May 17, 2007

"Entrepreneurial Lies!" - by Sanjay Anandaram

It is apocryphally said that Benjamin Disraeli said that there were three kinds of lies – lies, damned lies and statistics. He was referring to the persuasive power of inaccurate but well presented arguments. Entrepreneurs will do well to remember this and some other obfuscatory arguments as they make their presentations to VCs.

“We have no competition”
Really? This statement demonstrates either of the two (sometimes both, unfortunately for the entrepreneur) situations: (i) that either there’s no market for the offering or (b) there’s inadequate understanding of the market and competition. Rather like horse-drawn carriages being blind-sided by the arrival of motorized transportation.

“We are unique”
Because we have placed ourselves in the top right hand quadrant and have thoughtfully placed everyone else in the other 3 quadrants. Of course, it is another matter that the dimensions of the grid chosen by us are absolutely pointless. Comparing product features and more importantly benefits against the competition’s is a good starting point for developing a unique position.

“There’s a huge need in the market”
Because I read a report in a magazine by a consulting company about how big the market for clean water is. Therefore, I can build a Rs 100crore company selling bottled water. Without talking to customers (i.e. those who actually use the product not talk about it) about why they would buy it, what would they pay, what specifically are they seeking when buying the product, why would they prefer the product over other products and so on, it is hard to convince anyone about the existence of a real need.

“Customers are ready to place purchase orders”
Only if we develop the product as per the specifications and at the price (free?) we’ve promised them for which we only need Rs 20crore and 9 months time?!! Well, unless customers are ready to speak to VCs and truly vouch for the value being provided, your credibility will be stretched.

“The following people are on our board and are advisors”
Having brand names on your board certainly helps. But, and this is a big but, having a steel tycoon on the board of an online ticketing startup doesn’t add much value compared to having the CEO of a travel company. It is important that the brand names on the board be able to vouch for the capabilities of the management team. It is usually not a validation of the management team if the board consists of well known relatives and family members. In any case, whatever the caliber of the board, it is the management team that must pass muster. Also make sure that the board members know they are on the board and are aware of the goings-on in the company.

“We have established partnerships with the following companies”
And then you go on to enumerate a list of no-name, capital starved, struggling startups. Not a good sign. Remember, two struggling startups are more likely to pull each other down than otherwise. Notwithstanding tales of love where partners survive on nothing more than love and fresh air, it is better to have partnerships where at least one of the partners has market and financial muscle.

“We are a proven team”
We have worked together in cushy jobs for a $5 billion global company for 2 years. We have no experience of working in a startup and no idea about how to manage things on small budgets and without expense accounts. What you should instead say is that you have the right experience and skills and the passion to succeed, that you are willing to do whatever it takes to succeed, that you are willing to surround yourself with people who know and that you are willing to step aside should the company need it.

“Our estimates are conservative”
Since projections are rarely achieved and if the estimates started out by being conservative, then it doesn’t say much about the team, right? Instead of saying projections are conservative, it is better to show the assumptions that’ve been used to arrive at the projections. And these assumptions should have been market tested.

What do you think?


Sanjay Anandaram is a passionate advocate of entrepreneurship in India; He brings close to two decades of experience as an entrepreneur, corporate executive, venture investor, faculty member, advisor and mentor. He’s involved with Nasscom, TiE, IIM-Bangalore, and INSEAD business school in driving entrepreneurship. He can be reached at sanjay@jumpstartup.net. The views expressed here are his own.