Friday, March 16, 2007

Lesson #10 - Tell the Truth


"We must not promise what we ought not, lest we be called on to perform what we cannot." — Abraham Lincoln, 16th American president (1809-1865)

Honest Abe has a point. And nowhere is it more true then in entrepreneurship and in a startup. In every aspect of building a venture, I have found that the allure of stretching the truth, or spinning facts in my favor is difficult to overcome. To some degree, entrepreneurship depends on the extended truth - it has many names - Financial Projections, Market Size, etc - but more importantly 80% of selling an idea to employees, vendors and investors - requires a little buzz building, and to some degree lying.

The question is "why do entrepreneurs lie?" I have a theory. First, I think most entrepreneurs are lying to sell, not to deceive. I don't think entrepreneurs are evil, but are (to some degree) victims of the environment that has been created by "the others". Who are the "others" - well it's hard to define them all - but I would include Venture Capitalists, Analysts, Media and Icons.

Lets walk through some examples, before I dig deeper into my theory.

Why does an entrepreneur lie about financial projections? Simple - to please the Venture Capitalist. VC's have created a template of the "perfect deal", and entrepreneurs feel if they don't fall into that template - they will be dismissed.

Why does an entrepreneur lie about number of customers to an analyst? Simple - so they can be seen as a leader. Analysts may dismiss a companies viability based on simple stats - e.g. number of employees, number of customers.

I think you get my point. In order to get through the front door, or on the front page - you need to (what I like to call) project the truth. In essence, answer each question with what you feel the truthful answer will be in 6 months to a year.

If you don't project the truth, how else can you get ahead? Where does the momentum come from? If an analyst won't consider your company in a report due to the number of customers, then you won't be able to get customers because you are not in the report. If an investor won't fund you because you miss revenue targets, how do you close customers without funding for sales and marketing?

It's not easy telling the truth. So here is my theory and basic assessment of entrepreneurship today. First - the theory -

"Entrepreneurs are forced to lie, because there is no respect for the truth in entrepreneurship anymore"

The entire "economy of entrepreneurship" has been turned upside down by the "others". (and I know what you are thinking - I sound absurd - of course people prefer the truth over lies). You are right - they do prefer the truth - but the expectations have been set beyond what is feasible and realistic - so in reality the "truth" falls short everytime. Thus - the bubble.

Think of it as a math equation ....
BUBBLE = EXPECTATION - TRUTH

Consider my last blog about Facebook. Yahoo! offered 1.6B, and they turned it down. A Board Member felt it was worth 8B. How big do you think his bubble is?

So, now that you accept or deny my theory - I want to throw my assessment on the table. If Entrepreneurs continue to lie, and don't embrace the truth - then we are headed for another disaster (ala dot-bomb). If Entrepreneurs tell the truth - even when the truth is bad news - we will have an economy that has never been matched in history.

If entrepreneurs don't close the gap between expectation and truth - everyone will suffer. The expectations set on the market by the "others" is setting us up for failure. My advice, ignore the "others", ignore their measurements, and focus on what matters - the truth.


2 comments:

Jeffrey said...

Interesting observation, and completely accurate.

But it's not just the 'others' that have created this environment. To some extent, the VC community itself EXPECTS us to stretch the truth. In fact, you might argue that they're testing your ability to sell them on the vision and as such they're fully prepared for the 'bubble factor.' The best investors simply make a determination as to how big-o-bubble they're dealing with.

But Rich, let me ask you a question: As an investor yourself, how would you react if someone put an idea in front of you that looked like a great single and probably a double without a huge investment but it's no grand slam? Would you invest?

You see, too many folks have forgotten that many great businesses are simply built on execution and patience. There are lots of great ideas out there that are solid doubles but the investment community would prefer to blow millions looking for the next YouTube or the $8b FaceBook.

BTW: I do have a nice double, but it will never get an audience because it's just a double.

Rich Swier said...

Jeffrey,

Thanks for the comment. You are correct, that so many VC's are stuck in their "model" of investment, which makes it difficult for them to invest in smaller market opportunties. They need to put 10-20M of capital to use in a deal, so the liquidity needs to be big. Whereas a "double" may not offer that type of valuation.

However, I think 80% of the Web 2.0 companies right now are at best "doubles" - (good example, is StumbleUpon just was bought by eBay for 40M+). They only raised 1.5M in Angel capital, and so I assume the return to the investor is atleast 10x. Which to me is the perfect scenerio. Investor makes 10x (which is a homerun) on an investment that really would be considered a double by a VC.

I think you can get an audience, but it may not be on Sand Hill road.