Excerpt: The Startup Game

The following excerpt is from The Startup Game by William H. Draper III. Learn more about the book and listen to our interview with Bill Draper.

Let's look at a few stories spanning three generations of Drapers, which add dimension to our emerging picture of venture capital and entrepreneurship. Let me first reassure you, however, that my goal in this opening chapter is not to present three Draper biographies. Instead, my goal is to help you place my stories and my advice in a larger context.

Lessons from the German Coffeemaker Machine
When people ask me whether venture capitalists are born or self-made, I tend to waffle. I suspect it's a little bit of both, with definite shading toward the self-made.

In the late 1920s, decades before my father, General William H. Draper Jr., founded his venture capital firm, he worked on Wall Street as an investment banker for Dillon, Read and Co. For most of that decade, since the end of the tough recession of 1920-1922, the stock market had been soaring. Business-minded Republicans had occupied the White House since 1921. Wallets and bellies were full. An unbridled optimism filled the air. Wise men were talking smugly about the "end of the business cycle"--meaning that from that point on, there would no longer be any economic downturns, and the economic escalator would only go up.

One day in 1929, before the crash, my father was bitten by an early version of what we would today call the venture capital bug. At the time, he had just received a huge bonus. As he saw it, he had two choices. He could use the money to pay off the mortgage on our family's new house and we would own it free and clear. Or, he could invest his entire bonus in a new business idea that he had recently come across: a German-made automatic coffeemaker.

This brings us to an important lesson about venture capital: don't invest any money that you can't afford to lose. After all, as the name implies, venture capital is a risky business.

I'm not exactly sure how my father made his decision, but he had other business in Germany and might have been intrigued by the famous German coffee klatches. The 1920s was the decade in which a whole new universe of consumer-oriented gadgets was introduced--partly because of the gradual electrification of America--and bringing on the next indispensable device must have seemed appealing. And there was the heady context of the summer of 1929--business was booming, and it simply seemed that one couldn't make a bad investment.

So he plunged. He put his entire bonus into the coffeemaker venture. That turned out to be a bad decision. Two months later, the stock market crashed, and the investment crashed with it. The mortgage on our house remained a burden, and for many years there wouldn't be any bonuses being handed out on Wall Street. My father had to work night and day for the next ten years to keep us afloat.

I was born in 1928, so I was only an infant when these fateful decisions were made. But I gradually became aware that in the Draper household, money was tight. I remember, for example, that throughout my childhood, my father would invariably return the Christmas gifts that my mother bought for him, because he felt that the family needed the cash more than he needed a present. My father was by nature a hard worker, but in those difficult years, he drove himself at a punishing pace as he struggled to hang on to his investment banking job, in the deepest and darkest economic depression that our country had ever faced. One of his jobs--surely an unpleasant one--was to close down several Dillon Read offices that were outside New York City. There were many periods, as I recall, when he worked all night at the office. I remember later visiting his office at 38 William Street and seeing the wooden rolltop desk that had served as his makeshift pillow. His hard work paid off. In 1937, he was promoted to vice president at Dillon Read, and the financial pressure eased somewhat.

There was a second thread that continued through my father's life in this period. He had served in World War I and had stayed in the Army Reserves after the war. (Every summer he took a short leave from Dillon Read to serve as a reserve officer at the Army base in Plattsburgh in upstate New York.) He eventually reached the rank of chief of staff of the 77th Division, a post that he held from 1936 through 1940. In 1940, he was called to Washington by General George Marshall to serve full time on President Roosevelt's Advisory Committee for Selective Service. He thereby began two decades in which he alternated between distinguished stints of public service and equally notable work in the private sector, both in the United States and abroad. (I'll return to my father's career occasionally in later chapters, because these stories help to make some of the larger points of this book.)

In 1959, my father made history in his business pursuits. With his friends Rowan Gaither and General Fred Anderson, he formed Draper Gaither & Anderson: the first venture capital firm on the West Coast and the first limited partnership in the venture world. My father has had a significant influence on my life, my character, and my actions. Why is the coffeemaker story so vivid in my memory?

Because he told it to me many times and drove the message home. He wanted me to take away lessons from this misadventure, including the need to spread the risk, to always save something for a rainy day, and to work hard enough to make good things happen.

About the author

Chau Tu is the former assistant web producer for Marketplace.

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