Bill Draper Takes Stock Of A Venture Industry He Helped Create

Courtesy of Draper Richards

It’s not a stretch to say that the story of Bill Draper is the story of venture capital.

The iconic 83-year-old founder of Draper Gaither & Anderson, Sutter Hill Ventures and Draper Richards virtually created the West Coast incarnation of the industry when he and his partners founded DGA in 1959 and set the stage for the massive growth of Silicon Valley over the next five decades. He is also part of a family line of investors – his father preceded him in the business, and his son, Tim, co-founded Draper Fisher Jurvetson.

Draper, who is the author of a new book, “The Startup Game,” was interviewed by Ann Winblad of Hummer Winblad Venture Partners at the Commonwealth Club in San Francisco Monday night. He engagingly recounted the beginnings of his career, some of his most notable investments, and his feelings about entrepreneurs. Asked about what he would say to his grandson were he to follow in the family footsteps and get into venture capital, he said: “Make sure you have operating experience, do your homework, try to be humble at all times, think about each opportunity from the entrepreneur’s standpoint, and be gracious to all of them, because they are the future of this country.”

Here are some of the highlights from Draper’s talk:

On how he built DGA:

“Deal flow was pretty good. We (he and his partners Ron Gaither and Fred Anderson) started with $75,000 each, $50,000 of which was borrowed, and leveraged it with SBIC funds. We decided to rent two blue Pontiacs and we went to the fruit orchards, looking around for buildings that didn’t have a fruit logo on them. We’d ask for the president and say we’re in the venture capital business. They’d say, ‘What?’ We’d waste morning after morning, but pretty soon we were the go-to guys among the bankers in San Francisco. They’d get a call from some little company that needed banking, and they’d call us to ask about it. That’s how we got business.”

On relations with entrepreneurs:

“When an entrepreneur has a first board meeting, we called that the ‘Oh sh—meeting.’ That’s when the VC finds out the bad news he didn’t know when he made the investment. How the VC reacts to that defines the relationship – it either becomes more brittle or closer.”

On VC ego:

“It (should be) less about themselves, and all about building great companies and supporting entrepreneurs, making sure the entrepreneur gets the credit. Take (Stanford football coach) Jim Harbaugh – after winning the Orange Bowl, he would not talk about himself. Now, he’s got a big ego, but he knows how to play it, control it. Some names come to mind of people whose egos would fill this room, but we won’t name them.”

On best-laid plans:

“We often tell (entrepreneurs) they have underestimated the timeline” – toward becoming profitable or becoming an exit candidate, for example. “They’d say, ‘No, we’ve doubled the time we think it will take.’ Then we double that timeline, and very often that’s not enough.”

On increased VC competitiveness:

“Goldman Sachs came to our office in Palo Alto. We were making 30% to 40% returns, and here’s the CEO of Goldman Sachs coming to see our little operation. We figured we must be on to something. Now you don’t get those returns. Wall Street has dumped a lot of money in here and there’s a lot of competition. But that’s good for the country. A deal that might not have gotten done, gets done, and that might be a game changer.”

On sky-high valuations for Facebook and Twitter:

“I’m glad I wasn’t asked to make a decision about whether those were good investments or not. I can’t tell you. However, there are these wonderful breakthroughs you can’t measure. There’s no marketing needed, because it’s viral. Is Facebook overvalued at $50 billion? I would never dare say that.”

On pulling out of Zappos too early:

“When the bubble burst (around 2000), it was a very scary time. We had sold off a lot of investments when the bubble was rising, or even at the peak, and we were feeling probably less humble than we should have. We had a convertible debenture, and when the two years were up, we said, ‘We’ll take our money back.’ It later sold for a billion dollars to Amazon. If a VC looks you in the eye and says he hasn’t made mistakes, he’s lying.”

On listening to the founder of OpenTable:

“I used to always say to the CEO, ‘Why don’t you charge $2 per reservation, instead of $1? He’d say, ‘Bill, you don’t get it, we want to own the market.’ Or I’d say, ‘Why do you lease the machines, why not make them pay you for them?’ He’d say, ‘Bill, you don’t get it, we want to own the market.’ Thank God he didn’t take my advice.”

On the impact of investing in Skype:

“We have a registered nurse who lives with us, and she talks to her mom in the Philippines on Skype. She’s got a young son. Her little boy makes such a big difference in his grandmother’s life. That’s what this is about.”