The Top Lies of Venture Capitalists

Industrial-strength intelligence for entrepreneurs who need funding

If you think it's hard to get a "yes" out of a venture capitalist, you should try to get a conclusive "no." This is because there's no upside to communicating a negative decision.

To foster greater understanding between entrepreneurs and venture capitalists, here is an exposé of the top lies of venture capitalists.

1. "I liked your company, but my partners didn't." 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 while the "others" didn't, so don't blame him. This is a cop-out . . . a true believer would get it done.
2. "If you get a lead investor, we will follow." The venture capitalist is saying, "We don't really believe, but if you can get another investor 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 need to hear is, "If you can't get a lead, we will invest." That's a believer.
3. "Show us some traction, and we'll invest." 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."
4. "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 translates to "If this is a good deal, I want it all." What entrepreneurs want to hear is, "We don't want any other investors."
5. "We're investing in your team." This is an incomplete statement. While it's true that they are investing in the team, what the venture capitalist is really saying is, "We're investing in your team as long as things are going well, but if they go bad we will fire you, because no one is indispensable."
6. "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!
7. "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.
8. "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 and 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 another company to commit to their product - something that isn't much more than a PowerPoint presentation.
9. "We like early-stage investing." Venture capitalists fantasize about putting $1 million into a $2 million pre-money company and ending 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 venture capitalists are remarkably risk-averse, considering it's not even our money.

* Editor's note: A term sheet is a letter of agreement between a venture capitalist and the company in which she or he is investing. To review a sample term sheet, click here.

Guy Kawasaki is a managing director of Garage Technology Ventures,an early-stage venture capital firm and a columnist for Forbes. Previously, Guy was an Apple Fellow at Apple Computer, Inc. where he was one of the individuals responsible for the success of the Macintosh computer. Guy is the author of eight books,including The Art of the Start, Rules for Revolutionaries, How to Drive Your Competition Crazy, Selling the Dream, and The Macintosh Way.

This blog post is adapted from a post on Guy's own blog, a must-bookmark site for entrepreneurs eager to know more about how venture capitalists think.

For more insights on obtaining funding for your start up, be sure to check out The Entrepreneurship Master Program, now in progress at Trump University.