VCP 100: Nominate the Top Utah Founders VCs Must Watch! Nominate Now

Jon Bradshaw & Peter Harris

Truth or optimism. VCs encounter multiple people talk about their plans, their business and these entrepreneurs sometimes toe the line of being overly optimistic that it could be a lie. Here is what not to say, or how to frame it differently next time.

Common Lies that VCs Hear

Common Lies VCs Hear

Truth or optimism. VCs hear multiple people talk about their plans, their business and they toe the line of sometimes being overly optimistic that it could be a lie. Here is what not to say, or how to frame it differently next time.

Some Lies/ Points  Covered in This Episode Include:

  1. Saying your market is a huge number/ some ridonculous billion $ industry, but the fact is you dont know whats the sub sector or specific part of the market you are targeting
  2. All we need is get 3% of the market
  3. Our contract with a “big company” is going to be signed ANYTIME NOW.But the truth is that the process is much longer. So over committing your  investors is no good. Play low key when talking about accomplishments, and surprise with news
  4. There is no competition. No one else can do what we can do OR we have the first mover advantage
  5. They mis- estimate the sales plan. Give an unrealistic time period- 45-90 days of sales cycle
  6. My projection is conservative. Is it really?

Let us know what are the common lies you have heard? What should we talk about next? Give us a follow and leave us feedback.

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Episode Transcript

Jon: In the great recording studio that we have here. It is great in awe of Utah.
Peter: It's good. The cold keeps me like, you know. On point.
Jon: Have you funded a deal in Orem, Utah? How about Utah County? Let's go there.
Peter: Yes. Which one? Work Front canopy Demo Chimp, which is now consensus. The answer?
Jon: But you've done a bunch. When I. When I came out of college, there were some local VCs names that won't be mentioned that.
Peter: Those who shall not be mentioned.
Jon: Lived in Utah and hadn't done a single Utah deal. You probably know who I'm talking about.
Peter: No.
Jon: But have they've done a Utah deal and they they did giddy, right? Yeah.
Peter: Leon's done a bunch of Utah deals.
Jon: Okay. They did.
Peter: We. I'm joking. Because they used to be called You've partners. Okay. And the movie stood for Utah Valley. Utah Valley and.
Jon: Then Salt Lake.
Peter: But then they were like, Well, we don't want to be known for doing Utah deals, because then people just think we're Utah. Fine. So they rebranded to Pelion and they refused to do Utah deals, basically. And then they missed out on nature and structure and loose and a bunch of these deals. And then they were like, crap movie here.
Peter: There's actually something interesting happening in Utah.
Jon: Were you in Lucid as a as an investor? No, I know we missed out on Lucid got, we had the first bite and.
Peter: We're an investor now but not not in the early stages.
Jon: Okay. But you guys don't do a lot of early stage deals, so it's acceptable for you guys to miss out on some. It's probably not with your bylaws.
Peter: Nobody has bylaws that are like, you missed out on that deal.
Jon: But you typically are going you're going more later stage. I think you were I imagine that your operational structure doesn't let you go early stage.
Peter: No, we can do early stage.
Jon: And send over. Check. Thanks, but. All right. So on the today's episode, let's talk about common lies that VCs here and I think one happened to me about a month ago. I was with with a VC and he said, How big will you become? And so I jumped right to a default answer of will be $1,000,000,000 plus.
Peter: Will be a billion.
Jon: Dollars. And I'm like, my gosh. But sometimes, like when you start pitching, you have no idea what questions are gonna be thrown your way. And so in my.
Peter: Case, you just make them up. It's good.
Jon: Well, you don't try it. You don't try to make them up. Like I think in that moment I was like, I have to be very confident or it's going to be like, it's going to be. It's going to be. It's going to be problematic. But I think no matter how well prepared you are, there will always be questions that come your way that you may or may not be sure how to answer, and especially when you're not in the VC game day after day after day.
Jon: Those are a new set of questions like like my customers will ask a very different question about my business than you would. Sure. And so that's a whole different paradigm shift. And to be fair, this will be me, kind of like, are you like slapping on VCs? I feel like I've been in a space for four plus years and a VC hasn't been in my space, but they think they know more about my space than they do.
Jon: And so I feel like the hard part about my context is I can't speak. It's like, how do you communicate what's happening there on their level where they think they know everything and then they don't? But anyways, that's getting to say the thing. But I think what happens is it makes it really easy to fall into one of these traps, which is what happened to me when I met with this, a local fund and they said, Hey, how big, how big will you become or how big, how much will how far will 2.5 million get you?
Jon: And I'm like, and I paused.
Peter: But is that the VCs fault? Like, you should know the answer to that question? I think it's a totally fair question.
Jon: I think it's a fair question.
Peter: But especially because you just said, like you know more about your space than the VC. And if the VCs asking you like, how big is your space? But I said, no, but but.
Jon: A VC is going to ask, you know, like it wasn't how big is the space he was asking like he was.
Peter: It's an inferred.
Jon: It's a different question on a on a pre-seed deal, pre-revenue deal. And so there's a.
Peter: Lot of issues. So so let's talk about so I would ask that question how big do you think this company could get?
Jon: But you're also in a later stage and we're numbers are much and that's a different question What they asked.
Peter: Okay.
Jon: You know, say how big in this company get is.
Peter: What did they ask you?
Jon: I think they ask specifically is how far does this get your company?
Peter: No, but that's a totally different thing. And you told them $1,000,000,000.
Jon: I don't know the exact answer, but. All right. So, Peter, what is the first common lie that you hear from an entrepreneur?
Peter: I don't know that there's like the most common, but some of them, some of the more common ones are like, we don't have any competition.
Jon: Okay.
Peter: Right.
Jon: How often do you hear that?
Peter: Quite a bit. Quite a bit. Or usually they'd be like, Yeah, we have some competitors, but really, like they don't really do what we do. And so they're not real competitors.
Jon: And are these deals non pre-seed.
Peter: All across the board, across them usually by growth stage like they've, they've kind of learned, you know, that yeah, they have competitors and they need to understand how they're positioned relative to the competition. But look at how it's and it's very like most basic, if you don't have competition you probably aren't doing something interesting. That's just the truth.
Peter: Right. And the other thing is like if you're really solving a pain point, that pain point existed before you existed. And so people were solving it in some way, and it could be that they were solving it with like Excel, right? But that's fine. Like, talk to us about like, why you're so much better than Excel. Don't just tell us like, we have no competition.
Peter: Like, tell us, like now it's Excel, that's our competition and here's why it breaks and why it's not a great solution, Right?
Jon: Okay. So the first lie that you hear is there is no competition. The most common one that you hear from.
Peter: No, no, I don't want to say is the most common, but it is one of the more common.
Jon: Okay. What is one of the next most common lies or misconceptions?
Peter: Another really common one is, you know, we are days away from closing this huge contract with this huge customer. And we just, you know, any day now it's going to close, right? So we hear that one a lot. another one that's one of my favorites is like, this will be the last round we raise because then we're going to get to profitability and we all need to raise a penny ever again.
Peter: But here's the thing. Like, I don't know how many times I've heard that, and it's never true because one of two things is true. Either the companies projections were not as conservative as they thought they were, which is a whole other thing, right? A whole other like lie that entrepreneurs tell. I don't think they let me take like a caveat, though, or make a point really quick.
Peter: I don't think that entrepreneurs generally lie full stop, right? I just think they are a little overly optimistic. But if you believe what you are saying, it's not really a lie, right? It just may not be true. So anyways, was.
Jon: Elizabeth Holmes lying.
Peter: Well or over? I think I think she was actually lying. But, you know, that's based on like the little that I've read.
Jon: It's I've got a friend. So this is no gossip, purely gossip. But he says in that case, he knows several of the scientists that were around Elizabeth Holmes Yeah. And they they believe themselves. If they had been given two more years and she had just closed more, more funding that they would have gotten there had they just had.
Peter: Actually believed that. But the problem is, here's where she lied as she said that it worked when it didn't.
Jon: Okay.
Peter: That's that that was the issue. Not that she said that, like we can build it. And that wasn't true, that I don't think anybody I mean, some people had a problem with it, but like in the venture world, like I, I don't have a problem with that. I think the issue is that she was saying, no, it works, but it really didn't.
Peter: That's a problem.
Jon: I think the other thing we got to make here is we're not trying to make fun or like translate like all spinners are liars. What we're trying to say is, is what's the context of what's happening. So when you do go to pitch, you can understand what are the things that my people like trap like like how you get trapped or something.
Jon: You might say that you that a VC would say, Hey, this is a red flag.
Peter: Yeah. And also just like and sometimes like entrepreneurs think that saying like, if we only get 1% of the market, like we'll be a hugely successful business. Well, like VCs can see through like the logical fallacy there, right? Because like, 1% like that doesn't mean anything. What mean what's meaningful is like, how much is it going to cost you to acquire a customer and how much money are you going to have to raise, Acquire enough customers to build a business that's large enough to like, generate the kind of return I need?
Peter: I don't care about like one or two or three or 10% market share, right? And just saying a super low number like 1% or 0.1% or whatever, you're trying to make it sound like it's easy, but the reality is that it's not necessarily right.
Jon: I remember that when I first was with the Angel Group, the most common, I think, misconception or lie that entrepreneurs would say, Yeah, they're like, Hey, if I got 1% of the more of the market, or if I got 1% of the Chinese market, we've got an amazing company. But I think as we were talking earlier, that's most VCs recognize that's extremely hard to get to.
Peter: Yeah, Well, and it's it's, it's like it hides all of the hard work that it takes to get there. Right. And kind of like encapsulates is this like the straw man of hey yeah it's just 1%. It's easy, right?
Jon: How often are you hearing that? So the one that you mentioned earlier is we have a big contract. It's going to be signed next week.
Peter: Yeah.
Jon: How often do you hear that?
Peter: Quite a bit.
Jon: How often is that, like, possible? Because like, like with a lot of our clients.
Peter: Like, I think it's possible.
Jon: It's very common across the board. It's like there are a multitude of deals at any moment. Yeah, you have no idea one company could die, another one could be like ten times bigger.
Peter: That, I mean, in my thinking, that's your business. Like, would you? How often are you investing? Like by hiring more devs for that contract that you think might come in?
Jon: It's a constant. So that's a whole separate a separate thing. But that's but.
Peter: But it's not that different from like as a VC, right? Because you're, you're.
Jon: Exactly where you're.
Peter: Investing your own money. Right. To make it in making a decision there.
Jon: Yeah. That code base every single month we're looking at all of the clients, their potential hiring needs. We're trying to get a forecast from other things like additional funding. Yeah, new contracts, milestones they have to hit before, you know, they make their next decision. And also, like, we're in the unique spot where we can't we have access to their server data, things like that that had regular VC wouldn't who like but still like it's super tricky from our side.
Peter: Yeah and I guess that's my point is that like entrepreneurs will always say like, yeah, like, you know, Intel's about to become a big customer or what have you For me, like, that's great that you're in talks with, with Intel, they're in your pipeline. Like, that's great. But until it's like a signed contract and like the check is cleared, like, it's not like, like it's a nice like data point, but it's not super convincing to me.
Peter: Right. So, like, I would never make an investment based on, like, a large customer that my potentially close, I may say, Hey, that's cool. How about we fund once that customer closes, right? Because what you don't want to do, especially if it's a super meaningful contract, is to fund, then that contract never comes through. And now the company is kind of limping along and you just overpaid because you were you were paying based on a valuation of something that never actually materialized.
Jon: Okay. Also something that kind of happened in the Elizabeth Holmes deal with Theranos. But it does happen.
Peter: Yeah, it does happen if.
Jon: You have the right snake oil snake oil.
Peter: Salesman. But they actually closed some really big contracts. They did got paid.
Jon: Right. And got paid, but also didn't deliver on virtually all of them. But separate, separate aspect, how much percent control do they want? Is that a lie?
Peter: So one of the things that big contracts that, you know, are on the edge of closing right, is that like is still a good data point to share with a venture capitalist. Just know that like most venture capitalists are going to take over a huge grain of salt. So don't oversell it and don't you know, over bet the business on it, right.
Jon: Yeah. So in the scenario when should an entrepreneur say that, hey, I've got a big deal closing because of the challenges. I mean if you're fundraising, a fundraising can take two, three, six months. Yeah, a lot happens in that time. You want to show that things are happening.
Peter: Yeah, share it, but just don't. Yeah, I mean, I think it's totally fine to say, Hey, yeah, we've got this big contract we think is going to close, right? We're giving it this likelihood of closing. But just keep in mind that like, I think most smart VCs are going to look at it and say, That's great that it's in your pipeline, but I'm not going to I'm not going to give it a ton of weight until it actually closes.
Jon: Okay. I think another lie or misconception I've seen that from my investing days is a company came and they said this really well, well known individuals on their board, someone in the investment room, right. As an entrepreneur was pitching text to that person and say, What do you know about this company? And they responded and said, I've never heard of them in my entire life.
Jon: Is this a common thing that you run into in due diligence?
Peter: I wouldn't say it's super common, but occasionally it does happen. Yeah.
Jon: Look, in your career, has it happened?
>Jon: How many times in your career has it?
Peter: Maybe a handful.
Jon: But still a way more than it should.
Peter: Way more than it should. And look anything you put on your deck, you should, like, have signed off by the people like that are in your deck, whether it's companies or individuals or whatever. Right. There shouldn't be surprised because the last thing you want to do is for one of those people to be surprised and turned off. And then what you've done is that you've you've lost credibility with the investor you're pitching and you lost your advisor or team member or whatever.
Peter: Right.
Jon: One of the things right now is we're helping someone with a pitch deck. Yeah. And in their pitch deck we're constantly going back and say, Hey, there have been significant changes. Is everyone else still on board with this so that there's a nice paper trail of what's happening?
Peter: Yeah, I think that's smart.
Jon: Okay, what happens? How many times, ah, from your perspective are sales goals or numbers not misrepresented but that are just missed in in a pitch deck.
Peter: The earlier stage the company, the more likely that numbers are totally missed. The later stage the company, the less likely that they're missed by much. So it just kind of depends.
Jon: Are you just discounting them in your head? Is there like a number? Like I've got some friends who say, hey, we just closed this deal and knowing about what's behind the kimono enough. I instantly just kind of a 60 70% As a VC do you also do that.
Peter: It depends on the company honestly and their sales motion. So if it's like true enterprise SAS and I feel like a lot of confidence around their product market fit and that they've got like a decent sales motion in place, like I may give them like, you know, pretty good likelihood of hitting their numbers there, at least for like they're there one year out forecasts.
Peter: If on the other hand, like I'm not convinced that they are product market fit, I'm not convinced that they have good sales motion. And, you know, I'm I discounted by 50 to 60%. It also depends too, on like what kind of growth they're projecting. Right. They're projecting like 1,000% year over year growth or is it like 100% or, you know, 50% or something?
Peter: So I think anything over 100%, like I'm I'm going to sharpen my pencil a little bit and dig in a little bit more to make sure that I agree.
Jon: Okay. I know it's tricky. What the first time I ever pitched was to Peat Capital down in Provo. I don't want to say which VC it was, but the challenge we faced is that I guess here's the thing. Like we were just including screenshots from Google Analytics. But the problem is when you do that, if you double in a month, you know the line doesn't look that attractive.
Jon: Sure, if we'd taken the data and squished X access or manipulated, it would have looked better. Yeah. So we decided to be honest and say, here's the numbers. And the VCs honestly weren't that impressed. Yeah, but when we came back and said, Hey, this is what this means, we're doubling every month. Yeah, it's a whole different story. Like how do you, how do you accurately portray the data?
Jon: Because we're trying to be super honest. Hey, here's our numbers, here's a screenshot, and we felt like it worked against us because like, we're trying not to be like, everyone has exaggerated their numbers and now we're like at the opposite end of the spectrum and all the because we pitched with that pitch deck, they're like, Wow, you're the most honest entrepreneur I've ever met.
Jon: But it didn't get the deal done.
Peter: Yeah, yeah, No, like, I mean, there's salesmanship involved in fundraising, right? There's gaining momentum and all of those things. But look, both things that you said, like, neither one was dishonest, right? One was just like, more exciting the way it got presented. And I would say definitely like present an exciting story, like VCs want to invest in something exciting.
Peter: And to your earlier point, right, you talked about like you felt like you had to say that, that you could become $1,000,000,000 company. And the truth is, like VCs want to invest in billion dollar companies. You know that. And that's why you said it. But like, if you could be $1,000,000,000 company like, frankly, I'd as a VC, do I even really want to invest, right?
Peter: And so then the question is for you to decide, like, do you want to become $1,000,000,000 company? And do you believe that the company you were pitching can become $1,000,000,000 company? Because if not, then venture capital may not be the best funding source for you.
Jon: Correct? A lot of it comes down to belief now, but the challenge of what's too honest or not honest enough.
Peter: Look, I think you should be you should always be honest. And like I said before, I think entrepreneurs are overly optimistic, but I don't fault them for that because I don't want to invest in somebody that's not overly optimistic about what they're doing. I want to invest in somebody that swings for the fences every single time, right? Because at the end of the day, that's how VCs make their money, right?
Peter: We make money on the homeruns, right. And we make so much money. VCs make so much money on the homeruns that it makes up for all of the strikeouts. Right. And so if you get somebody up and they're like, well, I don't really want to, you know, swing for the homeruns. I just want to get on base. Right.
Peter: That's that's just not super exciting, right? That doesn't mean it's a bad business. It could be a fantastic business and something that the entrepreneurs should totally pursue. Right. It just may not be the right business for a VC.
Jon: How often do you hear VCs or entrepreneurs? How often do you hear entrepreneurs say they have first mover advantage.
Peter: A decent amount that that ties very closely. Like we don't have any competitors. The thing that the fallacy that exists with with first mover advantage is that it's honestly not always an advantage. So there's a lot of studies out there that show that like second a second fast mover actually can outperform a first mover, largely because the first mover spends all this time energy and resources to establish a market.
Peter: And the second mover comes in and they see all the things that they did wrong. They avoid all those things. They identify their like the areas that they missed out on. They execute on those and they quickly bypass them. Right. And so, you know, in some cases, a second mover can be better than a first mover. So, yeah, I don't know.
Peter: People say it and I don't always put a lot of weight behind it as being something important.
Jon: Okay. My the last one and I don't have any others, as they may say so and so Andriessen is really interested in do my next round.
Peter: Yeah. So I hear this one a lot, right. yeah. We're talking to Sequoia and you know, if you want in, this is the round. This is the last round where you know you're going to be able to we're going to take small checks or we're going to, you know, open it up to, you know, fund regional funds or, you know, whatever.
Peter: I would say 99% of the time that's not true. and, you know, the funds like Sequoia and Andresen, like just because they take a meeting with you doesn't mean that, you know, they're actually that interested. It's all this game of like building FOMO, which, you know, I totally get and respect. but, but yeah, it is. It is something that, like, good VCs can see through and.
Jon: Well, I think those are all the misconceptions or lies that I think I assume you hear. Are there any other common misconceptions or lies that that you come across?
Peter: So the one I mentioned earlier we didn't really talk about, which was this is like my last round of funding. Yeah, because we got sidetracked.
Jon: Yeah.
Peter: Yeah. So, so a lot of times entrepreneurs would be like, yeah, like this is the last round and of the we're ever going to raise in venture capital because then we'll be profitable. But like I said, there are two things that are, that are wrong with that or that are actually true. And the one that we talked about, which is that they are overly they are overly optimistic in their projections.
Peter: Right. They think that they're going to hit profitability far sooner than they actually will. And I would say like almost ten out of ten when an entrepreneur is said like, yeah, like this will be the last round to be raised to get to profitability. Like it didn't actually get them to profitability, got them like maybe close, but they still didn't quite get there and they had to raise a little bit more, you know, to finally get there if they ended up getting there at all.
Peter: And then the other thing is, let's say like you do like crush it and your business is doing incredibly well. Well, especially if you're like an enterprise software company or have any sort of recurring revenue, you shouldn't be slowing down. You should be pouring every single dollar you have into customer acquisition, because if you don't, your competitor will and they will get that customer and it will be ten times more expensive to flip that customer back over to you as a customer than it was to get them in the first place.
Peter: And so, you know, when entrepreneurs are like, yeah, like this is the last round we need to before we get to break even, there's a little bit of a red flag in my head there. It's like, you should be growing right as long as you can prove. You can demonstrate to VCs is that your unit economics work, right?
Peter: As in the amount of money we spend to acquire customer is offset by a multiple of the lifetime value of that customer. You should be spending as much money as you can to acquire those customers because over the long run, eventually that will flip and we'll you'll you'll get real market domination, which is why enterprise SaaS businesses burned so much cash for so long, because really what they're doing is they're just acquiring market share as fast as they can and trying to lock up the market.
Peter: And if your mindset is like, no, we don't want to like grow that fast because we're trying to be like, you know, conservative with our cash and so forth. But you are essentially giving up the front runner seat to your to your competitors. And so like on the one hand, like in certain markets and environments, I don't think it's necessarily bad to be to get to a point where you could flip a switch and get to break even.
Peter: So you didn't need more money. But the flip side is like, don't lose sight of the like what you're trying to build and, you know, give up that market position to somebody else because you're trying to pursue some some goal of of being break even and not needing to raise more venture money because we live like even in this current market, right, where things are really uncertain, we still are in the society where they fundraising is strategy, right?
Peter: The more you raise, the more you can plow into marketing and sales, the more you can acquire customers and the more you can cement yourself as a market leader and dominate. And if you are not doing that, you are missing out because your competitor definitely is.
Jon: Is are very good. Wise points, Peter.
Peter: Well, I don't know about that, but this is what I see.
Jon: So I think no, I think they're fabulous points. I think as you know, when I pitched investors, I now got you a bunch and they're like, Why are you raising out of my time as money? You know, because money, you got to you just got to run, right? What's better to have to burn all your time? Go really slow and then get outpaced?
Jon: Or do you just hit the ground running?
Peter: Yeah, but I mean, we all make choices, right? So it just depends on what what you care about. If you compare, if you care about control, then maybe race slow. If you care about time, value money, you actually want to enjoy your retirement and retire when you're young, then maybe raising money and giving up some control makes sense.
Jon: All right. Well, thank you for watching. Make sure you go to venture capital firm to subscribe to all of our podcasts to stay up to date on other secrets we may share or comment below. If you're watching on YouTube or, you know, leave a question and we'll Peter and I will answer it on a future episode.
Peter: Yeah. What are the big lies you've heard or you've got yourself telling investors when you've met with them?
Jon: We could probably do a an episode on what Lies vs Tell entrepreneurs.
Peter: Ooh, that's a good one. That's a great one. Throw in the comments below the B.S., the lies you've heard VC's tell, and we'll dive into that next time.
Jon: All right. Thanks everyone, for watching. Bye.