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May 25, 2004 - Entrepreneuritis
Entrepreneuritis
- the condition of being so focused, so “in the zone,” and so myopic
in your pursuit of entrepreneurial riches, that you leave all sense
and reason at the door and refuse to heed the advice of people who
know more than you.
This is a term
I’ve heard many times before. Who coined it? Let’s see…hmmmm…oh
yes. I did. And I coined to describe some of my early attempts
at entrepreneurship. With this in mind, let’s dial back the wayback
machine, and revisit the on-line book that spawned this period
column,
Venture Capital 101. It’s not plagiarism if you use your own
previously disseminated works and give yourself credit, is
it?
Venture Capital Maxims: Truth, Phrases
and Decorum
One sure sign
on Entrepreneuritis is found when early stage entrepreneurs run into
a buzz saw I call the maxims of venture capital. Believe it or not,
there is actually something worse than running into a buzz saw: its
not knowing you just ran into a buzz saw. Without further ado, here
are 2 sure fire techniques, observations, and truths, that will
help you avoid Entrepreneuritis.
The Truth about bad ideas
1.
No amount of spit and
polish can make a bad idea compelling. If the fundamental business
model and/or underlying assumptions are faulty, a professionally
prepared plan will not cure these fatal ailments.
2.
The “better mousetrap” theory is fatally flawed. If your target
market does not have a pestilence problem, the world will not beat a
path to your door to buy a “better mousetrap” they don’t need.
The Truth about venture capitalists
3.
VCs rarely say “no.” They don’t want to be the example a successful
entrepreneur uses one day when talking about “all those idiot VCs
who passed on my deal.” To their credit, VCs tend to be optimistic,
helpful, and encouraging. The downside of this is many
entrepreneurs keep chugging on, working on bad businesses, mainly
because they haven’t heard, “no, not a chance hell.”
4.
VCs are polite people. Most people learn good manners at an early
age. For example, it is not polite to hang up the phone while the
other person is still talking. No matter how irrational or
long-winded the caller, most people try to end a conversation
politely before hanging up the receiver. In other words, just
because VCs give you a few minutes when you call them does not mean
they’re interested in your deal! Do not confuse good manners for
interest.
5.
VCs utilize the “One Reason” rule. During the first step of a
review process, VCs rarely read business plans: they scan them. They
are not looking for reasons to invest; they are looking for reasons
not to invest. They are not looking for the singular hidden gem in
your plan. Only if the plan passes this initial screening, will VCs
dig deeper and seriously consider the investment.
6.
The entrepreneur’s “greatest idea in the world” is the VC’s
commodity. VCs see 50, 100, 1,000 “greatest” ideas a month.
Entrepreneurs need VCs more than VCs need entrepreneurs. The person
who controls the money controls the situation.
7.
While VCs know it is unlikely every investment is going to be a home
run, they perform their due diligence expecting every investment to
be a homerun.
Phrases (of death) - don’t say these
things
Here are some
of the sayings and phrases entrepreneurs should avoid at all costs:
8.
“You don’t get it!”
This is usually a sign of
entrepreneurial exasperation, leveled after the entrepreneur has
been rejected after the nth time. The VC probably understands more
about the situation than the person leveling the charge. In fact,
the exclamation is akin to yelling, “I’m telling mom!” Stop your
whining and fix your plan. Or find a new job.
9.
“Will you sign an NDA?”
This is a sure
sign the entrepreneur is a rank amateur. There is usually an
inverse relationship between the voracity of the NDA inquiry and the
quality of the deal. If your plan is based on an idea so tenuous
that merely hearing what you do (or plan to do) will cause grievous
harm to your plan, you don’t have a plan. You have a pipe dream.
An exception
to this rule is if you are far downstream with investor negotiations
(for example, you’ve already had numerous in depth, serious, and
meaningful discussions), you actually have something proprietary,
and it is time to “open the kimono” and expose the secret sauce (for
example, source code) to the fund’s technical expert. In this case,
it is probably appropriate to ask for non-disclosure protection.
10.
“These projections are conservative”
Your rank amateur is showing! This
usually means the projections are pie in the sky, and extremely
unobtainable.
11.
“We have no competitors”
All companies have competitors, either
direct, indirect or substitutes. Movie studios directly compete
against other studios, but they also indirectly compete with every
other kind of entertainment: theater, sporting events, restaurants,
nightclubs, and so. There are always alternatives/substitutes to
your product. The biggest competitor you may face is apathy. The
customer’s decision to NOT buy your product is a possibility.
12.
“All we need to do is grab 1% of a $100 billion market and we’ll
have a billion dollar company”
This statement is unique to exactly
you…and the other 6 billion people in the world! This is yet
another sign the entrepreneur is letting his rank amateur show.
13.
“I’ll quit my job upon funding.”
This means you
won’t be quitting your job because you’re not getting funding (from
a venture capitalist). You need to make the full and complete
commitment to your business long before you seek venture capital.
14.
“Seasoned management will be hired upon funding.”
Oh, yes! I can see the venture
capitalists lining up when they read this sentence…lining up to
laugh at the plan before it is condemned to the ash heap of clueless
business plans.
Basic decorum for entrepreneurs
Entrepreneurs
looking for capital make the same set of errors with alarming
regularity. Here is a list of the most common decorum mistakes:
15.
Give direct answers to direct questions. This is the number one
rules violation…with a bullet! The entrepreneur is so excited about
the chance to give his spiel to a decision maker that he often jumps
20 steps ahead, rushes through his answer, and generally fails to
answer the question. You can almost hear the gears spinning in the
entrepreneur’s head as he parses every question, looking for hidden
nuance and meaning in otherwise direct and clear-cut questions.
Here’s an example:
Q: “What are
your revenues?”
A: “Our
technology is portable to Unix servers and we hope to get a patent
next year after we use this venture capital round to pay back my
mother.”
16.
Be honest. While you would think this is a basic business tenant,
many entrepreneurs flat out lie about the their company and its
prospects. The truth will eventually come out, don’t shortchange
yourself and your dream, and make sure you are honest in your
presentation and answers. One of the biggest lies entrepreneurs
tell is that other investors are about to put money in the deal, and
“you better get in now while you can buy at a low price.”
17.
Be accurate. Entrepreneurs have a tendency to gin up their
companies, trying to portray their efforts and dreams in the best
light possible. The combining of effort and dream seems to be the
culprit here. Using the same question as posed above, here is how
honesty gets twisted:
Q: “What are
your revenues?”
A: “$2
million.”
Sounds like a direct answer to a
direct question, right? The problem, not readily apparent, is the
fact that this entrepreneur doesn’t have a $2 million company. He
has some trailing revenue, but his $2 million figure is what he
hopes the company will produce in the coming year. Make sure you
have a very clear delineation between historical results and your
projections.
18.
Understand the lingo. Educate yourself, do your homework, learn the
terms and the language.
19.
Know to whom you sent your plan. If an investor calls you back, it
is a bad thing to say, “Huh, who are you?” This makes it look like
you are sending your plan willy-nilly to everyone and anyone.
Investors usually take this as a sign that the deal has been
shopped, meaning a large number of other people have passed on it.
20.
Know if an investor actually invests in your type of deal. This is
a basic issue that many early stage entrepreneurs don’t seem to
understand. Venture capitalists’ investment criteria are usually
limited by their experience and/or the covenants of the fund’s
operating agreement. Let’s say a strong software company approaches
a reputable venture capital fund that invests only in
medical-related deals. The venture capitalist will likely realize
this software company is a good deal, but he will refrain from
investing because software is outside his area of expertise and/or
the fund prohibits investment in anything other than medical device
and drug discovery.
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Bill Snow runs this site. If you haven't figured that out yet, I can't
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