Bill Draper, one of the country’s legendary and most successful venture capitalists, is the founder of the Sutter Hill Ventures and Draper Richards. He has invested in over 1,000 companies and many of his hits are household names such as Skype. Now he has a new book out entitled “The Startup Game,” published by Palgrave Macmillan. The book is a very fun interesting read. The following is an interview with Draper.
Why did you write this book and who is the intended audience?
Draper: “I wrote the book because I had so much experience in venture capital and with entrepreneurs and I should get the word out before it is too late. The fact I was part of a three-family generation of VCs gave me the punch to get going. The intended audience is entrepreneurs, VC and business people interested in how venture capital and startups get going and the inter-relationship between venture capitalists and entrepreneurs. Actually anyone interested in the creative sparks of American economy.”
How much has the venture capital profession changed in the last 50 years?
Draper: “It has changed dramatically. When I was driving a car around the prune orchids in Santa Clara, before it became know as Silicon Valley, I would write the terms of a deal on yellow piece of paper. I would discuss it with the entrepreneur and have him look it over and he would say he was ready to go.
“I would then give it to an attorney. There was no term sheet back then. There is more formality today. The size of the industry has dramatically changed. There were only a few funds back then and we all cooperated a lot .
“If we had a $2 million dollar deal and we were putting in $1.5 million and we would get two others to come in to make up the difference. The sizes of the funds have become so large they can’t share because they have so much money under management. I don’t think it is good because when we partnered we shared due diligence, shared ideas and provided different support from contacts.
“The greater the number of funds the better it is for the entrepreneur because there are more people to talk and negotiate with. We would start the equity split with the entrepreneur at 50-50. There are going to be more specialized venture funds focused on socialization or chips. The technology has gotten so sophisticated and is dramatically so it is hard to keep up without specialization.”
How important is a business plan?
Draper: “That again has become more important today then it was 50 years ago. I remember when we backed Quantum and there were four guys who were all engineers They were building storage drives. We talked about what they wanted to do and had backed another company in the field, so we knew the territory. They didn’t have a business plan and we just discussed their ideas. Today you wouldn’t think of backing a company without a business plan.”
What do you look for in plans today?
Draper: “The first thing I do is look at the biographies of the management. I am most interested in the leader. I want to get to know them. I talk to others about the leader. I want to make sure the entrepreneur has strength of character, empathy and that they have the internal strength to stay with it. I want to know that the leader can recruit people smarter than themselves.
“I look for good margins in the area of 50% or better because margin gets into by marketing, distributors and other things. I look for what is different. You don’t know what is going on at various companies and you might not know what the competitor is coming out with. I look at the financial projections to see how they will scale up.
“The entrepreneur always underestimates cost and overestimates sales. I look for spelling and grammatical errors. Details are very important. I look to know they have done their home work.”
What if the entrepreneur has a great idea, but no money or so little money is spouse is afraid to risk it?
Draper: “That is why they need a venture capitalist. We like them to have skin in the game, but if they don’t have it or the spouse doesn’t want to take the risk that is okay. That is what VC’s are in business for.”
What has been your experience of investing in husband-wife teams?
Draper: “The most well known team example is Cisco, which was started by a husband and wife team. My old firm, Sutter, looked at it and turned it down because the husband and wife were a little wacky. They did the right thing, but Sequoia went in and replaced the husband with John Morgridge who was the CEO and it was a huge success.
“I haven’t invested in any. It wouldn’t be a positive, but it wouldn’t be an overwhelming negative. There was a company called Measurex and was lead by a great leader, which became a New York Stock Exchange company. He was married to a very nice person and he made her the vice president of personnel. That was a problem because they people in the company go to the personnel to discuss problems about the boss and was a bit of a drag on the company because employees didn’t feel they could come to her.”
What is the youngest entrepreneur you would invest in?
Draper: “We backed a guy who was 26 or 28. He came into the office in shorts and sandals. He ended up running a company called Oona. We had backed Skype and the entrepreneur wanted to use Skype to develop hardware to use on Skype. We once had a 29-year-old nerdy kid come in and he wanted $2 million for 10% of the company. We made the same offer others had, but he turned us down and that was Bill Gates.”
All of the examples of entrepreneurs you invested in all went to elite schools, have you ever invested in a person who graduated from a state school?
Draper: “I am sure we have. We want to back brain power so we don’t care where they come from. I can’t remember anyone right now that I had invested. I probably backed over a 1,000 companies, so there must be a few there. I don’t focus on the elite schools; it just depends on who comes through the door.
“I am interested if they graduated cuma cum laude. We backed a guy named David Lee, who went to school in Minnesota, who was Asian, and didn’t go to an elite school. Many of the foreign entrepreneurs don’t go to elite schools. The foreign students are risk takers and are ambitious because they were willing to come here.”
Is there a difference between East Coast and West Coast investors?
Draper: “I think West Coast investors are more like gun slingers. They worry less about entrepreneurs who have failed. There is more risk taking tolerance. It shows. I was speaking at Harvard that they say they haven’t been as good at backing their entrepreneurs so they go West. An example is Facebook, who came to Silicon Valley to raise its money.”
What is the biggest mistake entrepreneurs make when trying to convince a VC to invest?
Draper: “They should be themselves and not put on an act. They don’t level right away about their weaknesses or their plan has. It’s best to get that out early. I don’t like when they come in and show a lack of knowledge of the venture capitalist before coming in. They need to know how the VC can help them build their company.
“They try to put on a front or an arrogant attitude. They act cocky. They come in alone without bringing in a couple of other people who has a certain expertise that would show the depth of the team. I don’t like to see them reading off the Power Point because I want to look in their eyes.”
What do you look for during due diligence and how long does it typically take?
Draper: “It varies dramatically. After a first meeting you do a few phone calls. Then you have a second meeting to ask better questions. Then you start aggressively calling people to tell them about the deal and getting information. It shouldn’t take months, but weeks.”
Is it good to start the conversation with the VC by asking them what they liked about your business?
Draper: “It is a good idea, but not to start off with it.”
If you had one piece of advice to give an entrepreneur trying to raise capital what would that be?
Draper: “Go where the money is. Let me explain. There are a lot of VC’s are on time clocks because their funds end usually in a 10-year period. You shouldn’t go to a fund that is in the process of raising money. Go to firms that just completed raising money and they need to put the money to work.”