« Commandment #7: Limit Yourself to the Baker's Dozen | Main | Commandment #9: Be Like Goldilocks »

March 19, 2005

Commandment #8: Know What You Don’t Know – and Admit It

If all questions about your startup had well-known, easy answers, you’d be on your IPO roadshow, not meeting with early stage VC’s.  Most good, early-stage VC’s don’t expect entrepreneurs to know everything, but they do expect entrepreneurs to know what they don’t know and to be upfront about it.  This Commandment gives advice on how to handle this.

To set the stage:  VC’s invest in people.  You’ve all heard the old saw: “To a VC, what are the three most important things about a startup?”  Answer:  “(1) the team, (2) the team and, (3) most of all, the team.”

By and large, it’s true.

Now, if you followed Commandment #1, you’re meeting with VCs who know something about your area. I know it seems hard for entrepreneurs to believe (especially given some of the comments I’ve gotten), but VC’s are generally smart people (present company excluded).  They can have lots of other unattractive attributes (just like entrepreneurs and other people), but they are, on average, reasonably smart.  Thus, your jaw shouldn’t drop if you find yourself in a VC meeting and you get a question about your business to which you don’t know the answer.  Believe it or not, this sometimes happens.

Here’s some really important advice. 

When this does happen:

            DO: admit (with confidence) that you don’t know the answer

            DO: make a note of the question

            DO: quickly find out the answer to the question

            DO: promptly follow up offline with the VC who asked the question

DO NOT, REPEAT, DO NOT: fake your way through an evasive, oblique, or indirect attempt at an answer.

I know from comments to my blog that some readers reject my proposition that VC’s are, more or less, smart folks.  That’s OK.  Everyone’s entitled to their own view on this matter, and, who knows, they may even be right.  But, even to those doubters (if they want to raise VC money), I implore you to believe that VC’s (smart or not) do have good bullshit detectors – even in areas where they’re not necessarily domain experts.  Often, of course, it’s not even that hard.  Human beings are generally pretty good at reading body language, and body language usually gives away evasive behavior.

To put this in a more positive light, from the VC’s perspective (no VC actually thinks about it this “formalistically”), I offer this little “algorithm”:

·        There’s a “list” of the important questions about any new business idea, some of which are not currently “answerable” (e.g., will the market develop as predicted by the entrepreneur);

·        The entrepreneur should have answers to most of the currently “answerable” questions on this “list” (e.g., why a large incumbent vendor with major brand recognition and a huge cash hoard can’t easily move into the market); and

·        If the entrepreneur doesn’t, he should admit it, and quickly heed the aforementioned advice about follow-up.

Again, VC’s don’t expect entrepreneurs to have all the answers.  As mentioned, if you did, you’d be on your IPO roadshow.  VC’s do, however, expect entrepreneurs to know the “list” of important questions. Failure on this front is the real confidence deflator (though, to say the least, it also doesn’t inspire confidence if an entrepreneur doesn’t know the answers to questions that he should). 

Failure to heed this advice can hurt an entrepreneur in a way that might come as something of a surprise.  VC’s ultimately cannot know nearly as much about your particular business as you do (see numerous references in prior Commandments).  After lots of due diligence meetings, reference checks, customer calls, etc., many funding decisions more or less rest on VC intuitions about the “character” of the entrepreneurs.  This is why VC’s are so much more comfortable backing entrepreneurs they already know. 

Keep in mind, many important questions about a startup are not answerable until the startup answers them (positively or negatively) by executing its business plan.  VC’s, at least the good ones, know this. Thus, if the entrepreneur exhibits evasive behavior when answering a question, the “trustworthiness meter” starts running in reverse.  Believe me, every startup will encounter situations in which the entrepreneur will have to report to the Board of Directors on a tense, critical situation, with highly imperfect information – and, after lots of analysis, the Board’s decision will often rest on beliefs about “character”.

So, for any entrepreneur who wants to raise VC funding, following Commandment #8 -- (1) know a lot, (2) know what you don’t know and (3) admit it when asked -- will get you a lot farther down the road.

March 19, 2005 | Permalink

Comments

Hi Allen. Great, great post. Just goes to once again underline the depth of information in the blogosphere.

As a founder, I can probably add to the discussion about who is smarter and who is not- by sighting (what I think is) an important distinction.

All entrepreneurs suffer from overconfidence. They just can't grasp that their venture is likely to fail, being both subject to normal distribution, bad luck and human fallibility.

VC's on another hand, understand very well that even what appears to be a bullet proof business, may still end up being a disappointment.

In that respect- the question of who knows more about the market, the technology, the strategy and all that- is secondary- the VC's can teach us a lot about risk management (because I find it to be their professional specialization).

I wonder if risk management forms a part of your job description? If so, isn't strange that RM, as a central job for both the entrepreneur and the VC, fails to be included in the most popular entrepreneurship curricula?

Posted by: Danny | Mar 24, 2005 7:05:28 AM

I agree with Danny that all entrepreneurs suffer from overconfidence, however if you do not have maximum confidence, the venture is likely to fail.

Posted by: Pagerank Prediction | Jan 25, 2006 3:13:34 AM

thankyou

Posted by: sohbet | May 7, 2007 3:43:51 AM

Post a comment