Entrepreneur Myths (15 page)

My 20-year-old son is wiser than I was at his age. When I was 20, I wasn’t as entrepreneurially smart. One advantage he has over me is that he grew up in an entrepreneurial household. He watched his parents go through the ups and downs of entrepreneurship in multiple ventures. He has listened to us discuss business since he was a baby. I admit I’ve become a little jaded over the years while (1) running a venture capital fund, (2) being part of some failed startups, (3) raising capital on various ventures, (4) running a film production company and, last but not least, (5) running a physical commodity trading company.

The bullshit and lies I experienced could be a book in itself. One of my upcoming books will be called
Why People Bullshit in Business
. It will be a 20-volume series that I’ll continually update for the rest of my life. It’ll go Hollywood, baby, and be a television series.

Entrepreneurs lie. Investors lie. Partners lie. Suppliers lie. Employees lie. Customers lie.

The number of people I’ve encountered who pretended to be investors is beyond ridiculous. This applies to venture capital too. More than once, I was invited to pitch at venture capital meetings only to be told the fund had no additional money to invest. Why the VC had me come in — I have no fucking idea, even today.

Entrepreneurs have lied to me about their financial records and history, in order to look good. The biggest entrepreneur bullshit document is the sales pipeline and potential revenues projections spreadsheet. With all the investments I’ve made in startups, only 20% met their sales forecasts. Sales are difficult to predict, as I covered in Myth 20 — especially for startups. An enormous number of entrepreneurs exaggerate their sales pipelines, either through sheer optimism or white lies. But they all believe their numbers. I guess the sales forecast is in the eye of the beholder.

For an entire year, the CEO of a software company I funded assured me they were about to close a deal with Amazon. Yeah, Amazon! Yippee! Month after month after month he gave me the sales pipeline update, and there it was — the Amazon “big sale,” right around the corner. It could close any fucking day. This went on until I stopped funding the company.

Lies are abundant in sales pipelines and forecasts, internally and externally. You must also watch people on your
own
team for misspeak, lies, exaggerations, bullshit, etc. From a management standpoint, be careful who you choose to take on as a partner and of what they promise to accomplish. I had a couple of partners who claimed to be able to do certain functions, such as raising capital, but they either didn’t deliver at all, or did other tasks instead. One so-called partner went behind my back and tried to cut me out of a commodity venture when they smelled big money. Greed can take over the minds of many people who are normally good. It’s hard to predict in advance who will turn on you. As I advised in the last chapter, have your attorney go over any partnership agreements. You should try to find partners with moral fiber at least as strong as your own.

Experience in business doesn’t insure immunity from bullshit. You must constantly watch for scammers, sociopaths, liars and cheats. Sometimes, the entrepreneur is just overly optimistic, delusional or lives in a bubble. They might truly believe they’re in the closing stage of a sale when in reality the decision must go through a corporate purchasing committee before the purchase is made. Translation: Your potential sales just went into a black fucking hole and it’s going to take longer than expected, if it ever happens.

There are two sectors where I see rampant lying, backstabbing and greed. One of them is the film business. The other is the physical commodities business.

The physical commodities business is the international trade or commerce of products and goods. On paper it seems simple. Company A buys product from Company B, arranges the financing and logistics, and then sells it to Company C in some other part of the world. Physical commodities are things like rice, crude oil, sugar, diamonds, gold dust, biodiesel, scrap metal, etc.

In the physical commodities business, I saw 99.99% of people lie or misrepresent themselves. I’m not fucking kidding. By the way, if you’re thinking about getting into the physical commodities business, good-fucking-luck to you. Don’t call me. Unless you’re very careful, you will be burned or waste a lot of time working on transactions that are complete bullshit. In that business, 360-degree transactions happen all the time. This is where you discover, just before closing a deal, that you are both the seller
and
the buyer. You discover this at last moment because everyone in the commodities business is looking to protect their source to the buyer or seller, because nobody trusts anybody else. Here’s how these clusterfuck (CF) transactions go:

(CF1)
You either own a product or represent a seller.

(CF2)
You go into the commodity broker marketplace to sell the product.

(CF3)
You call a few friends who tell you they have buyers for the product.

(CF4)
Your friends call their friends, who tell them they have buyers for the product.

(CF5)
Obviously, as the deal goes through the network, other companies add margins to your price, without even fucking asking or telling you. Lies. They also claim to be the actual owners of the product. More lies.

(CF6)
This shit goes on for days or weeks, and then one day you get a call from someone you know who knows of someone else who has an incredible opportunity to sell you the product. You find out — sometimes only after a broker tries to actually dial you into a conference call with
yourself
— that it is actually your product plus added commissions for an entire football team of people who all claim they own the product, or are “seller’s mandates,” or are direct brokers to the seller of the goods — blah, blah, blah.

This is exactly how it happened to a friend of mine — twice. Why does this happen in the physical commodity business or any other business? Well, it’s because entrepreneurs lie. People get greedy. It’s that simple.

When I was young and naïve, I gave people the benefit of the doubt. I assumed they were telling the truth. However, 20 years of entrepreneurial and investor experience has taught me better. I now assume that people are telling me the truth only after I see some proof. I’m not from Missouri but my attitude is, “Show me, motherfucker. Don’t just tell me.”

This attitude might sound pessimistic. However, look at it from the investor’s perspective. I once funded an entrepreneur who manufactured a great sports product. He strolled into my office one afternoon, demonstrated his product and I fucking loved it. Then this guy gave me some bullshit sales projections — you would have thought his company was going to be the next Nike. I invested because it was a great product; however I later discovered that his sales were not as good as he claimed. Nobody was beating a path to his better mousetrap and he needed capital for sales and marketing. What a big surprise.

Trust your gut. Keep your eyes and ears open. If you feel someone is lying to you in a transaction, but you can’t figure out why, then most likely they
are
lying. Your subconscious has figured out something your conscious has not yet processed, and your subconscious is 80% to 90% of your brain power. If you have reservations about a deal, and you don’t discount the transaction entirely — be extra careful you don’t get burned. And if you catch a liar in the act during any transaction, run as fast as you can. Otherwise, you stand the chance of getting fucked somewhere down the road.

The lies can get nasty. Back in my early days as an entrepreneur, I worked my ass off on funding a venture in the financial services sector. We were in the final phase and the big investors were about to come in, but the greed factor kicked in big time. I was having due diligence done on my potential partners but never finished, because two of these “partners” suddenly decided that I added no value and cut me out of the deal.

Obviously, this maneuver was designed to leave more money for them to share. If I had completed the due diligence, I might have discovered that two of these three entrepreneurs were con artists. One of them is currently serving time in jail. I am happy I was cut out of that deal. The irony was that a substantial amount of due diligence was done by various finance companies even after I was cut out, and nobody discovered the fraud until more than $50 million had been invested. No, this guy wasn’t Bernie Madoff — but he looked like he could be his ugly cousin.

Give people the benefit of the doubt. But conduct some due diligence. Google them, for heaven’s sake, or hire a professional. But even then, you can be taken for a ride into financial ruin. From an investor standpoint, unless the entrepreneur has a good reputation, you have to assume they will exaggerate, at some point, to get your fucking money.

My advice: Because entrepreneurs and investors at all levels must continually guard against being lied to, study the mechanics of lying. Read a book, take a class on how to read body language and facial expressions, or invest in a lie detector machine.

Brain Candy: questions to consider and ponder

(Q1)
What do you think? Do most people tell the truth in business? What percentage are liars?

(Q2)
Have you been burned by someone lying to you in a transaction? Did you lose money?

(Q3)
Have you ever been in a transaction where something warned you not do it, you did it anyway, and then lost a shitload of money because of some lying, motherfucker cheat?

(Q4)
What signs do you look for when trying to determine whether someone is lying?

Entrepreneur
Myth 24
| Competition is not important as long as you focus on your customer

“If ignorant both of your enemy and of yourself, you are certain in every battle to be in peril.”

— Sun Tzu, in
The Art of War
on Offensive Strategy

I don’t care who the fuck you are, how successful you are, or how dominant you are, you have to watch what your competition is doing even if you fully understand, or think you understand, your customer.

If I had a dollar for every time an entrepreneur pitching me for money told me they had no competition, I’d be a fucking billionaire. You have to know your customer, but you also have to know your competition better than the competition understands you or themselves.

I notice entrepreneurs in startups are lazier than people at Fortune 500 companies at analyzing the competitive marketplace. Entrepreneurs rely more on their intuition than on competitive analysis. In my earlier entrepreneur days, I was guilty of this myself. To a certain extent, intuition is extremely valuable, but you need to thoroughly understand the competitive landscape, whether you’re burning your own money or getting investment dollars from elsewhere.

Entrepreneurs need to analyze the competitive space from the standpoint of both direct competition and indirect competition. I recommend this book:
Competitive Strategy
, by Michael E. Porter. I first read it after dropping out of college and it influenced my life greatly. Written in the 1980s, it stands today as one of the true great business books of all time. Professor Porter is to strategy, what Mick Jagger is to rock ‘n’ roll. Many of Mick’s songs are absolutely timeless. So, it goes with
Competitive Strategy
. Professor Porter wrote another seminal book called Competitive Advantage. Believe me; you want the competitive advantage for your venture, so read it too.

It’s ironic that a college dropout promotes professors. Isn’t it?

Develop your competitive overview by looking at the following key variables played out in the marketplace. These are summarized from Michael Porter’s books.