Top 10 Lies VCs Tell Entrepreneurs & Lies Entrepreneurs Tell VC’s

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Top 10 Lies VCs Tell Entrepreneurs & Lies Entrepreneurs Tell VC’s

but it wasn’t which I’m delighted to do

but it wasn’t crystal clear from the

title on the program exactly what the

session was supposed to be about so if

there is any confusion you know why I’m

talking about lies the point of this

session is to talk about that process of

venture capital where the entrepreneur

and the VC get together to talk about

raising capital so there’s a lot of

discussion in entrepreneurship about

building companies and building teams

and strategy and all that stuff not a

lot of discussion about that that fairly

unique odd little experience that

entrepreneurs have which is talking to

VCS and raising capital and then dealing

with the VCS so in order to try to make

some what light and interesting of what

is otherwise a fairly serious and

painful topic we we created a garage a

series of of lies that VCS tell

entrepreneurs and entrepreneurs tell

lies as a way of elucidating the process

and trying to talk a little bit about

what works and what doesn’t work when

you’re raising capital with venture

capitalists to be to be more precise the

origin of this particular this

particular session was way back when we

were starting garage I was at a

conference one of those big VC

conferences where you get entrepreneurs

on stage and they get six minutes to

expose their lives to an audience filled

with feces who are passing judgment on

them so you pay thousands of dollars to

go to these things and I was at that

point I felt like an interloper I had

been an entrepreneur all of my

career I had been on the other side of

the table the guy who stood up there and

exposed his life and now I was in the

audience and I was sitting with the VCS

and I was standing in the back of the

room listening to the entrepreneurs

watching them feeling their pain and

there in the back of the room next we

were two VCS and one VC turns to the

other and he says how do you know when

an entrepreneur is lying and the other

VC kind of looks at him and goes I’m not

sure how and the first VC says his lips

are moving so the point is if you’re a

VC and you’re listening to pitch after

pitch after pitch after pitch you know

in spite of what everybody says about

the importance of entrepreneurial

passion and enthusiasm and optimism

the reality is investors really don’t

want to invest in people who are out of

touch with reality and so what happens

however is all of us who are

entrepreneurs and our enthusiasm we tend

to stretch the truth and by doing so we

lose credibility with investors and so

from an investor point of view to twist

another adage there are lies there are

damn lies and there are business plans

and so the point of this presentation is

to talk a little bit about typical areas

where entrepreneurs tend to go beyond

the bounds of appropriate passion

enthusiasm and tend to misrepresent the

reality of their business so with that

let’s go through the top 10 lies of

entrepreneurs when pitching to venture

capitalists lie number one is our

projections are conservative so

virtually now every entrepreneur has

been taught not to say this but the

reality is when you get down and dirty

into financial projections every

entrepreneur has to at some point they

come to that point in the sentence when

they say but but but there’s so many

things we can do I mean there’s so many

other markets there’s so many other

products these projections are really

real

me and they you know they’re trapped at

that point and they look at them you

know they stand up and they say

conservative realistic I really think we

can hit them but the reality is the

reality is everybody misses their

projections and so does on the one hand

and every VC knows you’re going to miss

your projections and the point of

projections is not to be precise and

accurate the point of projections is to

tell the story of your business and what

it could be so on the VC side we never

really really expect you to hit the

projections we certainly hope you’re

going to hit the projections and we

certainly want to understand the logic

behind the projections but the fact that

you’re an entrepreneur means by

definition they can’t be conservative

because entrepreneurs by definition

aren’t conservative so don’t say our

projections are conservative my number

two our market is 56 billion dollars and

again you know MBA after MBA

entrepreneur after entrepreneur pulls

out statistics from IDC and Frost and

Sullivan and all of you know Gartner

group with these reports that say hey

you know by the year 2010 conservatively

projecting this market is going to be 56

billion dollars but of course all that

shows the investor is that you haven’t

done good market segmentation because

certainly no entrepreneur no startup

company is targeting a fifty six billion

dollar market you know best case you’re

going to get some fraction of a fraction

of a percent and that’s not really what

business is about and so what you want

to do as an entrepreneur building your

business plan is you want to carve up

that market and figure out what in fact

is the sub segment of that market that

you’re targeting because from the point

of view of the investor saying your

market is 56 billion means that you

don’t really understand the narrow

specifics of your market and the

opportunity that you’re targeting line

number three our contract with Cisco

Microsoft Oracle whatever our contract

is going to be signed next week so one

of the dirty one of the dirty little

secrets about the venture capital

funding process is that when you walk in

and you pitch an investor

you’re not going to get a check that day

it’s going to be an extended process in

fact it’s going to be months not just

weeks between the time that you meet

with the investor and the time that

they’re actually going to close the deal

so anything you say to an investor about

something that’s going to happen within

the next six months had better happen it

damn sure better happen but in all of

your enthusiasm because you know you’ve

got a contract in legal at Cisco you

know you want to share this wondrous

story of how you’re about to close Cisco

right but inevitably inevitably it’s

going to get quote hung up and legal or

somebody’s going to go on vacation or

something like that and you have just

said to the VC last week our contracts

going to close you know next week two

weeks later they finally get around to

following up and they say oh yeah that

contract that closed last week how’s it

going well you know and so all of a

sudden you’ve blown your credibility

again because in the space of one week

you’ve already failed to live up to your

projections if you can’t if you can’t

hit a one-week deadline how the hell you

going to hit a five-year deadline right

so if you’ve got a lot of great stuff

going on while you’re talking with the

investors play it low-key only talk

about the stuff that you’ve actually

accomplished you know thrill the

investors with what you have in fact

accomplished a date and then in the

weeks that follow surprise them delight

them with the news that you’ve closed a

new contract you’ve got another customer

you’ve got a beta you’ve got you know

you’ve hired some you know wondrous

Talent don’t promise things unless your

apps are absolutely sure that you’re

going to deliver it line number four if

we only sell 40% of the company we’ll

still have control now one of the big

concerns entrepreneurs have is the

structure of the cap table they’re

anxious about you know kind of at what

point can those investors wake up on the

wrong side of bed and decide to throw

my ass out of here and you know that’s

it’s a reasonable concern but the

assumption that happens sort of outside

the VC room the VCS aren’t in the room

and then the– you know the

entrepreneurs are sitting there looking

at term sheets or thinking about

valuation issues and they’re thinking to

themselves was long as we don’t sell 51%

of the company you know we’ll still

control this company two big problems

with that one it’s wrong you know as

soon as you sell a single share of stock

to somebody else you have a fiduciary

responsibility to other people you know

so that’s just sort of basic law but the

second issue the second issue is that

this raises a huge red flag for

investors if you’re concerned about

control if you’re concerned if you have

a point of view starting at the

beginning that you have an adversarial

relation to the Senate ownership it

doesn’t set up a lovely relationship

with your investors so you want you

first of all if you are anxious about

control then you got to make sure you

work with investors that you like to

work with people who have a reputation

for integrity honesty being straight

with you who you know aren’t going to

screw you but you got to pay attention

to the fact that it’s not about the

percentage of the cap table it’s about

your relationship with your investors

and your performance as an entrepreneur

line number five there’s no competition

in our space we hear you know all sorts

of variations on this particular theme

one is you know there’s there’s no

direct come there’s no direct competitor

throw there’s the other famous one is no

one else can do what we can do so that’s

a form of non competition I suppose the

question of course is do you understand

what competition means when you’re

building a business there’s no

competition in our space implies that

nobody’s doing what your solution

promises to do because if nobody is

because if somebody is doing it then

there’s an alternative to your solution

and if there’s an alternative to your

solution then of course there’s

competition it’s that

usually and frequently for early-stage

companies that alternative is the status

quo it’s either you know doing it

yourself or using an old technology to

do it but if somebody is if if you have

a value proposition whether it’s to

speed up the infrastructure of an

enterprise network or if it’s to offer

messaging over mobile phones to

consumers there are other there are

other solutions out there that may not

use your technology but they’re an

alternative solution to achieve the same

value proposition so when people say

there’s no competition we have one of

two reactions either maybe indeed nobody

in the face of the planet has ever done

this before in which case it’s probably

not that interesting you know it’s

probably a classic example of a

technology in search of a solution and

that’s not to interest interesting or or

the entrepreneur gets up there and says

there’s no competition when in fact you

know a couple of minutes on Google would

reveal the result sorts of competition

and then we realize the entrepreneurs

bozo and that’s not conducive to raising

capital either so make sure no matter

what when you’re talking about the

competitive environment at least you

acknowledge the status quo at least you

acknowledge you know the homebrew

solution or whatever the alternatives

are as a way of explaining how you’re

going to compete in the marketplace and

what your competitive advantage is line

number six we’ve assembled a world-class

team now every once in a while this is

true but you know even for great

experienced serial entrepreneurs at the

early stage it’s pretty much impossible

to have assembled a world-class team but

again everybody every on Twitter are

wants to be wants to be thrilled with

their partners and wants to show the

love that they’ve got for the team that

they’ve assembled and so you’re sitting

in the conference room with you know

their roommate the engineer and their

wife’s brother who is the sales guy and

you know you’re standing up there and

saying you know we’ve got a world-class

team and they may be great people and

they may be perfect for the stage of the

company but they’re probably not

world-class team and they’re probably

people who are not going to be the

senior executives two or three or four

years from now assuming you’re

successful and so I’m not suggesting

that you shouldn’t be delighted with the

team you have but I’m suggesting it’s

important to be realistic about the need

to evolve teams over time and that may

include you yourself independently as an

entrepreneur you may be absolutely the

right person to start this company up

but over time you may take a different

role an appropriate role in the in the

company as it grows excuse me why number

seven our sales cycle is three to six

months and that’s conservative by the

way so you know this is yeah this is

probably the single biggest problem in

hitting financial projections hitting

goals and objectives for companies

everybody everybody gets this wrong and

I don’t I don’t know why that is you

know every you know you hear the you

hear the examples of course every once

in a while they’re famous they’re on the

covers of magazines because they

actually meet their plans right there

very few companies that actually hit

their sales plans and that’s because

entrepreneurs you know people generally

miss estimate the sales cycle and one of

the reasons this happens and you know

having been this been through this

myself is you’re sitting there you’re

trying to plan out the operating plan

for the year and you’re looking at your

pipeline and you know the customers

you’ve got going and you’re looking your

products and all that and you’re saying

to yourself okay you know let’s look at

the last 10 deals we closed well you

know we look at the last 10 deals we

closed and they closed on average in

4550 days you know and so you know we’ve

got data we’ve got data that shows that

on average you know we close our deals

in 4550 days so let’s be you know let’s

hedge that a little we’ll say three to

six months right but statistically and

in the real world what really has

happened is you’ve got ten deals you’ve

closed and you’ve got another forty

deals that you haven’t closed right it’s

the rest of the pipeline hopefully god

bless you you have 40 more deals on your

pipeline

but all of those 40 deals haven’t been

averaged in two that 45 50 day

calculation so you’re off by that factor

right you know however long it’s going

to take to close all those guys actually

has to be averaged in and so again it

varies from business to business but

unfortunately the way the calendar works

the way humans work it’s really really

hard for anybody to get a contract to

get a contract signed by an organization

in less than a six month period and

usually you know when just looking out

there at different businesses and enter

particularly if you’re selling to

companies the time from the very first

meeting if you’re talking if you’re time

from a very first meeting through all

the evaluation through god bless it you

got a pilot you know god bless it you

got the CIOs got to sign off before

you’re going to plug this thing into

anything you know and God bless legal

gets through it in less than 30 days

right it adds up nine 12 months minimum

to get these sorts of things done but

it’s it’s really hard when you’re

putting together the operating plan of

the business plan forecast to admit that

you know it’s going to take twelve

months on average to close each of these

deals so be very cautious about this and

be able to explain how it is that your

sales cycle is going to evolve in your

particular business ideally somebody on

your team has had a lot of experience

selling into your market and has a lot

of real-world experience and what all of

the elements of sales are but frequently

and this is one of the I think one of

the biggest issues facing a lot of

companies you know even facing the MBA

curriculum I think is that the

discipline of sales and sales processes

are not well taught well understood and

well managed in most startup companies

line number eight we have the first

mover advantage so this was actually

this was particularly exciting during

the bubble its I noticed you know it

kind of disappeared when the bubble

burst does this phrase but I noticed

it’s coming back it’s coming back

particularly in web get all these web

2.0

things because with web 2.0 you know

it’s really easy to get something up and

running and you know so the game is who

gets the critical mass and the buzz and

you know the mentos video first right

and so it feels as though and I’ve even

you know read books by credible authors

about you know the importance of first

mover advantage and you know in some

cases it’s taught in the curriculum

about you know the importance of being

first and that is the basis of market

share and market share is the basis of

the experience curve and the experience

curve is the basis of competitive

advantage and so first mover advantage

is you know historically it’s an

important thing but the reality in

startup companies technology based

startup companies is there’s a whole

bunch of stuff that can go wrong if

you’re the first mover first of all

generally the first guys to have the

clever idea that you know once the

technology is good enough to enable you

to do something interesting like you

know integrated messaging systems using

your cell phone or something the problem

though is you’ve got the first

generation of technology protocols that

are going to be you know they’re they’re

not quite stitched together all that

well and they’re still pretty expensive

and you got a lot of heterogeneity in

the system not a lot of standardization

and so frequently the first movers are

the guys that spend the most money

trying to get to market and at the end

of the day they wind up having a you

know mediocre solution and so they spend

a lot of money take a number of years

for you know enabling the market to

figure out how do we really want to do

this thing that these guys have invented

and then a whole bunch of other guys

come along swoop in take over the market

and so you see that time and time again

in the VC marketplace so when an

entrepreneur gets up and says you know

we’re going to be the first movers

that’s a red flag to us because we’re

we’re thinking to ourselves well first

of all are they really the first movers

in probably they aren’t because probably

we’ve already seen four five six other

teams that may or may not be in stealth

who are doing exactly

same thing but secondly the question is

can they really get to market and stay

ahead of the curve or are you going to

wind up building a building a solution

on a platform of code that’s going to be

obsolete in 18 months and the guys that

come along in 18 months using the

next-generation protocols the

next-generation standards they’re going

to be able to get to market with a

solution that’s even better than yours

in five weeks from the time of

introduction and you’re going to be

scrambling because you’re gonna have to

rewrite your entire code base from

scratch so it isn’t necessarily the most

compelling business idea to be the first

guy to create a solution once a solution

becomes technically possible so that’s

that’s I got to tell you having been on

the entrepreneur side of this that’s

that’s a tough one because once you have

the idea you know you’re standing there

in the shower thinking to yourself this

is a great idea right and nobody else

has done this yet wouldn’t it be cool to

be the first guys to go do this and that

that probably can make sense

you just got to think through do you

have the resources and the staying power

to be the first guy out there and then

to also be the fast follower to be too

quickly cannibalize what you’ve learned

and get a new solution out there before

everybody else leapfrogs ahead of you

line number nine all we have to do is

get 2% of the market right so this is

the coral area of our market is 56

billion right so you get you you know

you segment your market carefully you

identify all the possibilities you know

after all there are now two billion cell

phones on the planet

right you know selling it close to a

billion a year so boy you know two

billion cell phones and all of them can

receive a text message right so let’s

see I you know it’s certainly possible

for me to get to a couple hundred

million cell phones that’d be pretty

easy to do wouldn’t it I mean it’s not

that many so it’s really easy to talk

yourself into this sort of rule of large

numbers that says there’s so much stuff

out there and there’s so many people

doing things in this space

you know myspace is the other favorite

you know if I could just get a few

people to start a viral kind of adoption

of this widget on MySpace you know it’s

a piece of cake for me to have 10

million people in you know implant my

widget on their MySpace page I mean of

course that’s easy to do right so the

point is you get you get wrapped up in

how many people and how many how many

dollars and how many potential customers

there are for a given solution and there

you are looking at your Excel

spreadsheet and you’re thinking yourself

I can’t go to these VCS and tell them

we’re going to be two billion dollars in

you know year three right because it’s

you know it’s unrealistic to be two

billion dollars in year three but at two

billion dollars that’s only 10 percent

of the market right so you know so we’ll

be conservative and we’ll cut it back

well the problem there is not that

you’ve been optimistic about your market

share the problem is that you’ve missed

defined the market that you’re going

after you know there’s a very narrow for

most applications there is in fact a

very narrow customer base that you

really can go after who are likely to

adopt it within any sort of realistic

time frame so it’s about narrowing your

target market of which you will then

have a significant percentage rather

than taking a big market and saying you

know we’re going to start year one we

think we should be able to get 1/10 of

1% of the market and that’s you know a

five million dollar company right so we

see this all the time you don’t want to

take an arbitrarily large market and

then do a bottoms-up assumption on how

you’re going to generate revenue what

you want to do is you want to isolate

the target prospects for your business

think about you know specifically who

are the customers who might buy your

product in the first 24 months and if

you’re selling into business you should

be able to name them and figure out or

if you’re selling into a consumer market

you should be able to identify the

channel by channels who you’re going to

get to you know can you realistically

get into Best Buy in the first 12 months

of being a business or whatever I don’t

know pick your market take it apart

deconstruct it and then figure out

bottoms up sales call by sales call

marketing campaign by marketing campaign

realistically how are you going to build

up these numbers against what market are

you targeting so if you say all you need

is 2% of the market as an investor we

say well you know either you don’t

understand your market or we want to go

after the company that’s going after the

other 98% and then line number 10 my

number 10 is I’ll be happy to hand over

the reins to a new CEO this goes back

you know to your world-class team and it

goes back to you as an individual

entrepreneur as well that you know again

most entrepreneurs now have been coached

well enough to know that at some point

in time maybe they’re not the right CEO

for this company the issue that

investors have is when the entrepreneur

says this are they in fact sincere or is

in fact what the entrepreneur saying in

subtext I will hand over the reins to a

new CEO if that new CEO is the right CEO

for my company right and that’s just a

big red flag you know if you think it’s

your company then we’re likely to have a

problem that is a concern for investors

because it is not your company it is our

company it includes the rest of the

management team it includes the rest of

the investors it includes all the

employees it has to be a team effort if

you have an ego centric perspective that

this is your baby and your baby alone

and it’s your job as steward of this

baby to make sure that you were the one

who decides who the right CEO is for the

company you’re likely to butt heads not

just with your investors but with the

other people on your management team so

this is a way that investors can set out

what is the real ego involvement of the

entrepreneur in this in in this

particular company so those are the top

10 lives of entrepreneurs

I guess question is whether it’s worth

taking some questions now or should I

dive into the to the other side of the

coin and take questions at the end so

anybody sitting here with an absolutely

earning pressing got to have an answer

to now kind of question or shall I go on

to the top 10 lies of VCs okay in that

case I will go on to the top 10 lies of

venture capitalists but first if I may

by the way while I’m am well I’m

catching my breath my dear friend here

Larry kubal you were also Stanford right

okay was suggesting to me that I have

not completed the four square matrix

here so we have entrepreneurs lying to

VCS and we have VCS lying to

entrepreneurs but as Larry points out

being a VC at a firm called Labrador

there’s another dimension to this which

is VCS line to these seeds which is you

know extremely common you know you know

if I yeah someday somebody’s going to

write the expose you know they’re going

to get into somebody’s email box and all

the you know all the pitches VC sent to

VCS about their you know oh wow I found

a great investment and you know we we

just put the seed money into this

company and it’s going to be a rocket

and I’m gonna because you’re my dearest

friend on earth I want to let you in on

this deal great so so Larry what you

think of that presentation so in any

case top 10 lies of venture capitalists

and again so here we are in this in this

surreal world you know you as an

entrepreneur trying to build a company

and you know you’re really focused on

the important stuff right you know

getting products that work and

understanding the market and we’re

lining up customers and building a team

and then you’ve got these other people

you got to deal with these guys called

venture capitalists and they’re kind of

a different breed they’re not like your

customers I mean your customers you know

how to talk to customers but these VCS

they don’t react the same way as

customers and it’s hard to understand

what’s really going on in there

and so the point of this presentation is

to provide a guide to the language and

culture of venture capital it’s sort of

a sort of a different world you’re going

into and it’s valuable to understand

what it is VCS are saying when they say

things like I like the way you think so

what do you really mean Larry when you

say I like the way you think huh okay

okay hey I’m not the SEC sure I

understand what you’re saying but you

know unless I’m nice to you I won’t hear

anything more right right right

so okay so with that let me share with

you our particular perspective on the

top 10 lies of VCS and by the way I

should assure you you know this was it

was really hard work distilling down

from the hundreds and hundreds of

possible lies but what happened in fact

was so you know I had developed this top

10 lies of entrepreneurs thing based

upon that conference I went to and we

gave it you know in a few cases and it

actually wound up getting published in

the Harvard Business Review and then

someone said well wait a second

you know how come you’re not you know

giving equal time to the VCS and so guy

came up with a with the you know this

this idea we got to have top 10 lives of

VCS and we sat down and you know we went

through all these things that we said to

entrepreneurs and that we’ve heard other

people say to entrepreneurs over the

years as entrepreneurs and sitting on

that side of the table and so with that

try to do our best to distill it down to

the top 10 so line number one we like to

move quickly you know and you know so

again you know you go in you pitch to

the VCS and they’ll tell you how their

streamlines I make quick decisions and

you know the partners let’s see it’s

Friday the partners meet Monday boy you

know you should have a check by Tuesday

as the impression you know they almost

give and the reality is you know one

you know these these are people too and

they they over promise and under deliver

as a rule and but the the dirty little

secret underlying this particular point

is the the process really does take a

long time it does take months generally

from sort of the initial contact to

closing the deal and part of that is

because it’s extremely valuable to the

investors to watch how you and your team

perform over the period of negotiation

with the VCS so it’s you know we have

this inside garage I’ll be disclosing

here and I probably shouldn’t be but I

will and anything so we we refer to

deals as either microwave or slow bake

and sometimes you get a deal and you say

okay maybe this is a microwave kind of

deal now 60 seconds boom we want to cook

it and we want to make it happen and

generally from a VC point of view it’s a

microwave deal if you’re afraid that

that you know if you don’t move quickly

something bad will happen and usually

there’s something bad that will happen

if somebody else will take the deal

right you know or this you know

sometimes we’re more altruistic than

that and we say if we don’t move quickly

then we won’t get the market opportunity

we won’t be able to take advantage of

the market opportunity quickly enough

but that’s extremely rare almost every

deal in the venture capital community

can be a slow bake and the reason slow

bake is good for the investor is again

they get to see how things evolve over

the weeks and months that pass so when

you go in you pitch a VC and they say we

like to move quickly be very very

realistic about this and understand that

you know it’s going to be it’s going to

be multi multi weeks if not multiple

months in the process and that there

everything you do in that process is

being evaluated it’s not just about

what’s written on paper or what was on

your slide presentation

it’s about your performance about it’s

about when and how you return calls it’s

about the quality of your emails it’s

about you know whether you actually

deliver on what you

said you would do the prior week all of

these signals as to the quality of you

and your team as an entrepreneurial team

really really matter and that’s part of

the data that’s being gathered yeah they

talk about the formal due diligence

process and you know they have lawyers

that look at contracts and they look at

your patent your patent applications but

that stuff is really less important than

how you’re behaving over that period of

weeks BC line number two we’re

value-added investors you know we can

really help you build your company what

they’re really saying is because we’re

such great guys and such a great team we

have such a great network you of course

should take a lower price in the

valuation of your company you don’t want

dumb money right

you don’t want dumb money you want to

value at an investor you know surely

anybody who bids higher for your equity

then we bid you know must be dumb money

right kind of by definition

so we’re value-added investors is all

about saying you know we are going to

help you with more than just money now I

don’t mean to suggest I don’t mean to

suggest that VCS aren’t value at

investors you know Labrador ventures for

example is an extraordinarily capable

venture fund in terms of helping

companies build their companies right

helping operators build their companies

but when you’re in a meeting before

they’ve invested and they say this part

of what they’re setting you up for is

when and if we give you a term sheet and

you notice that our pre-money valuation

is lower than some other firms pre-money

valuation the reason for that is that

we’re going to make you richer because

we’re value-added investors so that’s

the subtext of that particular statement

corollary to that is we have a great

network part of being a value-added

investor and when you probe down into

that what you find out is that network

network network includes things like my

son plays baseball with Scott McNealy

son lie number four I really like your

company I just couldn’t convince my

partners

basically what they’re saying is I don’t

want to have to admit to you that I just

wasted a bunch of your time going

through this process it is in all

fairness to venture capitalists it is

you know it’s a very challenging process

that you see you know a great team with

a great idea with a lot of energy and a

lot of potential but the challenge for

entrepreneurs is not is not proving it’s

not proving that you have a good idea

that could generate a lot of money the

reality is your that’s that’s not the

proof point that’s not where you’re

trying to convince the investors what

you’re trying to convince the investors

is that you’re the best next investment

for their fund that’s a very different

sales proposition than proving that

you’re a good idea and the problem for

you

unlike selling to a customer if you’re

selling to a customer you know exactly

what the alternatives are right you know

don’t buy the Cisco router by our right

router because our writers spec spec

spec spec spec benefit benefit benefit

benefit you know you can sell against

the known competition when you’re

selling to customers when you’re selling

to VCS you don’t know what the

competition is right you don’t know what

are the term sheets they have out or who

else they’re talking to and so there you

are thinking that you’ve got a great

brilliant idea and you’ve actually got a

partner who probably is genuinely

enthusiastic about your company but it

may be that you’re number four on their

list you know being number four on the

list is not at all bad it’s just not

good enough to get a term sheet and so

on some Monday morning meeting with

partners they sit down and they say yeah

you know that team that came in really

really interesting let’s keep looking at

them but no we’re not going to we’re not

going to deliver a term sheet and this

guy comes back in says you know how I

said I thought I could have a term sheet

by September let’s see it’s January

oh yeah my I really want but my

partner’s it was my partner’s who

wouldn’t let me do it so that’s what the

dynamic that’s really going on behind

the scenes line number five

we like to syndicate huh what that means

is if Sequoia gets excited about this

you know we’ll be happy to come in so

again this is a little unfair to these

C’s because VC is in fact do like to a

need to syndicate but there’s a

difference between a VC that is happy to

take the lead and drive the process

versus a VC that says to you if you find

a lead let us know right so if if if the

VC says to you if you find a lead

investor let us know what that VC is

telling you and very clear distinct

languages no we’re not investing right

so the on the other hand if a VC says

you know we like to syndicate and you

say great who are your best friends and

they say I’m going to call up you know

Larry and Howe and Tim you know this

afternoon and we’ll get together and

we’re going to put this together that’s

very different if they’re actually going

to do the work to build the syndicate

that’s a great thing it’s a great thing

if you get a lead investor who’s going

to sell your deal to other VCS if you’ve

got an investor who says they’re

enthusiastic but he’s not willing to

sell your deal to other VCS then they’re

not a qualified investor for your

company well I number six we need to see

a little more traction this is a famous

one again what the investor is really

saying is we’re not going to invest but

you know as Larry pointed out I don’t

want to close I don’t want to close off

my options because I really like the way

you think I don’t want to close off my

options this may be an interesting deal

let’s stay in touch

which is a way of saying report back to

us on a weekly basis what sort of

progress you’re getting so the the

challenge for the VCS again as I as I

learned to appreciate after cutting over

to the other side the dark side as they

say is that every good deal

every good deal in the history of edge

venture capital was once a bad deal

right Yahoo was a really stupid idea for

the first 24 investors

that looked at it you know nobody would

invent nobody would invest at YouTube

when the guys first launched YouTube

right nobody would invest in you know

pick a company right every successful

company was a bad idea to a large number

investors and then something clicked

usually rarely was it that you know they

you know magically the right investor

came along and the clouds parted you

know and the heavenly chorus explained

the brilliance of the business idea to

that particular investor that’s rarely

kind of the way the dynamic really works

usually what happens is the team gets

rejected and they tweak the model and

they work a little harder and they seek

out advice and then they get rejected

again and then they tweak the model and

they seek out advice in the build team

and then they get rejected again and

then finally after twelve or fourteen

tweaks they click on something you know

something happens and they get a beta

test at some company or some advisor

comes in and opens up the door to some

big company something happens that

changes the optics of the deal and then

all of a sudden the investors have a

different perspective on this deal so

the challenge for entrepreneurs a

challenge for entrepreneurs is having

the staying power to do 12 to 14

iterations before you get it right and

then what every investor knows is after

the money goes in you’re going to have

to go through at least two or three

iterations one more you know again

before you get it right but as an

investor you want to see the first

twelve or fourteen done in somebody

else’s nickel you don’t want the first

twelve to fourteen done on your nickel

so that’s why investors say we need we

need to see a little more traction and

why it’s perfectly legitimate for you to

both hear it as a no but if in fact you

can tweak it and change your model go

back and find out if they’re going to

say something more substantive line

number seven we invest in teams what

they’re really saying is you know

assuming the technology works and

assuming this is a huge market we invest

in teams right and what the investors

want you to know is you know you hear

this all the time on these panels

is that the success of a company is a

function of the team does the team have

the flexibility and the knowledge and

the domain experience and the talent and

the you know the right ego and the right

confidence to evolve a business into a

successful business

teams are in fact critical but part of

what the investors are saying to you

when they say we reinvest in teams is

they’re trying to give you comfort that

we think you’re the right team and again

they may in fact think you’re the right

team for exactly this moment in the

company except for the fact that as soon

as the money goes in we got to go hire a

new CEO because you know your roommate

just doesn’t quite cut it he may be a

good coder but he’s not a CEO and then

we got to go higher you know a guy who’s

really a VP of engineering who really

has experience developing products you

know on time on budget but for right now

today this week the team you know is the

right team so from an investor point of

view we’re not expecting the team to be

the complete team when we write the

check but we are expecting that the team

works effectively together that you’re

perfectly capable of living on rice

cakes and mountain dew for an indefinite

period of time and most importantly that

you’re capable of attracting

high-quality successors to each of you

in your positions it’s that issue of is

there a dynamic here the you know this

combination of excitement and

opportunity and capability and

competence that make will make other

people want to jump on this team that

will make very talented people give up

their options in another company and

give up a higher salary to come take

advantage of this opportunity that’s

what we’re looking at when we talk about

investing in teams line number eight and

the board meeting so from now on I guess

the next three lies are sort of post

investment lies okay so imagine you

actually got through the hurdle and now

now we’re at the board meeting at the

board meeting one of the one of your

investors says you know when we were

doing this at Cisco I watch out but that

really means is all I’ve got is a hammer

and you’re looking like a nail to me you

know the adage about if all you’ve got

is a Hammer Every Problem looks like a

nail and there is a challenge there is a

challenge in the VC community that a lot

of us come from very specific

backgrounds you know I come from a

software background and so a lot of my

experience and a lot of my scars have to

do with getting software out into a

market through channels to customers big

sales small sales channel sales all that

stuff and you know on time on digit

budget hitting plan so I’ve got all of

this historical experience in my brain

that that filters every problem I see

when I’m sitting on a board and so the

challenge you’ve got as an entrepreneur

is you’ve got this entrepreneur who made

several of this venture capitalists who

made millions of dollars because he was

employee number 785 at Cisco so plate

number 785 and Cisco made millions of

dollars that’s pretty cool right and

this guy thinks he was there you know

and he’ll what he’ll say is you know I

was there at the beginning right I

wasn’t play number 785 right and so they

tend to assume that gives them wisdom

about start-up experience right so I

really don’t mean to pick on X Cisco

people I apologize if there’s anybody

there who made millions of dollars in

Cisco but in any case there is this

tendency for VCS to have a certain

perspective it’s one of the most

important reasons to have more than one

investor in your company and what

sometimes happens that is a challenge

for entrepreneurs you know sometimes

they get a sole investor whether it’s a

VC or an angel a sole investor as the

investor in their company and you know

if you can do something to counter that

I strongly urge it because there is a

tendency if you have a sole investor for

that person to say this is my money and

I know how to do things the right way

and let me tell you how to do them so

you got to watch out for this particular

VC line number nine is you’re at the

board meeting things aren’t quite quite

going right

but the you haven’t spent a lot of time

talking with your investors on this and

at the board meeting the investor says

you should lean on us for help

and the challenge you’ve got there is

what the NVC is really saying is I don’t

know what’s going wrong here I don’t

understand what’s going wrong

otherwise I would have told you what you

should have done right but if they say

you should lean on your board it means I

don’t have the answer but we need to

spend more time trying to figure out

what’s going wrong on how to get to the

right answer

line number 10 is m and line number 10

is good work and what that means is I’m

probably not going to fire you this week

so again

yeah the challenge fraud Twitter’s and

investors is if you make the quarter

that’s great but you know if you miss

the next quarter I don’t care if you

made the last quarter what I care about

is that you missed the next quarter and

that’s the the challenge that investors

have so understand again the culture of

the VC who is reporting back to his

partners each quarter on the performance

of the companies that he’s watching over

and you know you go back into your

partners meetings and you talk about

well there’s this challenge and there’s

that challenge and no matter what the

facts and circumstances one of your

partners is going to say well is that

guy the right CEO you know should we be

thinking about a change right and so

that’s the the the problem for the VCS

is that VCS are all taught that

fundamentally their sole responsibility

for managing an investment is the

decision of the CEO and when to fire the

CEO so it’s all about you know should we

make a change in the CEO position and

it’s a perfect it’s a perfectly

legitimate model for board governance

and board dynamics but the challenge for

an entrepreneur is once you take

investors on once you take on a board

it’s that board’s responsibility to

evaluate you continuously and so if you

you know if you do perform well that’s

great

keep up the good work

if things are going wrong you have to be

aware of the fact that the board is

going to be thinking at some point maybe

it’s time for a change and so what a lot

of entrepreneurs do is they then hunker

down and that’s not necessarily the best

solution the entrepreneurs that survive

the process of the entrepreneurs that

open up and they reach out and if

something is going wrong

instead of ducking it and saying let’s

have fewer board meetings this year you

know why don’t we just have a board

meeting every six months that’s a

natural entrepreneur instinct right

instead of doing that you go out to

lunch with each one of your investors

and you lay out what’s happening and you

talk about what you’ve done and what

you’ve accomplished and you talk about

what you identify as the challenges and

you say what you wanted what you want to

make sure all of your investors know and

all of your board members know is that

you do understand what the challenges

are and you do have a plan on how to

address them and you’ve got the team

lined up and you are taking action as

soon as a board sees or investor see

that you’re trying to duck

responsibility you’re trying to duck a

communications role then they get scared

or and scared or and you create this

this vicious cycle of antagonism between

the entrepreneur and the board as

opposed to collaboration between the

entrepreneur and the board so I use this

as tongue-in-cheek around a very serious

issue about communication with boards

and again every every entrepreneur is

taught when they start a board that the

most important thing to do with the

board is not surprise the board right

you’ve never surprised the board if

someone walks into a board meeting and

hears bad news for the first time that’s

a bad thing because what they want they

want to know the bad news before the

board and they want to know that there’s

going to be discussion of how to address

the bad news not a communication that

there is bad news so as an entrepreneur

as a manager your job is to make sure

that all the communication gets to the

board early as soon as possible you

never want to hit a board member to hear

bad news from someone else and that as

quickly as you can you have reached out

to try to find alternate solutions

suggestions and that you as the senior

manager in the company have these

proposals or plans in place as to how

address it even if the plan is simply a

plan to figure out how to address the

problem

it’s better than avoiding the problem

altogether or just sitting there saying

you know we missed the quarter I guess

we’ll just have to try harder next

quarter right you better explain why you

missed the quarter you better explain

how you’re going to try harder what

you’re going to change about your

business otherwise you’re going to lose

the confidence of your investors so with

all in all seriousness and all humor

those are the top 10 lies of venture

capitalists again I don’t know I guess I

don’t know if they I did send some

slides I don’t know if they’re available

on some website or not but if you want

the slides just send me an email at

Reichert across a calm you can find them

there if you have comments questions

follow-up thoughts whatever you can also

get me at my email address we also on

our website have some other stuff for

entrepreneurs we have a guide on how to

write a compelling executive summary we

have a guide on perfecting your pitch we

have a few other things some of guy

Kawasaki’s speeches and then guy my

partner has also written a book called

the art of the start which is a

compilation of everything we’ve learned

in the eight years of of garage and he

maintains a blog which he has recently

renamed how to change the world you’ll

be stunned too you’ll be stunned to know

well you know you heard it here first it

that will be the title of his next book

probably so he figures if he just writes

a blog a day for you know some period of

time eventually he’ll have enough words

for a book and so that makes it a lot

easier than sitting down and actually

writing a book but so I with that having

been said any any questions any comments

yes sir

I understand how you have a half a lie

okay what question was about to in the

business plan when you’re doing the

projections I’ve done a number of

pitches and I’ve been given advice

before to kind of pump up the

projections by about twenty percent

because the piece is going to cut them

back anyways and I actually tried wants

to do I call it a realistic plan with

the longer sales cycles and so forth and

the plant those plans just kind of hit

the ground with bud having good there

seems to be this dynamic I just wouldn’t

give any advice about how to break

through that word so he’s expecting a

pump does you know I haven’t cut it down

right well so again I mean every every

situation varies but and there’s a you

know even within my partnership we have

controversies around this topic but my

my experience is that that Excel the

spreadsheet should putting in you know

what you think is realistic even with

six month nine-month 12-month seal

cycles you should discover you know

miraculously that’s still a huge

business right if it isn’t a huge

business even with quote unquote

realistic assumptions then you got to

drill in understand you maybe in fact it

is going to take more work and maybe in

fact you got to figure out you know is

your pricing wrong is your market

penetration value I mean is it going to

take more capital to get to a bigger

business than I would like so it’s not

usually the problem that even when you

tailor back the numbers that the numbers

look totally uninteresting right now the

to get to the rules of thumb right

everybody wants to know you know is it

true that I have to have a hundred

million dollars on my revenue line

somewhere in my financial projections

and I would say that the answer to that

is unfortunately yes that is generally

true is it likely that you will in fact

hit the hundred million dollars you know

within five so generally that’s the

fifth year projection and the reason

that entrepreneurs do five years of

projections is that it’s just not

realistic to get to a hundred million in

anything less than Phi

of yours so the other reason by the way

to do five years of projections is and

this is where guy and I differ guys

attitude is we know they’re lying so why

do we even bother asking for five years

you know and my point is well of course

they’re not right but you’ve got to give

the company you got to give the

entrepreneur enough space to flesh out

the company to actually explain how the

company is going to evolve because the

first 24 months are one product one

market that’s just the reality of a

business you can’t can’t get to more

than one product one market in the first

24 months so you’ll want to understand

what the team is thinking in terms of

the next market in the next product and

that means you got to go three four or

five years but the other good reason to

go to five years is it gives you the

chance to get to a hundred million and I

hate saying it cavalierly that you know

you’ve got to figure out a way to get to

one hundred million not another case in

this business but there are some

circumstances though we’re getting to 40

50 60 million is perfectly fine if you

can get there and you’re still growing

fast and you’re obscenely profitable at

truly profitable as opposed to Excel

profitable right then you can get a half

billion dollar valuation on a company

like that so so from a VCS point of view

hey you know if I can get comfort that

there’s at least a hundred to two

hundred million exit here and the

possibility of upside to that and I’ve

got a reasonably sized fund then I can

be excited around a company like that so

that’s what’s going on the VCS head is

what can my exit look like and so the

gamesmanship though is as soon as as

soon as I see a yellow flag around your

projections then I start carving back

you know as soon as I think you’re being

somewhat unrealistic then I assume

you’re unrealistic on what unrealistic

across a whole bunch of stuff and I just

keep carving back so if I believe you’re

being realistic and if I believe that

there might possibly be some upside I’m

not going to carve back so that’s you

know that’s the guy

that is the game you’re playing if I

have any suggestion if there’s any

suggestion you pumped up the numbers you

know then that’s the last meeting and I

just you know there’s there’s so much

room in the marketplace for successful

companies that to have to pump numbers

is like you know forget it why you know

why would I bother right so uh yeah that

was hopefully that helped I don’t know

yes it was more also about like how much

the investors want versus how much times

burns your seeking at what target

percentage ownership you know those kind

of issues and get involved

kind of how the pieces think about that

but you know how they’re usually R

mismatched between entrepreneurs some

pcs on that issues yeah yeah so one of

the one of the important dynamics in the

venture capital world is that funds have

gotten bigger and bigger and meaning if

there’s more and more money to put to

work and there aren’t necessarily more

good deals or good opportunities but as

a result you are seeing VCS sort of

pushing out at the edges and you know

going International and going into clean

tech and all that sort of stuff because

they’re trying to find places to put

money to work but one of the challenges

you know for you for any given

entrepreneur is I’m a fund I’m a you

know four hundred million dollar fund I

see your particular business plan I want

in any given situation I would like the

opportunity to make my fund on my

investment in your company right meaning

I want four hundred million dollars back

out of out of investing in you and so

then you get the math working which is

what’s the possible exit well you know

they’re very few billion dollar exits in

this world right and so I’m going to

hope god bless everything goes right

you’re a 500 million dollar exit I can’t

make the math work right I got o ninety

percent of you what eighty percent of

you to get a five hundred dollar exit

you know that dog don’t hunt so that’s

the pressure that’s the pressure I’ve

got as an investor to want a larger

percentage of your company because I’m

looking at possible exits and

much it can contribute to my fund and so

I want a larger percentage of your

company the counter pressure the counter

pressure is I want the team to be

motivated to build a great company so

I’m always going to work the angles to

make sure that the right three four five

guys in the team see a window for

becoming obscenely rich so I’m going to

keep carving out enough options but of

course the guys the founders if they’re

not adding value anymore and they’re

sitting off to the corner somewhere I

know they got their founder stock and

that’s that I’m not that worried about

them if they’re not contributing anymore

and the earlier investors you know the

early investors I’m not that worried

about them either right so but I am

worried about the key management and I’m

also worried the other piece I’m worried

about is my syndicate partners right so

I want to maximize my ownership interest

but I also want to attract a syndicate

partner alongside me because I don’t

want to have to carry this company

myself so I got to carve enough out for

my syndicate partner so you see

companies getting recarved with every

round of investment the first round is

generally pretty easy right because

you’re only you’re asking for a modest

amount of money and there’s plenty of

room and the cap table for the investors

to own 40% of the company and everybody

else in you know the founders own 60% of

the company and you got four million

dollars and you know come by everybody’s

happy right but things go wrong there’s

a down round you bring in some more

investors that’s when that’s when things

get really dicey and you see these

horrible cap tables where you know the

founders have been almost washed out and

these they know the seed investors the

angels are getting screwed and you know

so but there is no there’s no I wouldn’t

say there’s any hard and fast rule

because there’s so many different

scenarios there are some companies very

few that all they need is one round of

investment there are other companies you

know that are perfectly successful

companies but they’re in their Series F

you know so you can have a successful

company that takes a lot of capital but

it’s going to squeeze down the

percentages over time so did that

adequately duck your question

because a minimum percentage that they

would take or their minimum investment

amount where you get to the point again

this is not of interest to us yeah any

venture capital fund will tell you that

the minimum they’ll take is 20% so you

know the argument is if you don’t have

at least 20% then it’s not worth the

bandwidth it’s not worth the attention

it’s not going to make a dent etcetera

etc what I’m seeing and Larry and

anybody else who’s a VC tell me if you

see something different more and more

now I’m seeing the VC saying the minimum

is 25% got one VC that said our minimum

is 30% for a series a deal I mean are

you seeing minimums go up angel type

deals getting done I mean the angels are

sort of coming back and some very small

funds that are willing to do the angel

sort of seed startup money so but for

series a I’ve totally agree the minimum

they’re going up especially for the

larger funds for the institutions right

that’s a really important point there is

a whole community of investors out there

that is somewhat different than what I

was speaking of which are which are you

know angels and angel funds you know

sophisticated executives who are now

turning into angel investors in some

cases some cases they’re a little less

sophisticated but they’re really rich

you got to be careful in some cases it’s

a small fund that it’s basically their

money or their money and some other

friends and angel money and those in

those investors have some different

behaviors and I you know they they can

be a great way to get started you know

particularly if they have a particular

expertise that they can use to help your

company yeah

looking to take and if you know it’s not

to capital-intensive and choose an

appropriately-sized

form at under the font size because the

dynamics of alia party I don’t know

anything what do you say but yeah I mean

it is it’s um you know we as a small

fund strongly endorse that point of view

you know and we see teams all the time

that just came back from you know XYZ

big billion dollar fund on Sand Hill

Road

who you know they can’t believe when

they walked out of the meeting the VC

said you’re not asking for enough money

and that you know that seem

counterintuitive to the entrepreneurs

you know and I thought I thought we were

supposed to be lean and mean and

efficient and all that stuff but there

is this countervailing pressure so yeah

thank you for that point yes

leasing entrepreneurs come to you saying

things and kind of bet on the

projections question saying stuff like

well you know revenue generation isn’t

really a core competency for a consumer

internet company that’s looking to show

hockey stick type growth so really the

exit is based on traffic and how

important are these types of revenue

projections in that scenario yeah well

I’ll tell you we you know we have a we

have a sign on our whiteboard that some

and some entrepreneurs notice some don’t

it’s you know the universal traffic

signal with the red bar through it says

web 2.0 right

we are ye so this is us you know we’re

we’re very very skeptical of web 2.0

deals and you know I hate to lump it all

in one for and one in one bucket but the

idea you know boy I’ve been there before

that’s based on eyeballs and advertising

you know they’re certainly you can build

a successful company that way because we

have the proof points that you can build

a successful company that way but not

all 632 companies that look exactly the

same

are going to be

be as successful right and so from our

point of view our ability to pick the

one of the 632 that happens to get that

you know mentos video or whatever it is

and whatever you know social networking

video hosting whatever I just we yeah we

get these teams come in we get really

excited it’s fun it’s great it’s cool

but ah it’s just really hard to sit down

and be disciplined about it so I would

say I what I’m hearing is more and more

VCS that are increasingly skeptical of

this that are feeling you know we’ve got

we kind of did our quota of eyeball and

advertising deals for this fund and so

if on if you have a business model that

sort of is in that line I would strongly

strongly encourage you to figure out

another source of business economics

another business model something that

that people will pay for that is you

know there’s got to be some licensing

model in there somewhere or some service

model in there somewhere other than just

eyeballs and advertising is what I would

encourage you now you know for all I

know you’re the next Skype I don’t know

and I’m in up then I’m giving you really

bad advice here but I would say on

average the likely odds are that you

know for for these kinds of traffic and

advertising driven deals there are 32

other companies doing pretty much the

same thing and that’s going to be a real

problem when it comes not only to you

know going out there and competing in

the marketplace but convincing investors

that that this is a unique value

proposition with a sustainable

competitive advantage so the flip side

of that is you know every investor when

they look at a deal you got to spend

time thinking about how is this company

going to exit you know what’s what’s the

way in which we are going to get our

money back as investors you know

increasingly you can’t say IPO it’s

really hard

for an early stage investor to imagine

that any company that’s two guys in a

garage is going to get to an IPO within

a reasonable lifetime so you know maybe

eight nine ten years from now

I mean God bless that’s what it took

Cisco that’s what it took Microsoft

that’s what it took you know they took

nine ten years to go public right so we

can’t expect an IPO that leaves you know

an M&A transaction or possibly a private

equity transaction you know another sort

of emerging model for exits but to the

extent that it’s you know advertising

and eyeballs there are pretty limited

number of entities that are going to

give you a good price for that and

basically you got to be the winner to

get a good price for that kind of

business model so yes how many times

have I been involved with well I did buy

a compact computer so back in the day so

yeah let’s see um where else do we go

but right the reality is that there are

probably less than 20 venture backed

companies in the history of enter

capital that have gone from 0 to 100

million in in five years so we all know

that that’s the rarity so if you I mean

I’m sort of leading the questioner here

you’re presenting your comment is

probably why in the world would you

expect 100 million in a business in a

financial forecast if you know they’re

not going to hit it is that your

question right because the theory of the

financial forecast the theory of the

financial forecast is that we address

known challenges but we can’t address

unknown challenges so so as an investor

and as an entrepreneur you know there

are going to be unknown challenges but

you can’t cook them into your financials

because the question then says well why

does revenue and from year to to year 3

only go up by 5% and then it doubles the

subsequent year right which is more

likely to be the way the real

world works you know because we had a

recession because the CEO got hit by a

bus you know I mean these are all sorts

of things that happen in the real world

but you’re not going to cook that into a

financial projection you’re not going to

say well we’re expecting the CEO to be

hit by a bus in June of 2010 and so you

know well I would you know if somebody

if so every plan that we see that comes

in that has you know your five revenues

one zero zero Millions

and the metric behind it is 7.5 percent

you know market penetration

you know we dismiss but but if you can

but there are lots of businesses that

you can design from the bottom up that

you could get to a hundred million and I

agree I agree it’s more realistic that

it’s going to be 40 50 60 million and I

think as I said before if you’ve got a

nice business model that’s a perfectly

fundable deal that is a perfect do not

let me suggest to you that you shouldn’t

put out a financial projection unless it

has 100 million in the fifth year but

but if you’re going after something

that’s interesting there should be a way

there should be a way to see how if

everything goes right you could get to

100 million because there are again 20

companies in the history of the world

that managed businesses to 100 million

within five years so we want you to

model yourself after the most successful

companies in the world within the bounds

of realism may sound unfair but that’s I

mean that’s the that’s the psychology of

it okay all right so who are you with

I’m sorry

ah okay so you’re telling me that if a

team came in with a really interesting

idea just because it said 100 million in

the fifth year you’d say forget it don’t

don’t waste my time

okay I mean so well there’s an you know

to this point and it’s a reason this is

somewhat controversial is that in my

experience there are some VCS

that are a little bit on the obsessive

compulsive side in terms of numbers and

there are some VCS who are like another

line anyway I’m not going to waste my

time and so you may in any given firm

much less between firms come across very

different VCS so you’ll get one VC who

says to you you know you asked them a

question about their financial

projections and the VC will say to you

well I don’t believe them anyway so I’m

not paying attention to them and you’ll

get another firm another VC you ask them

a question about their financial

projections and they’ll look at your

gross margin in year four and they’ll

compare it to year three and year five

and they’ll say I don’t understand

exactly why the gross margin goes from

here to here in year four and you go oh

my god this guy’s insane right but the

purpose of that question is do you

understand the underlying economics of

your business do you have a business

understanding and a financial

understanding of your business or are

you just a technologist or just a sales

guy who knows how to make Excel show 100

million dollars so I will tell you I’ll

you know review I’m I’m a little on the

obsessive-compulsive side my partner’s

are a little on the what the hell side

so we have that dynamic within our own

firm I don’t know do you have do you

guys very are you all personally

I kind of look at the first two maybe

three years but I like also to be able

to squint my eyes and say this is going

to be a big business and I guess my

number would be over fifty but again the

as we’re talking about before the bigger

the funds the more money they have to

put in the bigger multiple to pay back

the fund they’re going to want the

bigger opportunities you know do get to

100 million so that you get a billion

dollar business right right so I’m sorry