Voices: Tim Draper: flowing venture capital where it’s needed
Tim Draper, managing director of venture capital at Draper Fisher Jurvestson and chairman of Bizworld, recently spoke to EDN about his thoughts on regulation, free trade, and encouraging entrepreneurship.
By Paul Rako, Technical Editor -- EDN, November 26, 2009
Tim Draper is managing director of venture capital at Draper Fisher Jurvetson, which was instrumental in the success of Hotmail, Skype, and Digidesign, among others. He is chairman of Bizworld, a nonprofit organization that teaches entrepreneurship and business to children. Draper has a bachelor’s degree in electrical engineering from Stanford University and a master’s degree in business administration from Harvard Business School and served on the California State Board of Education from 1998 to 1999. EDN recently conducted an interview with him.
Was there a key person who steered you toward technology?
Yes. I planned to be a physics major at Stanford, but my father steered me toward electrical engineering by telling me there are lots of jobs for EEs with a bachelor’s degree, but that, with physics, I would need a doctorate. I was fortunate that he was investing in the companies that were on the cutting edge of technology at the time.
Your dad pulled a 4.0 at Yale. How about your grades?
I am not sure he was a 4.0, but he was a fast learner. I had straight As a number of times at Stanford but was not a 4.0. I needed 180 units to graduate, but I took about 230.
Did you go straight to Harvard after getting your degree?
No. My first job out of school was as a sales-development engineer at Hewlett-Packard. I think the company gave me a good base from which to understand business. I also moonlighted and started a board-game company, Stanford: The Game, with Heidi Roizen.
Your father and grandfather were also venture capitalists in Silicon Valley. Was it preordained that you should be a venture capitalist?
I wanted to be an entrepreneur, and I had lots of ideas coming out of business school. One was digitized music, one was a human submarine, one was a 3-D holographic display, and one was a new way to hold stocks. I realized that I was better suited to starting an incubator. And then I realized that, as a venture capitalist, I could help lots of visionaries achieve their missions in life. It was an exciting revelation.
Your blog persona is Riskmaster. Is risk-taking and risk assessment the central part of being a venture capitalist?
The Riskmaster has many meanings to me. I look at all those entrepreneurs as Riskmasters, taking social, career, and financial risks to make the world a better place for us. I got to write a song with a big-name rock star, and, when he said he could not sing the word "entrepreneur," I came up with The Riskmaster. Finally, my buddies and I had a tournament of Parker Brother’s Risk every year for about 10 years that we called Riskmasters Tournament.
What is the fundamental trade-off between venture capital and private equity?
Both are valuable parts of the financial markets. Venture capital invests in entrepreneurs who want to build companies from nothing. Private equity invests to make existing companies more efficient. Venture capital is usually around start-ups and technology. Private equity can be for any established company in any field.
Do you feel that successful people have an obligation to help improve our political system?
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No, I don’t believe that the successful have an obligation to help improve our political system. I believe we all have that obligation, and the thing we can do now is to work toward less government intervention in our lives, our businesses, and our money. Yes, fixing education would have a positive effect on many aspects of our lives. Science and technology drive most of the growth in our economy. The United States should have the best science and technology education in the world for our young kids. We don’t. We do have the best education system for college-age kids, simply because it is a free market and allows the colleges to compete for the students. Monopolists who don’t allow innovation run K–12 education.
Do you have some patriotic desire to fund entrepreneurs in the United States?
No. I fund entrepreneurs who want to change the world wherever they may be. In fact, America is driving them away. Technical immigrants on the whole create jobs for Americans. If companies in the United States become uncompetitive globally, we lose jobs.
Do you feel that philanthropic involvement is an important part of being successful?
I mostly believe in the power of business to improve our lives. Most of my philanthropic activity has been around teaching and encouraging entrepreneurship globally. This [work] includes money for schools, Endeavor, and BizWorld and helping Draper Richards with its start-up nonprofit work.
Is regulation an essential part of a complex technological society?
Big government was as responsible as anyone for the crash. Fannie Mae and Freddie Mac guaranteed loans they shouldn’t have. Banking regulators changed the Glass-Steagall Act, which encouraged banks and investment banks to merge. In addition, the Community Redevelopment Act created a market for risky subprime loans. You can’t regulate good behavior. In fact, I would argue that a freer country has fewer criminals. Our government has gone from spending 8 to 40% of our GDP [gross domestic product] over the last 100 years. Our country in effect trusts itself less than it did, and it is killing our growth.
The liquidity crisis makes it harder for you to cash out with an IPO [initial public offering], but there must be massive amounts of idle capital available for you to invest.
That is not how it works. Without IPOs, capital sits in places where people can’t trade it, so in effect there is less of it to use for new investments. In our case, our limited partnerships invested their money with us. We then invested that money in tech start-ups. Some of those start-ups grew and created jobs and wealth, but that wealth is sitting in illiquid companies that can’t seem to get public, so there is no money to return to investors. Unless investors get money back, they can’t invest in more companies. Liquidity allows flexibility and creates wealth.
Instead of spreadsheets, do you look for a story, one that anticipates all the twists and turns of a creative endeavor?
Of course. What we look for in an investment is a creative, enthusiastic chief executive officer, a motivated team, and a vision to take a unique technology to a very large global market.
ABC News columnist Michael S Malone, a contributor to The Wall Street Journal, recently maintained that Silicon Valley has lost its luster and innovation is dying here What Happened to Innovation? Innovation and Silicon Valley still aren’t dead. Do you agree?
Silicon Valley is the model from which all other entrepreneurial centers have flourished. There are some problems in the Silicon Valley, such as too much government intervention and other countries doing a better job of attracting entrepreneurs, but I still think the Silicon Valley will be a hotbed, if only because of the extraordinary reputation the region has for entrepreneurship and venture capital.
Why are you a proponent of global free trade?
If the US government forces its businesses to use any workers who are not the best for the job, it will make the United States uncompetitive globally, which will make the entire country poorer and have the effect of making the United States lose more jobs and so on until there is no business left here.
Tell us about the stock market you are attempting to create.
Expensive regulation now costs companies on the order of $3 million a year and has made it untenable for a business that earns less than $10 million a year in profit to go public. Xchange is a new private market that allows companies to "go private" and be traded before they are big enough to go public.
Do you have a preconceived specialty about the things you want to fund, or are you open to anything?
We are open to anything that moves the world forward through technology. The market size has to be in the billions, though.
When you make an investment, do you insist on placing a chief financial officer or someone else in the company to watch over the money?
No. We don’t generally require anyone to do anything like that. Venture capital is built on a lot of trust.
Do you have to replace technical and entrepreneurial types of presidents and chief executive officers with managerial types as the business grows?
No. We are well-aware that Bill Gates, Larry Ellison, and Steve Jobs are all entrepreneur/chief executive officers. We believe that the soul of the company is the entrepreneur.
Do the business plans of all your start-ups have an IPO as an exit strategy, or is a buyout perfectly acceptable?
I am not as fond of buyouts because they limit the upside of a company’s potential, and they normally lose jobs. Also, since we are always looking for companies that will define and create industries, an acquisition can keep a new industry from forming. The IPO was a great alternative that allowed a company’s shareholders to trade shares without losing the company’s focus or general direction. Now, however, IPOs are too expensive for most companies that would like to get liquidity for shareholders, so we started Xchange to allow companies some liquidity for shareholders without spending all the money required to comply with expensive regulations, such as Sarbanes-Oxley.
Does the capital-gains tax hinder letting capital flow to where it is best rewarded?
I believe that capital should be able to flow as freely as it can. It allows the money to find the places in the economy that best serve the people. Any restrictions to capital flow leaves capital in places that are not optimal at any given time. As technology marches along exponentially, per Moore’s Law, capital should be able to march with it.
When you got out of Harvard you were interested in submarines. Submarines?
I decided that I like fish too much to let us humans mess up their environment. Space is much less limiting. Now, space is much more compelling to me.
What’s the most promising company you are funding?
The next one.
