Tech venture capitalist riding high

 

Tim Draper is famous for spotting the potential of Hotmail and Skype, and his company now manages more than $6 billion in funds, writes Karlin Lillington

HOW COULD Tim Draper, one of the most high-profile venture capitalists in Silicon Valley, not end up a venture capitalist? Both Draper’s father and grandfather, William Drapers jnr and snr, plied the rather specialised trade of giving money to smart, often nerdish people with big ideas.

As the founder of leading Silicon Valley venture firm Draper Fisher Jurvetson (DFJ), Draper is perhaps the only third-generation venture capitalist in the world. He is certainly the only third-generation Silicon Valley venture capitalist in an industry that only stretches back to his grandfather’s day, the era when Bill Hewlett and Dave Packard were tinkering in a Palo Alto garage and thinking of starting a little company.

Draper, whose antics – wearing costumes, rapping on stage, arriving on elephants – are tech-event fixtures, is lauded in the valley for having a good eye for an early opportunity.

He spotted the potential in Hotmail, the e-mail company eventually purchased by Microsoft, and, in the process of marketing it, is credited with having come up with the idea of viral marketing – where rapid word of mouth causes an internet site to boom.

He also backed internet telephony company Skype, eventually sold to eBay; online advertising company Overture, sold to Yahoo; and Chinese search giant Baidu. His company currently manages more than $6 billion (€4 billion) in funds and has made more than 600 investments. It has over a dozen affiliate offices around the world, keeping an eye out for opportunities on several continents.

However, Draper initially wanted to be on the other side of the table – asking for funding rather than giving it out. “My plan was really to be an entrepreneur. But, yes, I did grow up surrounded by VCs [venture capitalists].”

It isn’t all down to having the right family in place to plot a smooth entry into the world of venture capitalism. Draper did the hard university graft too – an undergraduate degree in engineering from Stanford University and an MBA from Harvard Business School.

Draper says there was no overt pressure to work in finance, and it wasn’t regular dinner- table discussion.

When he left Harvard, he says he had four big entrepreneurial ideas, mostly too far ahead of their time: digital music, holographic videos, a new global stock market, and developing a submarine (yes, he laughs at the last one). “But then I decided the people I really wanted to support are the people who have passion about what they want to do, and that passion really inspired me to invest in people’s ideas.”

Draper was in the fortunate position of being able to borrow against his father’s fund and build a track record of companies. But a venture capitalist needs more than just funds: picking the winners is the hard part, and he’s been doing that well for a couple of decades. He says he achieves this with a balance between gut feelings and the background in finance and engineering that comes with his formal degrees.

“At the very early stage [of a company], a lot is instinctive but, as it gets bigger, the MBA, finance, marketing, engineering background, that all kicks in. That said, some of the best investments I’ve made came from a market-down approach.”

He gives the example of Baidu: China obviously needed a good search engine of its own, and Baidu was a good bet.

Many of the companies started out in a different format and were pushed by Draper to change. Hotmail’s model was not web-based e-mail initially, nor was the business model “free”. That was an audacious decision that must have gone against a venture capitalist’s better instincts. “We wondered how we were going to make money, but decided, ‘we’ll figure it out down the road’.”

Hotmail went viral, and Microsoft became the way the investors ultimately made money – at a reported price of $400 million.

While these days Draper is seen as having a golden touch, DFJ has often come under criticism for its investment choices, especially as strange internet business models were beginning to emerge. Take Overture, which was based on the concept of paid search.

“When we funded them, all we got was bad press,” he says. But the model was sound, and the company was eventually sold to Yahoo.

What’s hot these days in the DFJ stable? Draper points to Glam, a network of fashion bloggers. “It has taken off and is now the 10th-biggest media proposition on the web.”

He also likes Meebo, an instant messaging-based program. Communications and internet media companies are a favourite investment area. In addition, he is recognised for spotting good green-technology investments.

“We’ve been at green tech for about 10 years, and have about 60 companies in that area,” Draper says, including electric carmaker Tesla and solar company BrightSource.

So how has the economic crash treated a big venture firm? Like many venture capitalists, Draper says it affords great investment opportunities. He is adamant too that an economic crisis stimulates the creation of exciting companies because, as people lose their jobs, some get the motivation finally to put a company idea into play. Many of the world’s most successful companies have emerged from a bad economy, he notes. And that is why he believes we are entering a mega technology boom.

“The dot-com boom was very local. The growth of the internet since creates a bigger opportunity. We’re more connected, there are more cellphones, more companies. I think we’re going to see a much bigger boom.”

In his spare time, Draper throws himself into a non-profit educational initiative called BizWorld, which teaches schoolchildren entrepreneurial and business skills. He occasionally acts too – playing a school principal in a Nickelodeon series directed by his sister, Polly Draper.

Is there any one deal from which he has learned the most? He considers, then says: “I learn the most when I throw myself the most into it. I may have learned the most from Skype, but also from doing Upside magazine – that got me into media and communications.”

And the worst business pitch he’s heard? He laughs. “The stupidest ones probably never make it to me.”

If the solid business plan isn’t there, he doesn’t hear about them. “Too many people only have ideas. And ideas alone don’t do it.”

Tim Draper speaks this evening at TCD as part of the Lectures Ireland technologyseries. See www.lecturesireland.com