Its not really a fallacy. They just have different goal posts from the entrepreneur. A business that tops out at $500,000 revenue per year is a failure for a VC. This could be a big success for a sole entrepreneur.

Just keep their advice in context.

I know Bob Parsons (of GoDaddy fame) isn't the most popular person here, but I'm always inspired by something he said (paraphrased loosely due to recall):

"Don't be afraid to enter a crowded market. Just be better than everybody else."

That's my mantra, personally. The stuff we're doing at Fogbeam Labs competes - to some extent or other - with stuff being done by Jive Software, Alfresco, Yammer, IBM, Cisco, Microsoft and a few other also-rans. But we really don't care, because we intend to simply make better products and kick the holy shit out of Jive Software, Alfresco, Yammer, IBM, Cisco and Microsoft.

Oh yeah, we're a little bit brash too. Ah, well, I always said one of my mindsets was to be "The Mötley Crüe of software companies." \m/

    I always liked the saying that the early bird gets
    the worm. However, the second mouse gets the cheese.
    Breaking new ground means that you get to be the
    first one out there, but it also means you have no
    paths to follow, no wisdom to heed, and no mentors to
    be mentored by. You have to hack that sucker open.
    It's harder. It really is.

http://www.readwriteweb.com/start/2009/05/first-mover-advant...

My startup is tackling what my former employer attempted to do, but I'm going to do it much better and sell a far superior product. I interfaced with customers and users at my last company. They failed to address the pain points that were brought up. Additionally they failed to pay attention to how the needs of users were evolving. I took it upon myself to address these customers and build something better.

Make sure you don't infringe on any IP's or violate any non-competes. =)