I sat down with Tim Draper recently to chat about the future of venture capital, the global meltdown, and the DFJ investing philosophy. Check out this two part interview here.
I recently made another trip down Sandhill Road to visit Draper Fisher Jurvetson, one of the most prestigious venture capital firms there is. After checking out Steve Jurvetson’s awesome space collection, I sat down with Tim Draper to pick his brain on the most important issues in venture capital and entrepreneurship today. Check out our interview below after a brief bio. Special thanks to Tim for being so generous with his time.
Timothy C. Draper is the Founder and a Managing Director of Draper Fisher Jurvetson. His original suggestion to use "viral marketing" in web-based e-mail to geometrically spread an Internet product to its market was instrumental to the successes of Hotmail and YahooMail, and has been adopted as a standard marketing technique by hundreds of businesses. On behalf of Draper Fisher Jurvetson, Tim serves on the boards of Glam, Kyte.tv, Meebo, ShareThis, SocialText, Wigix and DFJ Plug ‘N Play companies. Previous successes include: Skype (EBAY), Overture.com (YHOO), Baidu (BIDU), Parametric Technology (PMTC), Hotmail (MSFT), PLX Technologies (PLXT), Preview Travel (TVLY), Digidesign (AVID), and others.
Tim launched the DFJ Global Network, an international network of early-stage venture capital funds with offices in over 30 cities around the globe. He founded or co-founded DFJ ePlanet (global), Draper Fisher Jurvetson Gotham (NYC), Zone Ventures (LA), Epic Ventures (Salt Lake City), Draper Atlantic (Reston), Draper Triangle (Pittsburg), Timberline Ventures (Portland), Polaris Fund (Anchorage), DFJ Frontier (Sacramento and Santa Barbara), DFJ Vina Capital (Vietnam), and DFJ DragonFund (Shanghai).
Andrew Bellay: There have been a lot of trends over the past few years that have changed entrepreneurship and venture capital like cloud computing, opensource platforms, workforce virtualization, etc. Aside from reducing the cost of a startup, what else have these trends changed?
Tim: The trends happened because we were able to spread product throughout the world through the internet. It has allowed us all to communicate on a single platform. Now you can put something out there on the web and someone else can retrieve it anywhere in the world. That turns out to be a very valuable tool for a company that has remote operations. Sales, inventory, shipping, and finance, can all now happen out there in the cloud.
The big enterprise is just now recognizing the value of cloud computing. It’s just starting. It’s not just inventories or whatever – It’s social networking too. You can have a social network for just your company and it’s a very efficient way to know who you need to communicate with and know what they’re doing. That turns out to be really beneficial to the enterprise.
Of course the consumer has enjoyed the cloud for a long time and has done a lot of interesting things with the cloud. But right now it’s the enterprises that looks like they’re going to start to benefit.
Andrew Bellay: What about the life sciences? Will they benefit from these trends?
Tim: The life sciences and the patients are really going to benefit from the cloud. It used to be that if a patient came in with an infection, a doctor would give them penicillin and then you’d find out later that they were allergic to it. Then the same thing happens later when you go to a different doctor with a different infection. Now, if you find out a patient is allergic to a medication, it can be up in the cloud for another doctor to pull down and realize that this patient is allergic to penicillin.
Another example: The patient’s already taking three drugs and a doctor is about to prescribe a forth that interacts with the combination of the first three. Now the doctor can see that and prescribe something else that doesn’t react with the other medications the patient is taking.
The cloud is absolutely the best thing for keeping patient data. Athena health is allowing hospitals to keep all of the administrative data in the cloud and that has been extraordinarily helpful in costs saving for all the hospitals that have signed up. So yeah, I think it’s going to change healthcare in a big way.
Researchers will also have the benefit of being able to easily see the research being done by other leaders in the field. They’ll know what the state of the art is so that when they invent, those inventions will novel instead of reinventing the wheel.
Andrew Bellay: How has the reduction of start-up costs affected your business?
Tim: I think the reduction in start-up costs has been a result of venture capitalists not being able to raise as much money. When there’s more money there, the entrepreneurs will spend more money in getting the businesses going. Their creativity will go into capital-intensive businesses and in times when the venture capitalists don’t have much money, I think that’s the time when entrepreneurs get the most creative on less capital-intensive businesses.
These tend to be the times when venture capitalists make the most money too because they’re funding entrepreneurs with creativity for less capital intensive businesses. Every once and a while they end up finding something like Skype, Hotmail, Baidu, Google, or Yahoo.
Andrew Bellay: In the class team-or-market debate, we sometimes use the Draper camp as the group that always favors the team. Why is that you alwyas go with the entrepreneur and the team?
Tim: That’s not completely true. We put a filter on business plans first because we want to make sure the business itself has a big enough market to support a company with a good P/E, a big growth rate, and a market that is presumably unlimited in size. We do that cut when we’re looking at business plans and then we meet the entrepreneurs. The entrepreneurs we’re looking for are the ones with enthusiasm breaking out of their skin they’re so excited about what they’re doing. It has to be that way because when the bubble popped, anyone who was in the business for the money left like rats leavings a sinking ship. Anyone who was in it for the love of the business stayed at it, worked hard, and two or three years later created something of great value.
So we look for a lot of things in people. One is for their enthusiasm, their vision. Another is whether the personal history that brought them to this point makes sense – Do they have the background they’ll need? And finally, are they people that others will want to attach themselves to? Are they charismatic? Do they have a point of view? Do they have the ability to move a mountain because people want to work for them?
We use the other approaches, looking at markets and technology, quite a bit, but it’s really about having the right people in place. Because then, as a venture capitalist, you can sleep at night.
Andrew Bellay: Let’s talk about the fundraising market for venture capitalists. What’s it like out there?
Tim: I know that the former sources of venture capital – which were funds-of-funds, universities, and endowments – have dried up measurably. The people who work for those firms are doing a lot of data gathering but they’re not doing a lot of investing. The groups that do have capital to invest are individual family offices, large state pensions, and the royal families around the world. Those are the people who are making investments. The nature of fundraising has changed so venture capitalists – even the ones with great track records – have had to go back out and rebuild their network of limited partners.
Andrew Bellay: I’ve heard you tell future entrepreneurs not to waste their time on a small problem. What do you think are the big problems today?
Tim: If you’ve got a certain amount of time, energy, and life, you should go after big problems. We’re looking for entrepreneurs who go after big problems, big opportunities, and big visions. It was very exciting when we saw Tesla come in. It used to be the only people who bought electric cars wanted to show the world that they had an electric car. But the electric cars didn’t work as well as the gas powered cars. With Tesla, you got way faster and way better performance versus the price you paid. Suddenly it was worth it to buy an electric car. It was an economic decision [in the performance car market], not an environmental decision. People make economic decisions more readily than they make decisions to improve the environment. Now they can buy a performance car that’s economically viable and be good to the environment too. That was a very exciting breakthrough to have this team – Martin Eberhard and Elon Musk – go after a very big problem. And it was a big opportunity too.
Elon Musk is going after another very big problem with SpaceX. He’s got his eyes set on space and low cost, earth-orbit satellite launches. He can do it for a fraction of what the government used to be able to do it for. Elon is far more efficient, they have some great launches under their belt, and the government has hired them to do some launches too. Space is the final frontier. It is a great opportunity and we should all be looking at space as this big unknown that we can do some interesting things with.
Communications and the internet have made it so that every single industry out there can be improved. Everybody has, in effect, perfect and up-to-date information and we can all communicate instantaneously. This is a really great renaissance period. Every industry has been able to be re-invented by the internet.
Other breakthroughs like the internet might come along and revolutionize every industry again. One of those might be nuclear power, which by the way, I fail to see why we don’t have another 100 nuclear power plants in the US. It doesn’t make any sense to me that we would halt or slow the progress of nuclear power in the US when every other country in the world seems to realize it’s the best source of energy we can get – cleanest and fastest.
In any event, some breakthroughs in nuclear power could make energy much less expensive and you could see that that could transform a whole new group of industries. So I think those kind of changes are going to come faster and faster. We’re going to have more and more breakthroughs. We’re going to see a lot of cool new companies making big new changes in industries.
Be sure to check out part II of our interview with Tim Draper.
[Originally published By Andrew Bellay on aonetwork.com]