is not being accurate, but rather to tell the story of your business, of what it could look like one to three years from now.

Lie #2: “Our market is $56b.”

Though it might be true that the entire market of your entire industry might be $56b, here you’re basically telling the VC that you haven’t done proper market segmentation and/or you don’t understand the narrow specifics of your market. You could be more specific by defining your Total Addressable Market, your Total Serviceable Market and Serviceable Obtainable Market (more about these here).

Lie #3: “Our contract with BlueChip is going to be signed next week.”

When you walk in a VC first meeting, you’re not going to have a check offer right away. It’s rather going to be an extended process, weeks or months prior getting that check. Anything you say that’s going to happen within the next six months or so could hurt you if not delivered. Under promise & Over achieve. Don’t underestimate the capacity of your BlueChip client interlocutor to get on vacations or to get your deal stuck in their legal department. Only mention to the VC what you’ve effectively achieved, then surprise/delight them with good news that effectively took place.

Lie #4: “If we only sell 30% of our company, we’ll keep control.”

As soon as you take money from an outside investor, you have a fiduciary responsibility. The real topic is that you’ve got to make sure you’ll love working with the investor you’re taking money from. If the VC feels like it’s not likely to become a love story between you two, that’s a big red flag.

Lie #5: “There is no competition in our space.”

“No one else can do what we can do” raises the following concern to VCs: do you understand what competition means when you’re doing business? The fact that there is no competition implies the problem your solution is solving is not big enough / not interesting. Or? let me Google that for you and come up with five alternative solutions within 5 minutes, that actually solve the same problem. Do your homework on this one.

Lie #6: “We’ve assembled a world class team.”

Even for great serial entrepreneurs, at the early stage it’s pretty much impossible to assemble a world class team. Even though it is understandable that you want to be thrilled with your partners, they’re probably not the people that will be the senior executives three or four years from now, assuming you’re successful. It’s important to be realistic about the needs to evolve your team over time.

Lie # 7: “Our sales cycle is three to six months.”

This is probably the single biggest problem in hitting financial projections for companies, as people in general miss estimate the length of sales cycle. Also most of the time, the miss judgment comes from the fact that you compute the average time it took you to close the deals you actually closed so far. And that typically does not include the ones that you haven’t yet closed and that are not averaged in.

Lie # 8: “We have the first mover advantage.”

The reality of startups is that a whole bunch of things can go horribly wrong when you’re the first mover. Notably because usually the first mover is the one spending the most time and money to enable the market to figure out it really needs your type of solution. Once proven, tons of guys jump in and take over the market.

Lie # 9: “All we have to do is get 2% of the market”

You’re miss defining the market you’re going after. There is a very narrow one for most applications and there really is just a narrow number of customers you can go after, who are likely to adopt your solution in a realistic time frame. It’s once again about narrowing your target market of which you’ll end up with a significant market share, rather than getting a small piece of the $billion one. Prefer a bottom up approach to realistically build up these numbers: customer by customer, sales call by sales call, marketing campaign by marketing campaign,…

Lie # 10: “I’ll be happy to hand over the reins to a new CEO.”

Here is how this one translates in the investor’s mind : “I’ll hand over the CEO role to that new CEO, if that new CEO is the right one for MY company.” And that’s just a big red flag. Thinking it’s YOUR company is just wrong and a concern for the investor. The company you’ve founded is now a company of yours, plus your investor’s, plus your employee’s.

Feel free to ping me on Twitter (@NicolasValaize).