Doing the investment tango: The top 20 lies investors and entrepreneurs tell each other

At IMES, we work with a lot of Australian start-ups that are either in the midst of raising capital, have done it already or are thinking about it in the near future.

Many of these entrepreneurs won’t be able to raise the capital they need and will be forced to bootstrap it (often a good idea if they can manage it).

Some will get it via the three F’s: Friends, Families and Fools. And some will get it from Angels or Venture Capitalists.

Wherever the money comes from, the bottom line is they will have to pitch for investment. That’s where the dance really begins!

So how far should you stretch the truth with a pitch and will investors immediately find you out?

Lies entrepreneurs tell investors

Silicon Valley investor Guy Kawasaki, of Garage Ventures, is an expert in spotting the start-up bulldust.

On his blog, he posted the top 10 lies told by entrepreneurs to investors.

I have taken the liberty of adding some comments to Kawasaki’s top 10 to highlight the investor/investee dance of words and posturing that goes into every potential deal.

Here is a list of the top 10 lies entrepreneurs tell potential investors, and what entrepreneurs really mean:

1. “Our projections are conservative”

What this really means: But if I don’t show a hockey stick of growth you won’t listen and will tell me I can’t make money fast enough for your investment window (usually a VC fund is 10 years).

The challenge here is that most VCs only want home runs because at least 80% of the companies they invest in will fail and the earlier they fail the better from their perspective.

In order to mitigate for anticipated failures they want your company to make up for their bad investments. Therefore, if you can’t show tremendous upside in a large, well-defined market, you’re unlikely to gain their attention or a meeting in the first place.

2. “Jupiter says our market will be $50 billion in ten years”

What this really means: And if the market research we show you indicates only a $500 million target, you will tell me it is too small for a VC of your stature.

Another challenge here is VCs always say they want a disruptive technology/company but then struggle in the valuation phase because they don’t have a good comparison company to benchmark it with.

3. “Several Fortune 500 companies are set to do business with us”

What this really means: Yep! And if I don’t have name clients ready to go, you’ll tell me to go get them before you can consider funding us.

This is always a catch-22 issue. An entrepreneur usually gets to a development stage and then needs money to market and sell it to gain some traction (which requires more capital).

Unfortunately, this is also the same time the initial seed money tends to run out and the entrepreneur is in a bind.

One way to mitigate this problem is to get a named client to buy into your product or service early on in the development process to validate what you’re doing.

4. “No one else can do what we’re doing”

What this really means: As if I’d tell you there’s lots of competition and we’re not very different except for our positive attitude!

There are exceptions to this such as the plethora of group buying wannabees that have sprung up around Groupon’s success, such as Australian start-up Spreets.

The founder, Dean McEvoy, was in Silicon Valley with another start-up at the time Groupon was gaining traction. He saw what they were doing, knew the model was pretty straight forward and convinced some investors he could copy their model and succeeded.

5. “Hurry up because other investors are about to do our deal”

What this really means: We all know you’re going to drag your feet and take your time completing your due diligence and you know we need investment yesterday. So what would you like me to say? Take your time because you’re the only game in town?

Every entrepreneur should strive to have multiple potential investors interested and in the bidding when possible.

The reality is that start-up and investors’ needs don’t always line up at the same time. Most VCs have a 10-year fund investment window.

They want most of the initial investments to be made in the first three to five years, then they will reinvest in those that have gained traction (this varies but VCs generally keep around 20% of fund value for later investment rounds).

This is also why they would prefer their investments to fail earlier than later.

That way they can focus their resources on the winners earlier in the fund window and it’s also why entrepreneurs need to do just as much due diligence on the VC as they will do on the start-up.