the top 10 lies of entrepreneurs and other lists for startups

Guy Kawasaki is the CEO of venture capital investment bank Garage.com, and an entrepreneur, former Chief Evangelist for Apple Computer, columnist for Forbes magazine and author of numerous books on business and technology. On November 14, 2000, he came to this Morino Institute Netpreneur.org Coffee & DoughNets meeting to discuss the Top Ten Lies of Entrepreneurs, then set the new standard for content by adding the Top 10 Lessons of PR, the Top 10 Rules in the War for Talent and the Top 10 Principles of Business Development.  

Statements made at Netpreneur events and recorded here reflect solely the views of the speakers and have not been reviewed or researched for accuracy or truthfulness. These statements in no way reflect the opinions or beliefs of the Morino Institute, Netpreneur.org or any of their affiliates, agents, officers or directors. The archive pages are provided "as is" and your use is at your own risk.

Copyright 2000, Morino Institute. All rights reserved. Edited for length and clarity.

fran witzel: introduction

Good morning.  I'm Fran Witzel, Vice President of Morino Institute's Netpreneur.org, the learning community for the New Economy.

          As many of you are aware, Netpreneur.org is the result of the vision, leadership and commitment of one person, Mario Morino.  We're delighted to share with you that this weekend Mario was recognized as the winner of the 2000 National Ernst & Young Supporter Of Entrepreneurship Award.  Mario was cited for his work as "a mentor to entrepreneurs, providing them with the resources they need to find support, share knowledge, make contacts and form partnerships that will benefit their businesses."  Please join us in congratulating him on this achievement.

          I also want to recognize some very important people from our netpreneur community who have taken time to help us with this and other events: Carolyn Carroll of STAT Tech; Eric Sommer of iCapture; Suzi Connor, Marcia Nutt and Mitch Chen of Network Alliance; Hunter Monroe of ValueSpeed, and Dawn Amore and Arika Casebolt of Glowing Toad Designs.  Thank you for your help.  We couldn't do it without you.

          On behalf of the Netpreneur.org team and today's sponsor, Imperial Bank, it's my pleasure to welcome you to a very special Coffee & DoughNets presentation.  It was almost two years ago today, on November 19, 1998, that I had the honor of introducing the Angels & Revolutionaries event.  Our keynote speaker that night was Guy Kawasaki, CEO of newly-launched venture capital investment bank, Garage.com.  Guy totally blew the roof off the McLean Hilton as he described the “Rules for Revolutionaries” from his book of the same name.  Since then, Garage.com has helped over 60 high-tech startups raise over $200 million in venture capital, and, now, Garage.com is here in Washington again to give one of their two-day Bootcamp for Startups.

          This morning Guy is here to share his insights and advice again.  Not only will he talk about “The 10 Lies of Entrepreneurs,” we're also very lucky because he will address a number of other issues that I think you'll find particularly relevant in helping you start and grow your high-tech businesses.  We’ll take your questions when he’s finished, but, just before that, I've asked Guy to help explain what a “venture capital investment bank” is by describing what Garage.com does in more detail.  Please give a warm welcome to Guy Kawasaki.

guy kawasaki: the top four top ten lists

Thank you very much.  I am going to try something today that I've never tried before.  I'm going to give you four speeches, because when Fran and I met he said, “You have to do the Top 10 Lies of Entrepreneurs since that’s what we told everybody you’d talk about, but I've seen this other speech of yours and that would be good, and I've seen this other speech and that would be good and people are asking for this other speech...”  So, I'm going to do four in one.  We want to get out of here at 9:00, so we'll do four in 45 minutes.  Any one of these could be a 45-minute speech by itself, but I thought I would set the standard for content in speeches at a Netpreneur.org event forever.

          For those of you who saw me speak two years ago, you know that I always use the “Top 10” format so there are going to be four Top 10 lists.  The reason why I use Top 10 is that most high-tech CEOs suck as speakers.  One thing I figured out from watching these CEOs is that if you're going to suck, at least the audience can track progress through your speech if you use a top 10 format.  I hope you don't think I suck, but, in case you do, at any given point you can just do the math.  But remember to subtract from 40, not from 10, okay?

          What’s that, Fran?  We can go to 9:30?  I can take Q&A.  I can do a lot of things.  I could add a fifth speech if we go to 9:30.

          Okay, here's the first one.

the top 10 lies of entrepreneurs

          Garage.com is a venture capital investment bank.  This means that we help high-tech startups raise venture capital, and, in that process, we view roughly 12,000 business plans a year.  We also meet with probably 500 to 750 entrepreneurs a year and get pitched by them one-on-one.  We've seen a lot of plans and we've been pitched to a lot of times, so we've been told all the lies of entrepreneurs.  I have narrowed down these Top 10 Lies of Entrepreneurs to tell you what the most common ones are and what people are thinking when you tell them.  I want to give you a solid basis for not telling these lies.  By the way, many people have asked me to do the Top 10 Lies of Venture Capitalists, but I have never been able to narrow it down to 10.  Lie number one is:

“Our projections are conservative.”

“When you look at our financial statement,” says the entrepreneur, “You'll see that in year three we'll be doing $50 million, and that is probably a faster ramp-up than Compaq, Apple, DEC, Alta Vista, Inktomi, Yahoo!, E*Trade, everybody.  We're going to outdo all those companies because our projections are conservative.”

          Whenever a sophisticated investor hears this lie, he or she thinks, “I will multiply by 0.1 and add three years.”  That’s just so you know the math.  Never say you're going to do $50 million in year three because everybody says that.  Literally.  Every plan says it.  I think you all buy the same Excel template, frankly.  It doesn't matter if you're in wave division multiplexing, fiber optics or shrimp farming software, everybody says $50 million in year three.

“[IDC] says that our market will be $50 billion by the year 2003.”

Entrepreneurs try to validate their market by using an outside source such as IDC, Jupiter or Yankee Group.  They’ll say that IDC (or whatever firm) says their market will be $50 billion by the year 2003.  Well, when it comes to consulting firms, every study they have says that every market will be $50 billion by 2003, so this is kind of a meaningless statement.  You should never use external data to validate your market.  Sophisticated investors have a very good sense of the size of a market.  If you try to spin this lie, it will be the fifth time that day they hear that this particular market is $50 billion.  It will hurt your credibility.

“[Amazon.com] will sign our contract next week.”

Substitute Yahoo!, E*Trade, Excite or any major player for Amazon.com.  Pick a company.  Everybody says this.  Behind it is that no one in the new digital economy can say no.  How many of you have ever gotten a rock-solid “no” from anybody?  It never happens.

          You have?  All right.

          It seldom happens because people in the New Economy are just chicken.  They don't want to say no.  They always say, “Well, it sounds very interesting.  We'll get back to you.”  When entrepreneurs hear that, it parses in their brain as, “They're going to sign our contract next week!”

          If you're going to say something like this, if a company is really going to sign a deal with you, wait until the deal is signed and then tell people about it.  Nothing is worse than telling someone that a big deal is going to happen and then it doesn't.  Under-promise and over-deliver.

“Key employees will join as soon as we get funded.”

The fourth lie is, “As soon as we get the $3 million from you, we have these key employees who work at Microsoft and Oracle making $2 million a year, but they're going to quit and join our two-person operation that has $3 million in funding and doesn't have a product yet.”  It’s kind of a stretch for the imagination.  If you tell this lie, be sure that when they ask for the names, email addresses and phone numbers of those key employees, they really will say that they're going to quit, because, in most cases, they'll say, “Oh yeah, I met them at a Netpreneur.org event.  Seemed like interesting guys.”  That's not going to lead to funding, so don't tell this lie unless it's absolutely true.

“We have first-mover advantage.”

To this day, Garage.com is receiving business plans for selling books online that claim they have first-mover advantage.  Very few people have first-mover advantage.  Even if you do, I would make the case that first-mover advantage doesn't matter. It’s a really tenuous thing, amounting to maybe five weeks of advantage.  I would also say that very few people truly do have first-mover advantage.  I can't tell you how many business plans we get that say they're the first-and-only people to be able to do something, and it's the fourth plan we got that week in the same space.  At the very least, learn how to use Google, okay.  Type in the keywords, find out the other 88,795 matches in the same space.

“Several VCs are already interested.”

The sixth lie is that you have these VCs all teed up; they're all ready to sign; they're ready to rock and roll.  What happens when you tell this lie is that the potential investor will call the other VCs, and the other VCs will say, “Oh, yeah, about three weeks ago our partners decided to pass on that investment.  I guess I forgot to get back to the entrepreneur.”  That happens time and time again.

          There really are only two states with a VC¾either you have a term sheet or they're not interested.  If you don't have a term sheet, assume they're not interested; I don't care how positive things look or how much they tell you that it's very strategic.  One of the best ways to say no is to tell you, “As soon as you find a lead investor, we're in.”  That equals no.  Just understand VC-speak.  That equals, “No, we're not interested.”

“[Oracle] is too slow to be a threat.”

The seventh lie is: “Oracle, Microsoft, Inktomi, Yahoo!, E*Trade, Cisco, PeopleSoft, they're too big, too dumb and too slow to be a threat to the two of us working in our garage.”  You know something?  There's a reason why Larry Ellison flies in a private jet and you and I are in coach on United.  It is not because he's stupid or slow or not aggressive or because he doesn't have a great team behind him.  He has all that stuff.  Oracle is a big threat.  Microsoft is a big threat.  All these companies are big threats. Even if you truly can eat Oracle's lunch, you should never say it because no one is going to believe you.  You will reduce your credibility.

“We’re glad the bubble has burst.”

How many of you are glad the bubble has burst?  You are?  You're a short seller?

          Basically, nobody is glad that the bubble has burst.  Life is better with Nasdaq at 5,000, okay?  Birds sing better, the sun is shinier, the sky is bluer.  Everything is better with Nasdaq at 5,000.  Nasdaq is not at 5,000, so you have to spin this into something good, like “valuations are more rational” or “VCs are seeing fewer stupid ideas and they can spend more time with my company.”  You can spin it, but, let's face it, it's really not true.

          You're not glad the bubble has burst.  Say that you're in the educational toy business.  I've seen companies like that where prior to April they would say, “eToys' market cap is $2 billion and we sell only educational toys which is about a fifth of their business, so we should be roughly $400 million.  Maybe $400 million is a little too aggressive, since we are two people in a garage right now, so we'll take a 90% markdown.  Maybe pre-money is $40 million.”  If you go from $2 billion to $400 million to $40 million, you think that’s a great pre money valuation.  Oh, except that eToys, by the way, is now worth $300 million.  If you use the same math, you're now worth about $100,000.  You're not glad the bubble has burst.  Trust me.

“Our patents make our business defensible.”

Other than medical devices and biotech¾I'll grant you those¾I would say that patents are more or less useless.  They do not protect you.  If you have something worth copying, your patent will be worked around.  If you don't have something worth copying, then why get a patent?  We have seen very few companies that truly have patented technology that is truly defensible. The key to success for most high-tech companies, I believe, is implementation, not intellectual property protection.  If you want to be a defensible company, hire engineers, not lawyers.

“All we have to do is get 1% of the market.”

This is the so-called “Chinese soda test.”  The Chinese soda test is: if just 1% of the people of China drank our soda every day, we would sell boatloads of soda and be so rich. The problem is, it's not that easy to get 1% of all the people in China to drink one soda a day.  It's not that easy to get 1% of any market to use your product.

          This kind of reasoning goes along with lie number two. “All we need is 1% of the market and IDC says it's going to be $50 billion by 2003, so how hard could this be?  You ought to fund us.”  Well, as I said, getting 1% of a market is hard, and it also shows that your perspective is wrong.  People want to fund companies that want 99% market share.  Garage.com is looking for entrepreneurs whose greatest fear is the Department of Justice’s Antitrust Division 10 years from now.  If you come to us and say, “Our projections are just wild.  In our wildest dreams, we don't know what the size of the market is, but we know that we're going to dominate 99% of it, so we're afraid of the Department of Justice.”  We are interested in that deal, not the ones who say, “All we have to do is get 1% of the market.”

          Now, I told you these Top 10 lies for one very specific reason.  If you're going to tell lies, and sometimes you have to in a presentation, at least tell different ones.  Now you know the 10 lies that every institutional investor hears every day, so tell different ones.  That's speech number one.

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