Bill Reichert: Top 10 Lies VCs Tell Entrepreneurs | Summary and Q&A

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September 25, 2009
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Stanford Graduate School of Business
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Bill Reichert: Top 10 Lies VCs Tell Entrepreneurs

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Summary

In this video, the speaker discusses the process of venture capital and the lies that both entrepreneurs and VCs tend to tell each other during the capital raising process. The speaker covers the top 10 lies of entrepreneurs when pitching to VCs, such as saying their projections are conservative and that there is no competition in their space. They also explore the top 10 lies of VCs, including statements like "we like to move quickly" and "we're value-added investors." The speaker provides deeper insights into each lie, shedding light on the underlying dynamics and motivations.

Questions & Answers

Q: What is the purpose of the session on lies in venture capital?

The purpose of the session is to discuss the process of venture capital and the unique experience that entrepreneurs have of raising capital and dealing with VCs. The speaker uses lies as a way to elucidate the process and shed light on what works and what doesn't work when raising capital with venture capitalists.

Q: What is the first lie of entrepreneurs when pitching to VCs?

The first lie is when entrepreneurs claim that their projections are conservative. While entrepreneurs have been taught not to say this, the reality is that projections often go beyond the bounds of appropriate passion and enthusiasm, leading to a loss of credibility with investors. VCs understand that projections are not meant to be precise and accurate, but rather to tell the story of the business and its potential.

Q: What is the second lie of entrepreneurs?

The second lie is when entrepreneurs claim that their market is a certain size, usually a large figure like $56 billion. However, this shows a lack of good market segmentation and understanding. VCs prefer entrepreneurs to carve up the market and target a specific sub-segment rather than claiming to target a large market. This shows a lack of understanding of the narrow specifics of their market.

Q: What is the third lie of entrepreneurs?

The third lie is when entrepreneurs claim that they will sign a contract with a big-name company like Cisco, Microsoft, or Oracle in the near future. However, the venture capital funding process is a lengthy one, and anything promised to an investor about something that will happen in the next six months must be delivered on. Entrepreneurs should be cautious about making promises unless they are absolutely sure they can deliver, as it can damage their credibility.

Q: What is the fourth lie of entrepreneurs?

The fourth lie is when entrepreneurs claim that they will still have control of their company even if they sell only 40% of it. This is a concern for entrepreneurs, but it raises a red flag for investors. It is important for entrepreneurs to work with investors they trust and have a good relationship with, rather than focusing on the percentage of the cap table.

Q: What is the fifth lie of entrepreneurs?

The fifth lie is when entrepreneurs claim that there is no competition in their space. This shows a lack of understanding of what competition means in building a business. Even if there is no direct competitor, there are often alternative solutions or existing ways of doing things that are competing with the entrepreneur's value proposition. Entrepreneurs should acknowledge the status quo and explain how they will compete in the marketplace.

Q: What is the sixth lie of entrepreneurs?

The sixth lie is when entrepreneurs claim that they have assembled a world-class team. While enthusiasm for one's team is important, it is unrealistic for early-stage companies to have truly world-class teams. It is important for entrepreneurs to be realistic about the need to evolve teams over time and be open to the possibility that they may need to step aside as CEO in the future.

Q: What is the seventh lie of entrepreneurs?

The seventh lie is when entrepreneurs claim that their sales cycle is three to six months and that this is a conservative estimate. Entrepreneurs tend to underestimate the sales cycle, leading to missed projections and goals. In reality, it is difficult to get a contract signed by an organization in less than six months, especially when selling to businesses. Entrepreneurs should be cautious and realistically explain how their sales cycle will evolve.

Q: What is the eighth lie of entrepreneurs?

The eighth lie is when entrepreneurs claim that they have a first-mover advantage. Being the first-mover in a market can often be a disadvantage, as early technology is not fully developed or standardized yet. Being a fast-follower or having a better solution on a more advanced platform can be more advantageous. Entrepreneurs should consider whether they have the resources and staying power to be the first one in the market.

Q: What is the ninth lie of entrepreneurs?

The ninth lie is when entrepreneurs claim that all they need is to capture 2% of the market. This shows a misunderstanding of market dynamics and a failure to narrow down their target market. It is important for entrepreneurs to focus on a specific target prospect and realistically assess the size of their market and their competitive advantage.

Q: What is the tenth lie of entrepreneurs?

The tenth lie is when entrepreneurs claim that they are happy to hand over the reins to a new CEO. This raises concerns for investors about the entrepreneur's perspective and involvement in the company. Investors want to see a team effort and a constructive relationship between entrepreneurs and investors. Entrepreneurs should be open to evolving roles within the company but also show a commitment to working well with investors and the rest of the management team.

Takeaways

The key takeaways from this video are that both entrepreneurs and VCs tend to tell lies during the capital raising process. It is important for entrepreneurs to be realistic and avoid stretching the truth, as credibility is crucial for investors. Understanding the motives behind the lies told by both parties can help entrepreneurs navigate the venture capital process more effectively. It is also important for entrepreneurs to have a deeper understanding of the language and culture of venture capital in order to make informed decisions and build meaningful relationships with investors.

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