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The No-Bull-Shiitake Investor Wishlist
Guy Kawasaki of How to Change the World | December 9th, 2008 - 04:30 PM
(75) found this useful. Do you? 
You may never try to raise money from a venture capitalist, but unless you’re a trust-fund brat, you’ll probably have to raise money from someone to fund a business. Two pieces of advice before you begin:
First, don’t confuse fundability with viability. Only a few thousand companies a year raise venture capital. These companies are fundable in the sense that they have fooled a venture capitalist into believing that they can achieve sales of at least $100 million per year within five years. Thousands of other companies failed this fundability test—or, more likely, didn’t bother trying to raise venture capital.
Many of these companies are perfectly viable; they simply aren’t fundable, because they probably won’t achieve sales of $100 million/year, which is what venture capitalists are looking for. This applies to restaurants, bookstores, consultancies, blogs, and design firms. Venture capitalists are trying to fund the next Google, Apple, Microsoft, Cisco, and YouTube. Venture capitalists are not trying to help you build a nice $10 million business. However, angels, friends, fools, and family might think this a whopping success.
Second, don’t ask any potential investor to sign a nondisclosure agreement (NDA), because asking them to do so will make you look clueless. Venture capitalists and angel investors are often looking at three or four similar deals, so if they sign an NDA from one company and then fund another, they expose themselves to legal action. If you find an investor who is willing to sign an just to hear your idea, you probably don’t want his or her money.
I’ve never heard of a venture capitalist or angel investor ripping off an idea—frankly, few ideas are worth stealing. Even if your idea is worth stealing, the hard part is implementing the idea, not coming up with it. Finally, continuing the dating analogy, you probably won’t get very many dates if the first thing out of your mouth is “Will you sign a prenuptial?”
These are the characteristics of an attractive and fundable date for a venture capitalist or angel investor.
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Realness. This seems like a duh-ism, but few entrepreneurs do it. Most entrepreneurs focus on quick flips to an IPO or acquisition. don’t get me wrong: Venture capitalists and other investors aren’t necessarily good guys who want to make meaning and change the world. A simpler explanation is that entrepreneurs who make meaning and change the world usually also make money. Nothing is more seductive to venture capitalists than a company that may have a big impact on the world.
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Traction. The easiest way to prove that you have a real business is to already generate revenue. It’s one thing to believe your bull-shiitake pitch; it’s another to have customers and cash flow. You show traction, and investors will suspend disbelief. Fundamentally, you’re asking them to take a leap of faith, and it’s easier to get people to jump off a diving board than the Golden Gate Bridge. If you can’t show traction, then at least line up customer references who will really say, “If they build this, we’ll buy it.”
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Cleanliness. Investors are busy, so you need to present a clean deal to them. Clean means that there isn’t a lawsuit by your former employer contesting the ownership of the intellectual property, or a disgruntled founder who owns 25 percent of the company but doesn’t do anything but sit around and complain. The more crap that an investor has to clean up, the less likely he’ll be interested in your deal.
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Forthrightness. If you have crap that you simply cannot clean up, then disclose it right away—not necessarily in the first meeting, but soon thereafter. Also, have a plan ready to fix the problems. The worst thing you can do to an investor is surprise her with bad news, like a messy deal with lawsuits and conflicts, beneath the surface of the company.
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Enemies. Woe unto you who claims that there is no competition. It means you’re clueless or pursuing a market that doesn’t exist. Investors like to see some competition because it validates that a market exists. Th en its your problem to explain why you have an unfair advantage. If you truly have no competition (and I doubt it), then either say that Microsoft or Google might go after you because these companies want it all or provide potential competitive threats.
Generally, in everything that you say, ensure that your results exceed expectations. Deliver a prototype early. Deliver your list of references early. Sign up your first customers early. Close a partnership deal early. Launch early. The only thing you shouldn’t do early is run out of money while trying to raise money. Investors seldom fund ships that are already sinking.
Reprinted by permission from Reality Check: The Irreverent Guide to Outsmarting, Outmanaging, and Outmarketing Your Competition.
If you liked this chapter, there are ninety-three more where this came from.
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Curtis R. Curtis | December 10th, 2008 at 12:27 am
Thank you Guy. As you already know I am one of these guys. Nope no trust fund and after spending almost $2m building the software, we are now in revenue overdrive - sell, sell and sell some more. Speaking of selling, if anyone needs the latest and greatest SEO software, check out Ranksense.com. Anyways, everything here is absolutely on the money and actually makes me feel really good as we absolutely do meet these requirements, in fact, given our conversion rates at present, I think we will try to see if we can go it alone, given the low valuations VCs are giving right now - not to mention I do not want to count on luck “fooling” anyone in this market.
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Emilio | December 10th, 2008 at 12:30 am
Hi Guy, Your Book Reality Check is full of good material. I read a chapter twice a week. Probably finish your book by February 20009.
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David Damore | December 10th, 2008 at 12:35 am
More rock solid knowledge and information from Guy Kawasaki.
If you haven’t already, buy the book. No bones, no filler, 100% meat.
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Jack Lindberg | December 10th, 2008 at 2:25 am
I have all those and more. Where do I go for angel $$?
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Gerry Skews | December 10th, 2008 at 3:59 am
Hi Guy,
I think you are right on the money with what you say here. My own experience of rising funds for “brilliant” technology ideas over the years reflects exactly what you articulate. I would mention that the VC market in the UK and Europe is substantially different from that in the US. While it would take a chapter to summarise the differences I would just say that they are significant and approaches have to be different.
One anecdote I will share, the first VC I met when I did my first funding round in the UK listened intently to my value proposition, then picked holes in the strategy and as I was heading for the door said, “While the business plan you presented does not offer the ROI we expect, I would like you to meet with one of my other portfolio companies that I think could benefit from the technology platform you guys have designed” I knew at that point I had a winner on my hands.. Within a couple of months we were fully funded with another VC and up and running and well on our way to a thousand sleepless nights. The other portfolio company? well it was sold for well below the investment to a company that ultimately failed.
Just goes to prove there is a very thin line between tenacity and dogged stupidity, the difference is the people you chose to work with, which I think underlines your great points in this posting.
Regards - Gerry Skews (Ythos consulting)
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foldip | December 10th, 2008 at 8:47 am
Although I am young and unexperienced in this field, I cannot agree with your statement that “Even if your idea is worth stealing, the hard part is implementing the idea, not coming up with it.” What’s more: I think exactly the opposite is true. It is very hard to come up with a good idea, or an idea which turns out to be good :), and the implementation is just a little additional work. Being a VC and getting a good idea, is just one step from asking 50 developers somewhere in the world to implement that.
But I am sure I am wrong. But this is how I think about this.
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Scott Manley | December 10th, 2008 at 9:08 am
Great post and helpful as always.
What are the chances you could do a post on “How to tell if the VC you’re talking to still has funding”? In today’s economy, I’m talking to a few entrepreneurs that are getting the sense that the VCs they’re talking to don’t have the same/any funding but aren’t saying that in the hopes that they’re going to get some.
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Jared Lyda | December 10th, 2008 at 11:09 am
Thanks Guy! I’m not in pursuit of VC but am in pursuit of substantial cash. Your insights are fundamental. I’ve filed them in my mental rolodex.
Cheers,
Jared
http://www.fireandmotionblog.com
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TaZ | December 10th, 2008 at 11:12 am
Interesting as always! Some homework to do for me still. In the meantime i try getting some money with viral small ideas like http://www.worldslongestwebsite.com Let’s see if it happens
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Rob | December 10th, 2008 at 1:05 pm
To the poster who said the hard part is the idea. I have been through this process many times now and the idea is BY FAR the easiest.
In fact the way I operate is that if I believe I have a good idea I also assume 3-4 people also had the idea that same day and in the same amount of time I will develop it at least 1 other person will.
This has been proven over 10 times now, almost to the day. Its eery.
Plan your startup accordingly.
Rob
Exectones - The leader in Ringtones for Startups!
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Lance | December 10th, 2008 at 4:34 pm
I’m going to echo #2 traction. Projections based on current revenue and letters of intent mean a lot more than what we hope about an idea.
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Adam | December 10th, 2008 at 7:09 pm
This is a great post. Right now I have the idea now just need to find a partner and a team to develop it. This is great advice Guy. I am going to have to pick up your new book after I finish reading Rules for Revolutionaries. Loved The Art of the Start.
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Vivek Lath | December 10th, 2008 at 10:30 pm
Certainly insightful. I would like to focus the readers more on the last paragraph of your post. Learned from my own mistakes that moving fast is the best way to conserve and raise capital.
Implementation is certainly the most difficult task. Implementing (building, selling and repeat selling) is something that can really test your patience. Not to say that ideas are not easily replicable. Apart from the idea, it only takes certain skills and lot of common sense and patience to build a business.
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Dan Keldsen | December 10th, 2008 at 10:42 pm
Guy - received my signed copy of the new book, thanks much! As someone (finally?) launching a new company as of last week, I can say the arrival is timely!
But I’ve been following your advice for a long-time, except for that bit about not being crazy enough to be an entrepreneur. Whoops! Luckily I’m not beholden to VC money - I have paying customers! (for now - but we’re keeping the eye on cashflow, and I hear that’s *real imporant* eh?)
Cheers,
Dan Keldsen
Co-founder at Information Architected, Inc.
http://www.InformationArchitected.com/
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Jack Lindberg | December 10th, 2008 at 11:40 pm
the difference between ordinary and extraordinary is that little ‘extra’. Same goes with ideas…
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Gerry Skews | December 11th, 2008 at 2:57 am
Fuelling the “Ideas” debate. I used to think that ideas were easy and found it surprising that others were blown away by my genius (TIC) until I realized that ideas come from understanding the problem domain and being quite widely read in engineering & technology, oh yes, and having a lot of very smart friends whos brains you can pick to put together the solution.
One such smart friend told me that “Ideas are worthless, People who implement them are priceless” I have come to learn that this maxim is so true. It is all to easy to overvalue an idea, (I receive three a week) its also easy to dismiss the massive amount of hard work that is necessary to invest in getting a good idea to market and make profit from it.
If you want an ideas challenge….. Consider this…
Brain injury from trauma or disease is often caused or indicated by raised intra-cranial pressure. Currently the only way to measure it is to drill holes in the skull and insert probes.
Come up with a robust and reliable way to “remote sense” ICP and you will have solved a very significant clinical issue… If you solve the problem write to me and I will figure out how to make a few people quite wealthy…
Good luck…
gerry.skews@ythos.net
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Irina Mitrofanova | December 11th, 2008 at 5:00 am
Interesting analogy with dating process, by the same token strategic investor would be the one looking for a conventional marriage where partners need each other for more than just VC )) Ideally they should be able to bond by complementing each other and by sharing the vision/mission of changing the world together.
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Bret Conkin | December 12th, 2008 at 12:03 pm
As middleman that sees lots of pitches and connects them to investors, Guy’s points ring very true - as always. Interesting challenge to show exponential impact while staying “real”.
Jack Lindberg - you can find over 170 angel investors and much more on our free site http://www.fundfindr.com. Good luck!
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Sean Halle | December 13th, 2008 at 5:58 am
Anyone out there want free ideas? I’ve got thousands sitting around.. Better yet, name a problem, and I’ll find you a solution.. free! Seriously. It illustrates the value of details. 1% of value is idea, 99% details.
Seriously, though, I love solving problems, throw some challenges me way, just for fun. I dare you. I double dog dare you.
(For example, one possible solution to ICP sensing is measuring the rate of travel of sound waves and the angle of refraction as they go from skull bone into the fluid surrounding the brain, using standard techniques from geology.. or sensing the pressure on the skull by the rate of travel of sound within the bone.. think thumping watermellons and feeling the vibrations)
Sean
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Dr. Jim Anderson | December 15th, 2008 at 3:33 pm
Guy’s points ring true no matter if you are presenting a business plan to a VC or just presenting it for internal funding. The one key point that was skipped over was that you need to always be aware that there are other things that the $$$ can be spent on. You need to have a real good answer for why your project is the best one to get the funds.
- Dr. Jim Anderson
The Accidental Communicator Blog
“Learn How To Calm Your Fears, Wow Your Audience, And Get Your Point Across”
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colin | December 15th, 2008 at 6:08 pm
smart Guy, as usual. speaking of No-Bull-Shiitake, try http://www.BSFlag.com.
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David Bush | December 15th, 2008 at 8:52 pm
Great honesty and real world tactics Guy! Keep sharing the secrets and the world will change because of your influence.
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Mukul | December 18th, 2008 at 3:37 am
I like the way , its done..the beauty is the simplicity of practicality..
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Claire | December 19th, 2008 at 2:25 pm
Great advice guy. We are just about at the tipping point with http://www.8hours.com. Raised angel money and don’t want to raise VC capital. We need to prove our self first.
Thanks for being there for all entrepreneurs.
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Steven R. Sedlmayr | December 22nd, 2008 at 1:41 pm
You are right in what the VCs want. They want money first, change the world second. They want the next home run. And it usually is not their money, but managed money, and they get a big chunk of the success. Then declare themselves geniuses for making the investment, yet only one of 10 or more make the success. And success to them is making the 100 million or more. 10 mil really does not matter to them, they will sell their interests faster than they can shake a stick at. And they do have their own personal biases, based on what they know, and have seen work. Most just try to copy what the others did. Remember, they are not rocket scientists, but just push paper and money around. They invest money. They will try and tell how sage they are, but that means they invested in one or two companies that hit it big, not that they helped build it.
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Dan | December 23rd, 2008 at 11:28 pm
Great post Guy! Really insightful.,
We’re probably going to be looking into VC funding soon so I have a few questions, if anyone wants to chime in:
1) What kind/how much of equity should a company be prepared to give to their investors? What’s typical?
2) Should key management in the company expect to take decent salaries out of VC funding? I’m just curious as I see so many small start ups bringing in 5mil+ in investor money for small projects with less than 10 employees - seems like a lot of money is wasted.
Thanks!
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Leo Ku | December 29th, 2008 at 1:50 am
Hi Guy,
Big fans on your insight on entrepreneurship. We wrote an aritcle on our blog (Wealth Alchemist - launched by couple Stanford folks) and featured your post here:
http://www.wealthalchemist.com/Blog/2008/12/guy-kawasakis-no-bull-shiitake-investor-wishlist/
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Butler Consultants | April 2nd, 2009 at 10:25 pm
Thanks Guy. I am a huge fan of your insight.
http://www.financial-projections.com/
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