It’s easy to turn off prospective investors.
Just feed them the same old lines.

by Guy Kawasaki

For a few months, Ive had a constant ringing in my right ear. The condition is called tinnitus, and my doctors say that it can be cause by an ear infection, too much salt in one’s diet, a stressful lifestyle, or even a neuroma.

I have a different theory. I think that listening to the lies, exaggerations, and wishful thinking of entrepreneurs has caused the ringing. You see, I’m in the business of helping entrepreneurs raise venture capital, and I listen to hundreds of pitches every year. I hear the same fabrications and delusions over and over again. So, as a public service, I am now going to disclose the top ten lies told by entrepreneurs – and what investors say to themselves when they hear them. I’m not expecting to cure entrepreneurs of lying (fat chance), but hope I’ll at least encourage them to be a little more creative. And I may just save the hearing of a few VCs.

1. Entrepreneur: “Our projections are conservative.”

Investor: “Multiply this forecast by .1 and add five years.”

God bless the entrepreneur who forecasts sales greater than Exodus, JDS Uniphase, and Cisco and then states that the forecasts are conservative. Nobody believes the financial forecasts – investors simply want to see that the entrepreneur understands the industry, the logic involved in putting together a reasonable financial model, and how companies grow. If every man, woman, and child needs to buy two WAP phones for a company to reach profitability, something is wrong.

2. Entrepreneur: “IDC (or Jupiter or Yankee Group or Gartner Group) forecasts that our market will be $50 billion by 2003.”

Investor: This is the fifth $50 billion market I’ve heard about today.”

When every plan makes the same grandiose claims about market size, investors have a hard time taking the projections seriously. Instead of trying to prove that the market will be big, enable investors to fantasize about its size. Give them the facts and the context they need to understand the scale of the opportunity for themselves. For example, if you can demonstrate that every corporate Web site on the planet needs your company’s product, an investor can figure out that the opportunity is big.

3. Entrepreneur: “Amazon will sign our deal next week.”

Investor: Call me when you get Bezos’s signature.”

Few new economy companies ever definitely say no to any alliance, partnerships, or offer. They’re all afraid of missing the Next Big Thing. Instead, everyone says, “You have an interesting idea. We’ll get back to you about it,” and then they don’t. Unfortunately, the entrepreneur hears, “Yes, we’re doing it.” Never talk about a Big Deal until it’s a Signed Deal.

4. Entrepreneur: “Key employees are set to join us as soon as we get funded.”

Investor: “Give me their phone numbers so I can verify this story.”

There’s no chicken-and-egg problem here. The order is clear: you get the human capital, you get the venture capital. If an entrepreneur can’t persuade key execs to join because of the opportunity, she probably can’t entice them with big salaries. Indeed, one of the litmus tests of fundability and entrepreneurial skill is the ability to attract talent without money.

5. Entrepreneur: “We have no competition.”

Investor: “Either there’s no market or you don’t know how to use a search engine.”

To this day, investors get business plans for on-line bookstores calming a first-mover advantage. If an idea is good, five companies are already working on it. If an idea is great, ten companies are working on it. Claiming that there is no competition to an investor who’s heard a similar pitch five times in the last six months is like screaming, “I am a bozo!” Bozos don’t get funded.

6. Entrepreneur: “We need you to sign a nondisclosure agreement.”

Investor: “You’re clueless: no one signs a nondisclosure agreement.”

Investors won’t sign your nondisclosure agreement because they usually see several similar plans: what if they sign one company’s nondisclosure agreement and fund another? In reality, the ability to implement an idea, not thee ability to keep it a secret, is the key to a successful start-up. Investors don’t fund treasure maps; they fund teams that can get the job done. If an investor is willing to sign a nondisclosure agreement, an entrepreneur might not want his money.

7. Entrepreneur: “Cisco (or Oracle or HP or Sun) is too slow to be a threat.”

Investor: “If arrogance were venture capital, your deal would be oversubscribed.”

These companies didn’t get where they are by being big, dumb, and slow. I love Clayton Christensen’s Innovator’s Dilemma as much as anyone, but funding the next c urve is a scary proposition. It’s even scarier when an entrepreneur dismisses the current curve’s gorillas. Show a healthy respect for the incumbents while demonstrating a compelling and believable way to compete with them.

8. Entrepreneur: “We’re glad the bubble has burst.”

Investor: “We are, too, because your valuation just dropped 50%.”

Let’s be honest: no one is glad the bubble has burst. For entrepreneurs, it’s harder to get funded, valuations are lower, and due diligence takes longer. For investors, portfolios are worth a lot less (and the lockup period isn’t over), and the employees of portfolio companies are quitting because their stock options are under water. Since the bubble burst, everyone has been trying to spin a silver lining, but the sun shines brighter and birds sing sweeter when Nasdaq is at 5,000.

9. Entrepreneur: “Our patents make our business defensible.”

Investor: “Hire more engineers, not patent attorneys.”

Unless you’re a biotech or medical- device company, it’s hard to support this claim. If an idea is worth copying, there’s a will and a way to get around the patent. File all the patents you like, but investors believe that what makes a company defensible is the ability to out-implement, not out-litigate.

10. Entrepreneur: “All we have to do is get 1% of the market.”

Investor: “I want to fund a company that will get 99% of the market.”

I call this the “Chinese soda syndrome”: if just 1% of the people in China drink a company’s soda, it will sell a ton of soda. The problem is that getting 1% of the Chinese to drink the company’s soda isn’t so easy. Another problem is that no one wants to invest in a company that aspires to grab only 1% of the market. (It’s every investor’s dream to learn that his company is on the radar screen of the Justice Department’s Antitrust Division.) Shooting for the top-dog position is much more attractive to an investor than claiming it will take only a minuscule market share to succeed.

So if you’re an entrepreneur, do me a favor and don’t repeat any of these whoppers in my presence. If you pitch me and I turn my bad ear toward you, I’m trying to tell you something.

Guy Kawasaki is the CEO of Garage.com, a venture capital investment bank based in Silicon Valley.

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After 23 years of working for The Man, I quit my job to start working for Myself. Pinned to the bulletin board in my home office are two New York Times quotes from smart people:

“Most people work 40-plus hours a week at jobs they don’t like to buy things they don’t need.” -anticonsumerist Madeline Nelson

“I had one of the best jobs in the world, but there is a world of opportunity.” -Chris Sacca, former head of special initiatives at Google

In the two and a half years since I quit, I’ve looked at these quotes every day. And during weeks when I’m not receiving any accounts receivable, they still affirm what I’m doing.

The American Dream has been roughed up lately. There is doubt where there once was direction. There is retrenching instead of renaissance. But there is one place where you can still dirty your hands with hope, display your ingenuity, taste a measure of independence, and feel a bit like your great granddad must have felt–fresh off the boat, testing your potential.

I’m talking about starting a business. And I know you’ve you’ve thought about it, too. Maybe you’ve been developing an invention in your head for years and now you’re considering patenting it. Or maybe you have a special family recipe or an idea for a kick-ass Web site, or you simply wonder what you could become if you put as much effort into working for yourself as you now do for someone else.

“In an economic downturn, entrepreneurship is usually the savior,” says Chat Moutray, Ph.D., the director of economic research for the Office of Advocacy at the Small Business Administration (SBA).

On these pages, we’ll show you how to evaluate and act on your dream. Although you may find it difficult to believe in the government, the economy, and even the future, there’s still one thing you can have unwavering faith in: yourself.

Opening a Business in Paradise

Risk Rating high
Start-Up Requirements A Jimmy Buffett-style disdain for the status quo
Best For An adventurous outdoors man with minimal responsibilities
Worst For A family man
Most Common Screwup Not spending enough time in “paradise” first

Richard Difede is describing the view from his office window. “I see six palm trees and a stand of mangroves. And beyond that, I know there’s a beautiful bay where people are surfing and sailing. It’s 88 and sunny.” For his morning commute, he drives a winding coastal road past a spot where Columbus landed during his travels through the New World.

Difede is the president of Gold Coast Yachts in St. Croix, U.S. Virgin Islands (goldcoastyachts.com). Since he left the mainland 30-plus years ago, he has evolved from surf bum to savvy island entrepreneur who employs 60 people in a multi-million dollar yacht-building business.

But even though he’s admittedly on vacation within 5 minutes of leaving the office, Difede still logs 5-hour weeks and deals with many of the same headaches that regular working men do. And therein lies the fantasy and the reality of starting a business in paradise.

“Tourists come here and they’re overwhelmed by the environment,” says Difede, 56. “They forget their common sense, whether they’re drinking rum daiquiris or deciding to come back next week and open a business. Life is good here, and there’s a lot of opportunity, but you have to be smart about it.”

Determine What’s Driving You. “Paradise is a state of mind,” says Difede, who points out that the place where he grew up and couldn’t wait to leave–Franklin Township, New Jersey–was ranked fifth on Money magazine’s 2008 list of best small cities. “Are you running away from something, or running toward a deep, lifelong dream? It’s important to determine which of those questions defines you.”

Consider the Wife and Kids. If you have a family, their happiness will largely determine yours. “Kids generally love the tropics,” says Difede, “and the private schools can be quite good. But if your wife is used to moving from air-conditioned house to air-conditioned ca to air-conditioned Starbucks to air-conditioned shopping mall, it’s going to be a challenge for her.”

Look for Islands That Fly the Stars and Stripes. You can find an exotic locatio without leaving the States. There’s Hawaii, of course, but there are also U.S. territories. Difede recommends the Virgin Islands because of its “spectacular” tax program. For instance, if your business meets Economic Development Authority guidelines (usvieda.org), 90 percent of its eligible net revenue will be income tax–exempt.

Starting a Traditional Business

Risk Rating Medium to high
Start-Up Requirements Cojones and capital
Best For Anyone who desires total freedom
Worst For A man who needs structure to be productive
Most Common Screwup Not spending enough time in “paradise” first

Brett Hoebel ever started out to be an entrepreneur, and neither did Dawayne Brashear. Hoebel was in premed and then finance, while Brashear worked mostly as a model and flight attendant. But each man always had something he truly enjoyed that he dabbled in on the site. Hoebel let fitness classes part-time at a big urban gym, while Brashear used his interior-design degree to occasionally land small residential projects. These avocations eventually grew into vocations. Hoebel Fitness (hoebel.com), headquartered in New York City, offers personal training and nutrition programs, plus group fitness classes and gear. Brashear’s Edit Interiors (editinteriors.net), based in Bloomfield, New Jersey, specialized in commercial and residential interior design.

Although each business has an online component, Hoebel and Brashear still do most of their work the old-fashioned way–face-to-face, from brick-and-mortar storefronts. It’s handshakes, not keyboard clicks, that punctuate most of their efforts.

Together, they represent the diversity of backgrounds and interests that brig people to traditional small businesses. Here’s some advice on how you can take a skill, a love, and turn it into your livelihood.

Moonlight first. Starting a traditional business takes the biggest cojones of all because of the physical assets involved and the lack of a track record. So tiptoe into it with hands crossed guardedly in front of your assets. If you think you have a knack for computer repair, fix friend’s machines first .Or if you truly believe that Nana’s kiffles might have national appeal, test market them in a few local restaurants.

Be smart about raising capital. Although lots of people do it, the worst way to fund a start-up is by borrowing from credit cards. Instead, check out the SBA’s extensive loan program in the financial-assistance section at sba.gov/services/, or investigate venture capital options at activecapital.org.

Put yourself out there. You won’t have much money for advertising at the outset, so attend seminars, trade shows, or any gatherings of potential customers. “I went to a fundraiser the other night,” says Brashear. “I was tired, but forced myself to go.” Turns out the mayor of a major Northeast city was there. “Now I’m talking to him about doing a three-floor commercial installation.”

Devise 1-year, 5-year, and 10-year ideals. This is your role in the business at different points in the future. It’s more general (and even philosophical) than what’s in your business plan, but it can be just as influential in setting direction. Hoebel, for instance, doesn’t want to be teaching fitness classes 1 years from now, so he’s branching out into video.

Patenting an Invention

Risk Rating Low to medium
Start-Up Requirements One new, useful, not-so-obvious idea, and a few thousand dollars
Best For A creative individual
Worst For A guy who hates following instructions
Most Common Screwup Hiring an invention developer

Mark Kroll, Ph.d., holds nearly 300 U.S. patents. These range from the pet phone (“Fluffy? Is that you?”) to many improvements on the implantable defibrillator. (He’s a leading inventor of medical devices).) Although the 56-year-old Minnesotan won’t disclose how much all these patents have earned him over the years, his roles with various start-up companies hint that he’s doing fairly well. Plus each of his four children is a patent owner, as is his wife.

“I believe the average guy has at least one million-dollar idea in his lifetime, but he doesn’t follow through on it,” he says. “To a degree, everyone is an inventor.”

That being said, patenting an invention is one of the most complex and potentially poverty-inducing forms of entrepreneurship. “It’s shocking how many people spend $50,00 or more inventing, producing, and patenting a product, only to find out there’s no market for it,” says Bo Fishback, vice president of entrepreneurship at the Ewing Marion Kauffman Foundation.

Here’s how to objectively evaluate your idea and negotiate the patenting process.

Do a quick patent search. Simply type in a description of your invention at google.com/patents. You’ll be able to view actual applications back to 1836 (unlike U.S. Patent and trademark Office’s database, which goes back to 1976). You can also view detailed claims and drawings. Don’t be discourage to find other patents similar to yours, Kroll says. Instead, study them carefully to determine what makes your idea different.

Record the invention properly. File a provisional patent application (uspto.gov/web/forms/index.html). This entails carefully describing the product or process (as if you were telling a friend in an e-mail, says Kroll), supplying illustrative drawing, and paying a fee of $110 to $220. For a year after you file, you can call your invention “patent pending” and develop it further, without fear of infringement.

Evaluate its commercial potential. Now that your idea is legally protected, show it to potential customers or clients and gather objective opinions. David Pressman, a patent attorney for nearly 50 years, advises paying particular attention to any dangers noted in the design, because nothing kills a patent’s commercial value faster. Money spent on market research and refinement is always money well spent.

Apply for a patent. Using a patent attorney can cost up to $20,000, but Kroll says you can reduce that fee to around $5,000 by following the advice above and formulating your own detailed description of the invention. “Do the sketches first and put number by every element,” he says. “Then describe how each numbered element works, and you’ll have the starting work done on a high-quality patet application, leaving your lawyer to focus on the tricky part–the claims.” The fees start at $545, and if the application is approved, the patent-issue fee is $755. Be prepared to wait a year or two.

Market it to a suitable company. To profit from your invention, try to sell or license it to an appropriate company. Steer clear of any fee-based invention developers, say Kroll ad Pressman. You can develop a marketing plan on your own. Start your research at inventorsdigest.com/resources.aspx.

Starting an Internet Business

Risk Rating Varies
Start-Up Requirements A computer, an Internet connection, and a Web site
Best For Any entrepreneur
Worst For The tech illiterate
Most Common Screwup Waiting for customers to find you

Mark Llano, 40, served in the first Gulf War, worked as an investment banker on Wall Street, and then became smitten with the idea of starting an online business that sells tactical military gear to the government .So he tapped his credit cards and borrowed against the value of his home to launch Source One Distributors in 2003, working out of what used to be his 5-year-old daughter’s bedroom. Six years later, his company (buysourceone.com) features more than 500 vendors and has annual revenues of $52 million.

The internet is full of success stories like these. But there are just as many stories of fathers who lost their daughter’s bedrooms in foreclosures or young studs who lost their starched shirts to some foolishness. Here’s how to maximize your Web venture.

Realize that a cyberbusiness is no different from a traditional business. You’ll need thorough research, a well developed business plan, ample capitalization, smart advisors, a solid PR and marketing plan . . . essentially the same foundation that underlies every successful business in America.

Go on 70 percent. Research your idea, but don’t overdo it. “If you wait until you have more than 70 percent of the information, you’ve waited too long,” says Shawn Boyer, founder of SnagAJob.com and the SBA’s 2008 Small Business Person of the Year. “Less than that and you’re increasing your chance of failure.”

Hire SEO and PPC experts. “Hire a consultant who knows search engine optimization (SEO) and pay-per-click (PPC) advertising,” Boyer says. Your goal: Your site appears on the first page when certain keywords are searched.

Latch onto your local SBA office. By law, 23 percent of all federal contracts must be set aside for small businesses, and the SBA’s 8(a) business-development program helps open the doors for qualified firms to register and compete for these contracts. Your district SBA office (sba.gov/localresources) can help you determine if your company qualifies for any of this action.

Buying a Franchise

Risk Rating Medium
Start-Up Requirements On average $20,000 franchise fee and $75,000 to $200,000+ start-up costs
Best For A midlevel manager
Worst For A guy who wants total independence
Most Common Screwup Not consulting other franchise owners

It’s the soft opening for Dickey’s Barbecue Pit in Bethlehem, Pennsylvania, and a herd of people, including a live band, are in the restaurant. The kitchen is thrumming, and Dick Kile is in the middle of it all, shaking hands, doling out dill pickles, and extolling the pulled pork. Frankly, it’s difficult to believe he was once an executive vice president at Citigroup and, in fact, still runs a mortgage company. You don’t see many bankers in brisket.

“Even though I have no experience in the restaurant business, it’s something I always wanted to do,” explains the 53-year-old Kile. “I ate at a Dickey’s in Texas about 8 years ago and thought, ‘Wow, what a concept,’ but they weren’t franchising outside Texas at the time. One Sunday night a couple of years ago, I was on franchisegator.com and the Dickey’s name popped up. I made some calls, met the Dickey family, and here I am.”

Across America, Kile’s story can be retold 909,253 times: That’s how many franchise establishments exist i the United States. Together they generate $2.3 trillion in business and employ more than 11 million people, according to the International Franchise Association (IFA). Although the average franchise fee is about $20,000 and you’ll typically need another $75,000 to $200,000 for start-up costs and working capital, it’s all significantly less risky than trying to launch an entirely new business. That’s because you’re not just licensing a product or name; you’re (ideally) purchasing a proven system.

Remember that feasibility has nothing to do with franchising. Anyone can franchise anything. While it’s in the best long-term interest of the franchisor–the one selling the franchise–to encourage success, there’s no guarantee of it.

Shop the market. To find the best franchise for you, check online resources or attend one of the IFA’s several annual trade shows (franchise.org/events.aspx), where you’ll meet frachisors, attorneys, accountants, brokers, venture capitalists, and other types of experts. The hottest growth category continues to be computer products and services (up 274 percent over 5 years), while automotive and printing-related franchises lead the decliners. Two new franchises of particular interest to men include Tilted Kilt Pub & Eatery and Knockouts (a boxing themed salon for men).

Study the UFOC. By federal law, the franchisor is required to provide you with a Uniform Franchise Offering Circular (UFOC), which is essentially a disclosure statement addressing topics ranging from franchise fees to earnings claims. Be aware, however, that the government merely mandates and registers these documents; it does not verify the accuracy of their information. For expert help in reviewing the fine print, visit the IFA’s supplier forum at franchise.org.

Be sure to talk to franchisees both in and outside your area. Those nearby may consider you competition and may not provide completely honest feedback, says Pamela Mitchell, CEO of the Reinvention Institute, a career transformation company based in Miami. You might even want to work i the franchise for a few weeks, since there’s no better way to judge the day-to-day reality.

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