From: Linda (email@example.com)
Date: Tue Jun 20 2000 - 21:31:46 PDT
VC P.S.: Top ten VC myths, part 2
By Lawrence Aragon
Redherring.com, June 21, 2000
Bill Reichert doesn't have anything against MBAs. Heck, he
has an MBA from Stanford. But the president of Garage.com
has some pointed advice for his peers: get your noses out of
the textbooks. In the second installment of his top ten
myths of venture capitalists, he shoots holes in the "gap
analysis" taught by business schools and deflates four
common misconceptions. "I piss off just about everybody," he
says with a hearty, unmistakable laugh.
* Myth No. 5: Find a need and fill it. *
The reality: Anticipate a need and invent a market. As the
great hockey pro Wayne Gretzky said, "Skate to where the
puck is going to be."
Mr. Reichert calls it his "anti-MBA business model." Too
often, entrepreneurs get caught in the standard "gap
analysis" they're taught in business school. That framework
urges business people to research a market, identify gaps
between what customers want and what the market provides,
and then fill the gaps. Seems like a reasonable approach.
The problem is that in today's high-speed Internet economy,
gap analysis doesn't go far enough.
You must look beyond the gaps to where that puck is headed.
Getting trapped by "gap analysis" won't get you there. "The
gap in the market right now isn't going to be a business
opportunity in 18 months," Mr. Reichert says. "If the gap is
that visible or that important, someone is going to address
it faster than you or leapfrog it altogether."
Remember that the problems of gap analysis may emerge later
in the development of a company, not just at the
business-plan stage. Mr. Reichert recalls a board member who
came back from a tradeshow and was high as a kite about
interactive TV and wanted the company to change its
strategy. "There was huge pressure on us to shift the model
to interactive TV, but fortunately we resisted," he says.
* Myth No. 4: If you build it, they will come. *
The reality: Anyone can build, but can you execute?
"As opposed to the MBA-driven business model, this is the
engineer-driven business model," he says.
This may sound old hat, but don't get caught up in gee-whiz
technology. Mr. Reichert says the problem still is very much
with us. Even when it isn't readily apparent, it's bubbling
below the surface. Based on my correspondence with
entrepreneurs, I agree.
"Entrepreneurs are trained well enough so that they say,
'No, no, no. We're not technology driven,' or 'this isn't a
field of dreams,'" he says. "But deep down in their heart of
hearts, they feel that if their idea sees the light of day,
the world will beat a path to their door."
The bottom line -- as you've heard time and time again --
great technology isn't enough. Steve Jobs has a great
technical mind, but he's also a hell of a salesman. Too
often Mr. Reichert sees entrepreneurial teams that lack the
person or people who can sell ideas to new employees,
business partners, customers, and investors. "You've got to
sell all the time, and that's what makes the difference
between a success and a failure."
As Garage.com co-founder Bill Joos says, "It's not enough to
build a better mouse trap. You must really want to kill
* Myth No. 3: Someone will steal my idea. *
Reality: They already have your idea -- and the next one.
Entrepreneurs keep making the same mistake on this count. I
usually get at least one email from an entrepreneur every
one or two weeks asking how he or she can protect his or her
killer idea when VCs won't agree to a non-disclosure
agreement. That's the risk you take. If you pitch your idea
to a VC, you're right to be concerned about someone ripping
it off -- or the VC distilling the information and passing
it along to a company he or she already funds in your space.
However, if you don't pitch the idea, you're never going to
get funded, and your company will forever be a bunch of
words scribbled on napkins.
Mr. Reichert laughs when he recounts a "favorite" story
underscoring his point. A bright-eyed entrepreneur
approached him at a conference. She said she had an amazing
idea and was recruiting a team. "That's great," he replied.
"Why don't you send along your executive summary." She
wouldn't do that unless he signed a non-disclosure
agreement. So he said, "OK, then just tell me the name of
your company so I can keep an eye out for it if you decide
to pitch it." She wouldn't do that either, explaining: "If I
told you, it would give it away." (Rim shot!)
It's not enough to have a great idea. You need some kind of
"unfair advantage." "You should be able to articulate a
compelling business idea that you can win, even if the
entire world knows you've got this idea," he says. "You've
got to have some unfair advantage -- domain expertise, a
relationship, a technology, or something else other than the
uniqueness of your idea."
In a previous gig at The Learning Company, Mr. Reichert's
unfair advantage was the company's backing by Josten's
Learning. It wasn't enough that The Learning Company had a
great idea to develop online instructional materials for
colleges and universities.
* Myth No. 2: VCs don't get it. *
The reality: Unfortunately, they do. Make sure you
understand their feedback.
"Generally, VCs are pretty smart people," he says. "They
know a lot more about certain things than you do. So you
should take advantage of the opportunity to learn and not
just dismiss them as bozos."
The main point here is that it's too easy to blame VCs if
they take a pass on your idea. "Oh, they just don't get it,"
is a frequent refrain. I won't go so far as Mr. Reichert to
say that all VCs get it, especially these days when starting
a VC firm is as trendy as Regis Philbin's monochrome shirts
and ties. You need to do your homework and know who you're
I agree with Mr. Reichert's advice: When you're going to
pitch a VC, take someone with you whose sole purpose is to
observe and take notes. That person should write down the
exact questions that were asked, the body language of the
VCs, what piques their interest, and any other clues about
the concerns of a business plan. Even if you don't get
funded, you have invaluable information that you can use
when you pitch to the next VC.
* Myth No. 1: Our projections are conservative. *
The reality: "Lies, damn lies, and business plans."
This is just a short piece of advice to keep entrepreneurs
from embarrassing themselves or losing credibility with
investors. Mr. Reichert has a lengthy list of things you
should never say to a VC, including "our projections are
conservative," "there is no competition," "we're going to
sign a contract with XYZ company next week," and "ABC
competitor can't move fast enough."
VCs have heard these claims over and over again.
"Entrepreneurs don't realize that these are big red flags
for investors," he says. Do yourself a favor and don't
repeat them -- even if you honestly believe they're true.
Just focus on the fundamentals of your company and how
you're going to win. Don't make statements on which you
can't deliver. For example, if you don't have a contract in
hand, don't suggest that your inches away from landing Cisco
as a customer.
NEXT TIME: Mr. Reichert will field readers' questions. Send
them in as soon as possible.
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HEADQUARTERS: Palo Alto CA
TOP MANAGEMENT: Guy Kawasaki, founder, CEO, and chairman;
Bill Reichert, president
DESCRIPTION: Helps seed- and early-stage technology
companies raise funding from a qualified pool of venture
capital firms, angel investors, and corporations
TRACK RECORD: Helped 40 startups raise more than $101
million in 1999
SAMPLING OF INVESTOR MEMBERS: ETrade (Nasdaq: EGRP);
Advanced Technology Ventures; Mayfield Fund; Ben Rosen,
chairman of Compaq (NYSE: CPQ); Federico Faggin, CEO of
Synaptics; and George Gilder, egghead and president of
Gilder Technology Group
NOTEWORTHY: In February, the company filed a registration
statement with the Securities and Exchange Commission to go
public. That same month, it raised $27 million from a
lengthy list of top-tier investors, including Sequoia
Capital; Goldman Sachs (NYSE: GS); and MSD Capital, Michael
Dell's private investment firm.
MR. REICHERT'S RESUME: Mr. Reichert spent five years as a
consultant, doing stints at McKinsey&Co. as well as joining
two ex-McKinsey alums to start their own consulting firm. He
also cofounded five companies, one of which went public
(Academic Systems) and one that was sold (New Venture
Consultants). He also helped turn around The Learning
Company. Not everything he touched turned to gold. He fell
into the pen-based computing hoopla with Infa Technologies
and got burned like everyone else.
PERSONAL: The Chicago native is married with three kids. A
closet curler, he was the "skip" of the "rink" that made it
to the Illinois state junior championship final.
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