Archive for year: 2006

Entrepreneurs sometimes look upon VC’s like some kind of supernatural, infallible, ever-wise uberMortal.

And of course nothing could be further from the truth. VC’s are first and foremost people, just like you and I, with strengths and weaknesses. They make mistakes about as often as anyone else does.

The only thing that really gives them the aura is the money and their ability to direct it. But don’t let that fool you. Just ’cause they have a lot of money, doesn’t always mean they know how to invest it.

Want proof? Read “Redpoint Ventures raises $400 million, despite mediocre results” to get a dose of reality:

As of Sept 30 of last year, Redpoint’s $600 million first fund, raised in Oct. 1999, was showing a negative 18.5 percent internal rate of return, according to the University of California endowment, which is an investor.

As of June of last year, Redpoint’s $750 million second fund, which was raised in August 2000 (it was initially $1.25 billion, but Redpoint later returned money to investors, saying it couldn’t invest it all) had an internal rate of return of negative 13.9 percent.

I think it really helps to remember that VC’s put their pants on one leg at a time. When you go asking them for money, just remember that they’re not Gods, just a bunch of people trying to make the right bet on the right company, and most of the time they are wrong.

Guy Kawasaki has posted some good wisdom on what VC’s like. My favs:

• Build a real business.
• Get an intro.
• Obey the 10/20/30 rule.
• Show traction.
• Clean up your act.
• Disclose everything.
• Acknowledge, or create, an enemy.
• Don’t fall for old trick questions.
• Under promise and over deliver.

A very good read.

I received an email recently:

I have a patent pending technology in e-commerce that deals with comparison shopping and would like to have a patent search done on it. Would you be able to recommend a company that can help me with this?

Here’s the answer:

Patent searches could and should be done by you first. Go to uspto.gov and do it. Google will actually be an even better patent search mechanism in that you can look around for things that may be prior art but not necessarily patented.

If you really want your patent to be good, you must become an expert in that field. Otherwise you’ll potentially spend a lot of time & money to patent something which is potentially worthless or has already been invented. You need to know about all the other techniques used to do things similar to what you’re doing.

I asked Patent attorney Leighton Chong what he thought about this and he added:

You might also include the importance of “literature” searching as well, i.e., white papers, industry proceedings, conference symposia, press releases, new product literature, etc. These commonly precede patent publications, and are far more diverse, wider ranging, and easier for anyone to publish than patents. Online searching for published literature is also made convenient through search engines like Google which are about as reliable as industry databases. Since published literature is just as usable for prior art as published patents, in my opinion it is far more important to search published literature than patents.

Guy Kawasaki put up another informative post, “The Top Ten Lies of Entrepreneurs” and has done a pretty good job of digging up “red flags” in a given pitch. Here they are:

“Our projections are conservative.”
“(Big name research firm) says our market will be $50 billion in 2010.”
“(Big name company) is going to sign our purchase order next week.”
“Key employees are set to join us as soon as we get funded.”
“No one is doing what we’re doing.”
“No one can do what we’re doing.”
“Hurry because several other venture capital firms are interested.”
“Oracle is too big/dumb/slow to be a threat.”
“We have a proven management team.”
“Patents make our product defensible.”
“All we have to do is get 1%% of the market.”

Just about every pitch will use several of these “lies”. (heck, my last company used all but the Oracle lie) That’s not necessarily a bad thing. But what IS a bad thing is when these statements made again and again, in great fanfare, in an effort to close a deal.

That’s a red flag.

My personal opinion is that when you do make one of these claims, first, make sure it’s 100% true. Second, don’t make a big deal about it. Why?

When you make a big deal out of any of these points, you’re making it an important component of your company’s success. If any of these points fail or fall through, you will lose credibility in proportion to the fanfare you made of it.

When you do make a statement like “big company X is talking to us about an acquisition”, it helps to add in something like, “but of course that’s a long shot and right now we’re in very preliminary talks with nothing in writing”. Stuff like this lets you speak the truth, yet also communicate that you’re realistic about it.