In part 2 of my interview with Tim Draper, we talk about DFJ’s most exciting investments, viral marketing, and how Tim scaled venture capital when everyone said it couldn’t be done.
If you missed part I of our interview with Tim Draper, check it out before reading part 2.
Andrew Bellay: What investments are you most excited about at DFJ right now?
Tim: I’m very excited about Tesla. I’m very excited about Glam. I always have an affinity for anything that has any sort of viral marketing element in it. Glam figured out a really interesting business model where it could sell ads for bloggers and split the revenue with them. Bloggers attached themselves to Glam, and it became a bigger and bigger business. That model has certainly taken off.
I want to see what the iPad does for the industry. And I want to see what new technologies entrepreneurs come up with because they’ve played around with the iPad. It’s certainly going to transform the magazine business, the comic book industry, the TV world. There are going to be some very interesting things that come out of that. We have not made any bets on it yet, but we have advised our entrepreneurs to attach themselves to the iPad or whatever new tablets come out.
You mentioned cloud computing at the beginning. I am very excited about that world. We have a company called Socialtext that’s a terrific social networking company for the enterprise. They really have an extraordinary service that their customers are thrilled with, and it’s spreading very quickly.
We have a bunch of fun companies that are doing extraordinary things. In some cases, we’ll have breakthroughs; in some cases, we’ll have trouble; and in some cases, we’ll capture the market by storm. So we’re just excited about being here during this time.
Andrew Bellay: You’re usually credited with creating the concept of viral marketing. When you had this idea, did you realize it would turn into the essential business tool that it is today?
Tim: When I did it, it was really just for the benefit of the guys at Hotmail. I really had to pound the table to get them to do it, but eventually they did, and it spread quickly. I realized it was a big idea once they told me that they sent one e-mail to a guy in India, and within three weeks, we had 100,000 registered Hotmail users there. At the time, I was an investor in Upside magazine, and it took us years just to get to 10,000 users. I thought we were really on to something, and I immediately went to the rest of the companies in the portfolio and all the entrepreneurs I’ve seen since and have tried to bring viral marketing techniques to those companies. It has really been a fun thing to see it evolve, but it’s taken on various forms that I did not anticipate.
Skype – now that was very similar to Hotmail, so I knew that was going to work and spread in this beautiful way. There was nothing really new in viral marketing there except that it was audio and video. But when Glam came up with this concept of spreading through the blogosphere and working with the bloggers – that was really fun to see. We have another company, Meebo, that uses instant messaging on the Web. That also spreads very virally, and they can actually crank up or crank down the virality of their product depending on how much they want to impose on their prospective users. I think it really has taken on many new lives of its own.
Now I think they teach it in businesses schools, which I’m really quite proud of. It’s a business technique now. There’s marketing, and then there’s viral marketing.
Andrew Bellay: Any predictions for what might come next?
Tim: What’s really interesting is that any device has the capability of spreading product or service very quickly. So if you come up with something extraordinary, it will spread form laptop to laptop, from cell phone to cell phone, from iPad to iPad. They are going to spread very quickly and to many more people than they did in the past. The idea of selling something for a dollar to every Chinese person – which is an old concept – is now a reality. And it’s not just the Chinese. If you come up with something for a dollar that can spread on the Internet, you can have billions in revenue.
Andrew Bellay: Can you talk about the DFJ Network, your thought process behind it, and whether you think venture capital is a scalable business?
Tim: It kind of evolved. I did a lot of travel with my family because my dad was the chairman of the Export-Import Bank of the United States and then the head of the UN Development Programme. So I ended up going to a lot of different places around the globe.
When I had an opportunity to set up our first node outside Silicon Valley, it didn’t feel like it was that much of a distance. The first one was actually in Alaska – Polaris Fund. I went up there several times, and there was a development authority there that had a vision. At that time, oil was at six dollars a barrel, and they were feeling a little crunched. They needed something better for their economy, and they wanted to encourage entrepreneurs, so we set up the Polaris fund. In Alaska, we did fish-head splitters and low-earth orbit satellite launches. Some of the ones we turned down were Alaska Men’s magazine and a salmon-skin wallet company.
It made me realize that you could actually start businesses anywhere. And once the Internet got very active, I knew that you didn’t actually need hardware of any kind to start a business. You didn’t need long-distance shipping. It didn’t matter where your customers were. It didn’t matter where your suppliers were. Great businesses could be started anywhere. Venture capital is very much a local business. You need to be close to your customers, so I realized that we had to be local, but we had to be everywhere.
I didn’t want to spread the word until we had a distinct advantage amongst venture capitalists, so we quietly set up six offices around the United States. It was at an interesting time in 1995-1997, when it wasn’t very hard to raise money. And we then worked with a team to set up a global fund called DFJ ePlanet and set up three to four offices globally, and those became invaluable to our entrepreneurs. They could set up manufacturing in China, they could build into the European markets, and they could do it quickly because we had trusted friends in all these countries around the world.
Since then, the model has evolved. We’ve done a lot of other interesting things, and we’ve set up more offices. There are more than 30 offices around the globe and 17 or 18 partnership relationships. All of those things have been extraordinary in us in helping our entrepreneurs, looking for deals, making introductions, and syndicating deals.
It has been a little bit misunderstood because we have a lot of competitors who are upset that they don’t have 30 offices around the globe. They occasionally make it more difficult for us when dealing with our investor group or whoever. But I think it’s just envy of the leader.
Andrew Bellay: Do you think you scaled the whole business or just took more of the pie?
Tim: Whenever somebody says something’s impossible, I say, “OK, so how do we do it?” When they said that venture capital doesn’t scale, I thought, “Maybe it does scale. Maybe we just haven’t thought about it the right way.” That’s how we scaled it, geographically.
Andrew Bellay: I recently caught a video of you and Tony Perkins 18 months ago talking about the meltdown. You thought it was one of the biggest opportunities in the world. Did it pan out the way you thought it would?
Tim: Yeah, it is a huge opportunity. I think it’s a huge opportunity for venture capital, too. A lot of people are out of work, and venture capital encourages people to start new businesses. When you start new businesses, you need to hire people, and they get people back at work. When you have a meltdown like this – it happens every 16-18 years when we get too flexible with our debt – it forces people into creative mode. Creative mode is when many of the greatest companies in the world have been started. They’re started because people have lost their jobs and are upset or because people are looking at it as a neat opportunity.
Industries are reeling, so you can go after them as a startup. People are willing to work for less money, so you can get started by paying people with shares. Real estate is cheaper, everything’s cheaper. A lot of things work in your favor to help set the company up with a culture that then permeates through out the next 60 years. If you look at all the greatest companies in the world, a very large portion of them were started in times like this – when the rest of the industry is on it’s heels.
Make sure you caught part I of this interview. Special thanks to Tim and DFJ for this great interview! If you want a to see a bit more of Tim Draper, check out what Tim calls "the most interesting interview I’ve ever had."
[Originally published By Andrew Bellay on aonetwork.com]