Guy Kawasaki (ex-evangelist at Apple, venture capitalist, entrepreneur, blogger etc) is one of my favorite reads. Some time ago I read his book Reality Check which is basically a do’s and don’ts plus helpful tips and insights to building successful startups. One of the entertaining parts is his lists of top lies that VCs, entrepreneurs, lawyers and partners et al tell.
I have now worked as a VC for a bit more than 2 years so I figured it would be fun to look back and give some of my thoughts on the top-10 VC lies that Guy mentions in his book.
1. I liked your company, but my partners didn’t
Guy argues that if the VC really believes in your company, he/she will make sure to get the investment through.
I don’t really agree with this. We have had several cases where one partner really believed in the investment but we still decided not to invest (all investments need to pass a vote of the whole team). However, I fully agree that this should not be used as feedback to the company because it doesn’t help the entrepreneur in any way. It is much better to give the reasons why ultimately not everyone in the firm believed in the company.
2. If you get a lead, we will follow
Yepp, this is a cop-out. We think your company is interesting but we’re not fully convinced. However, if a big-name VC is willing to invest, so are we.
For a Nordic VC, one of the biggest challenges is to figure out if a local company really has the potential of making it globally. So if a VC outside of the Nordics decides that they think so, it naturally makes us more convinced as well. The drawback is that if a local company manages to attract e.g. a US VC, it may be too late for the local VC to get in anyway. Ironic, isn’t it…
This one shouldn’t not be mixed up with point 4 below.
3. Show us some traction, and we’ll invest
The lie here is that even though you have traction, we may not invest. But traction is often fundamental for a VC. Firstly, faced with the option of a company with traction vs a company without traction, the answer is pretty obvious. Secondly, especially for consumer-facing products & services, it is close to impossible to “know” what millions of people will like and how they will behave so traction in the form of user growth or conversion becomes essential for making qualified investments rather than throwing darts.
4. We love to co-invest with other venture capitalists
Guy argues that if a VC really likes a deal, no way someone else would be let in. I don’t agree. Especially during the last 12-18 months it has been very clear that most companies need more money than expected and that it is really hard to raise money even for great companies. At Creandum, we prefer to syndicate and it shouldn’t be mixed up with point 2 above. This genuinely means that we like the company, would like to invest but think it is better for the company and for us to co-invest with someone else. It gives additional financial capability and also more resources to allocate to the company (see further point 6 below).
5. We’re investing in your team
Yes, we invest in teams. But it doesn’t mean that the team will have our support forever. Most successful startups change some or all of the original team members along the road. A hard-earned experience is that once we think it is time to change key people at the companies, usually it should already have been done.
6. I have lots of bandwidth to dedicate to your company
Many VCs say that they are active investors. And most are compared to many other type of investors. But I think that VCs tend to exaggerate the time they actually spend on an individual company. A VC cannot really sit on the board of more than 3-5 early-stage companies and still be heavily involved. If you are looking for a VC that really can allocate time and pull up the sleeves, my advice would be to a) check how many companies they are involved in and b) take references from companies that they are or have been working with.
7. Do you mind if one of our associates accompanies me to your board meetings?
Guy argues that although this isn’t a lie per se, it doesn’t necessarily mean that you’ll get lots of extra support. As an entrepreneur, I wouldn’t be too worried about this request. Usually it means that someone young, ambitious and usually smart person will help out with various tasks and sometimes this person actually have much more time to allocate than the senior partner at the VC-firm. But of course, if you decided upon a certain VC due to that senior partner and an associate is what you get, you might feel a but cheated.
8. This is a vanilla term sheet
Guilty. It is true that most VCs have quite similar terms and that some terms almost have become industry standards. However, a standard term sheet is more of a set of items that a VC would like to have in place. Most individual items makes sense but the total may not be applicable for your company. And usually there is room for negotiation at least if your company is attractive enough.
9. We can open up doors for you at our client companies
Guy argues that since a VC cannot get a customer to commit to your product, it’s just a slick pitch. Well, I agree to that VCs can’t really make anyone buy your stuff but VCs definitely can and do open doors and make introductions and I think this actually can have great value to entrepreneurs.
10. We like early-stage investing
Usually VCs don’t want to limit themselves so why say you don’t like early-stage investing. Best way to check this is to see what investments the VCs have done. If a VC hasn’t done an early-stage investment in several years, it is usually a sign that you’re not getting any investment either. Sometimes, it can still make sense to get to know a VC at an early stage, VCs like to follow the development of companies even before they are ready to invest.
Finally, I would like to add one lie that I think is quite common. One of the main reasons why a startup gets a no is because the VC doesn’t think the team is strong enough or that we don’t get a good feeling of the entrepreneur(s). Now, I think this is sometimes a pretty difficult thing to say so I have a tendency to rather communicate other reasons.