The changing role of the venture capitalist

Marketplace Staff Jan 18, 2011


KAI RYSSDAL: Being a venture capitalist seems like a fairly daring thing to do. You invest in a generally untested, but potentially promising, idea and if it fails — that’s it. No money back guarantee, no nothing. William Draper got into the game a while ago, 1959. He was one of the first VCs out of the west coast, in Silicon Valley. And back then? It was really daring because, you know, no one had ever heard of it.

WILLIAM DRAPER: We used to go knock on doors and say we’ve got some money — and what’s venture capital? Well, we’ll just take a piece of the company and you’ll keep running it. That was a new concept out here in 1959.

RYSSDAL: Bill Draper’s written a book about his experience and about the relationship between capitalist and entrepreneur. It’s called “The Startup Game.” Welcome to the program.

DRAPER: Thank you very much. Glad to be here.

RYSSDAL: You know, you hear the term venture capital and you think of two things. One is money, obviously. But the other is technology. Everybody thinks venture capital and technology somehow go together. What is your take on what venture capitalists do?

DRAPER: I think most of the venture capital operations are focused on technology. I think that’s true. But money is a very minor part of the total package because there’s a lot of support, a lot of team building, a lot of organization and relationships between entrepreneurs and venture capitalists that are key in making a successful startup.

RYSSDAL: Another way to say that is, you guys don’t want to just hand over your money. You want to have a role in this business that you’re choosing to help get off the ground.

DRAPER: We do, but only if it’s a positive influence. There are times when you’re glad your advice isn’t taken, but you’re right, you’re happy to be heard.

RYSSDAL: You know, there’s a great line somewhere in this book. You said, “There was some money chasing a good idea.” I always thought entrepreneurs looked at venture capital the other way, as a good idea chasing some money.

DRAPER: Well, it all depends. In this case that would be Yahoo. We knew it was a very brilliant breakthrough in technology and so we were eager to make the investment. We got outbid and that was one of the ones that got away. There’s no venture capitalists that get small, and I’m the first to admit that I’ve lost a lot. Skype was my latest lucky break.

RYSSDAL: The Internet phone company, right?

DRAPER: That’s right. The Internet phone company and everybody uses it. I think 500 million people are using Skype today.

RYSSDAL: How do you know a great idea when you hear one?

DRAPER: I take a long look at the individual and make sure that person has done his homework, or her homework, before I back the idea because I figure that they’re going to live with this and if they haven’t really done a thorough investigation, then I want to know that at the beginning.

RYSSDAL: Can we get by without venture capital though? I mean, you can go to other investors and you can go to the stock market and stuff and get some money.

DRAPER: Oh no. Facebook couldn’t go to a bank and get a commercial loan to start up a company. And small companies shouldn’t borrow money because they don’t have the equity to support it. So this is all equity. Venture capital money is all common stock and preferred stock. Venture capital would be the only place — other than angels, wealthy individuals who might back it, or friends and family that get it started — you know, that’s the seed round and then you need some venture capitalists to support it.

RYSSDAL: I was about to ask you if you were optimistic about the state of the American economy, but it sort of seems to me that if you are in the business you are in, you have to be an optimist.

DRAPER: Well, I’m still young. Therefore, I’m very optimistic about the future and expect it to be better than ever and I think technology is the place to put your venture capital for sure because we’ve just had tremendous breakthroughs on ideas and they’re coming faster all the time. Machines are talking to machines and the speed is so dramatic that you’ll have some major breakthroughs if you play the game with diversification. You can’t focus on just one company and hope that it will be the builder of your fortune.

RYSSDAL: Bill Draper, long-time venture capitalist up in Silicon Valley. He’s got a book out. It’s called “The Startup Game.” Mr. Draper, thanks very much for your time.

DRAPER: Thank you very much. I enjoyed it.

RYSSDAL: We’ve got an excerpt from “The Startup Game.” Check it out.

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