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Inside "The Startup Game"

By December 2, 2009Article

Few books are endorsed by Eric Schmidt, President George H.W. Bush, Marc Benioff, John Doerr and Christopher Buckley. But few authors have impacted the world of private investment and public service like William Draper III .
As one of the first venture capitalists to back the Silicon Valley, Draper was a founding investor in Hotmail, Skype, OpenTable, Apollo Computer, Quantum, Qume, Activision, LSI Logic and many other startups over the past 40 years. During the 1980s and 1990s, Draper took a break from VC to focus on international relations, serving as Chairman of the U.S. Export-Import Bank and Administrator and CEO of the United Nations Development Program.
Draper’s new book, The Startup Game, explores the unique relationship between entrepreneurs and venture capitalists and how it has evolved through the decades. spoke with Draper about the enduring value of a handshake, the new power of technology investments, the software company he wished he would have backed, and the importance of good, old-fashioned luck. What are the biggest changes you’ve seen in the venture space over the past decades – and what hasn’t changed?
William Draper III: When I first started in venture capital, the term wasn’t known on the West Coast. That was fifty years ago. I would learn on the ground about small companies sprouting up and go meet with them. In San Francisco, there were many financiers and bankers but they weren’t knowledgeable about small, high-tech companies.
After a while, the bankers began to call us when they encountered the right companies.
The difference back then? Everything was small and very informal. We met with entrepreneurs and wrote on yellow pads of paper, “You take 50 percent for your blood, sweat and tears; we’ll take 50 percent for all the money. If we need more people, we get washed down equally. If you need more money, we get washed down equally…” That was a starting point for a deal. I’d give him the paper and tell him to think about it (Yes, the entrepreneurs were always “hims” there were no “hers” back then…) I’d tell him to call other people we’ve done deals with before so he could do his due diligence on us. If the deal was a go, we would write up a term sheet (but we didn’t call it a “term sheet,” it was really just legal papers.)
I remember when we first met with Quantum, a disk drive startup. These four guys came in and just told us about the business – there was nothing on paper at all! When we asked about the management team, one guy turned to another and said, “Jim, you’ve got the least to do, why don’t you be president?”
Venture firms today are much bigger and more formal – but so is the technology industry. The numbers have gone ballistic – 3 billion cell phone users today, 2 billion Internet users, Facebook users being worth $50 billion – those numbers were not known in our early days.
So VCs have to be more strict, especially when it comes to the startup’s business plan. When entrepreneurs present to VCs now, they never look down from their PowerPoint slides. The startup game is very different today – but it is a bigger game.
One of the most exciting things about the software industry today is the impact it can have on people’s lives. Even when I was in my prime and very active in the business, we didn’t overturn governments. In today’s world, Facebook, Twitter and Skype are being used to drive social change. Egypt has fallen out of the hands of Mubarak because of these technology tools. It is exciting that this “bottom-up” activity can really get organized all over the Internet and through software.
Viral marketing is another major change between the “old days” and today. In decades past, we would have to
be involved in the direct sale of equipment, or launch a marketing campaign to drive sales. Today, viral marketing has taken off.
It is amazing the way social media sites like Facebook work. Back in the 1990s, [my son, Draper Fisher Jurvetson’s Tim Draper] backed Hotmail. He saw the viral movement coming – in fact, some credit Tim for creating that term – and would only invest if they gave away the email free. Hotmail really took off and it was all because of viral marketing.
What hasn’t changed? The entrepreneurs. They are still energetic, bright, visionary individuals. They’ve got a lot of passion about doing something better/quicker/cheaper. They’ve become more sophisticated about executions on the edges of the business – minor improvements that can be the basis for an entire company – but they’re the same motivated, smart people.
Years ago, we worked on a handshake. That was your bond. In fact, one of our first offices was located on Welch Road on the Stanford campus. I didn’t like how that sounded because, obviously, if you welch on a deal, that’s not good.
Today, the same is true: if an entrepreneur and a VC shake on a deal, you don’t back out. It is a little different in today’s larger firms. Some younger VC partners want to put money out fast so they can get in another deal; they want to move fast to start another fund. This tests your code of ethics somewhat. But by and large, good ethics meant the same thing back then as it does today. Honesty still means the same thing. A quality person knows right from wrong. After years of investing, what deals stand out for you?
Draper: I’m proud of lots of companies that I’ve backed. They’re like my children.
Some of my recent investments have made me more money than any of the others. Take Skype, for example. I’d asked my partner Howard Hartenbaum to roam around Europe and look for investments. Tim told him to look at Kazaa and while that had gone down, it led Howard to the team and he was able to help write the business plan for Skype. That was a bonanza.
After working for the Import-Export Bank and the United Nations, I came back from public service to focus on software. In 1994, we worked with local partners to become the very first VC to set up in India. Draper International delivered 16X for its limited partners’ money in six years, so that went very well.
At about the same time, Tim began Parametric which became very big. It is funny because I remember him running through the six deals he was working on at the time, “The first one is a loser. The second is dying. The third we’re writing off. The fourth is dead. The fifth is the living dead… But the sixth one, that’s a home run.” That was Parametric – and that’s how the VC business still works today.
But I’ve missed a lot of opportunities as well. One company we did back sold shoes over the Internet. After the bubble burst in 2000, the executives asked if I wanted to convert the note to stock or take my money back. As the market was collapsing, all VCs were breathlessly trying to pull back in as much cash as possible. So I told them that if the money was there, I wanted the money back.
Of course, that company was Zappos – a company that eventually sold to Amazon for $1 billion or more. That was a big mistake.
I would also have liked to have been an early investor in They’re doing a wonderful job at driving change in the software business model.
In my book, I tell the story of another deal that got away. Around the time I was in India, my partner from Stanford arranged a meeting for Tim and I at Buck’s with a young entrepreneur. It was Jerry Yang. He impressed us with his online system for finding information. We asked him to figure out how much tuition was at Yale. Yang pressed a few buttons and the answer came back, $23,000. We began to help Yang find an executive to run the company but in the end, Sequoia Capital had a better CEO in Tim Koogle – and that was the end of our love affair with Yahoo. But the story shows what a wonderful, amazing place it is to live in the center of the universe in The Valley. What can today’s entrepreneurs do to improve their chances of receiving the “right” venture backing?
Draper: The common mistakes that entrepreneurs make today are some of the same ones I’ve seen many times over the years. Many overestimate the size of the market and underestimate the difficulty involved in reaching that market. They often underestimate the time it takes to get things done. During tough times, they often neglect to pressure suppliers for better deals.
Another mistake startup founders make is spreading the business too thin; it is better to do one thing right and then build on that. Typically, a founder with an engineering background will undervalue the sales/marketing organization. If it is a marketing founder, he or she will cut the budget too much on the engineering side.
When pitching a VC, some entrepreneurs make the mistake of trying to be somebody other than themselves. It is important to always be yourself and to shore up your weak spots by hiring a complimentary team member.
The pitch must be clear. Everyone in the company must have the same “elevator pitch” about the startup. If the leader of the company can get all the employees on the same page and marching in the same direction, there is likely to be cooperation in a variety of other areas.
Founders must do their homework on the VCs they approach. Find out what each VC will bring to the table aside from money, how they’ll use their Rolodex to supply strategic information, contacts and customers. Are they going to interfere in minutia or deal with big picture problems. Does the founder feel they’re being honest and is the founder comfortable being honest with them?
It is important to visit a variety of VC firms and find the right fit and grab it – entrepreneurs shouldn’t worry as much about whether they’re getting the last dime or not. That goes for the VC too: if the investment is cheap, there is probably a reason for that. VCs shouldn’t be afraid to pay up for quality.
Overall, it is amazing how much hasn’t changed over the years. For example, my son Tim and I share a similar point of view on the industry. We’ve spoken at events together and given a cross-generational perspective. One thing we both stress the importance of is luck. Good luck has to go with every good deal.
And we’ve found that, usually, a big part of that is that the harder you work, the better your luck gets.

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