Thanks, Fran. This is a terrific
forum. We'll aspire to do some of the things you are doing out here on the West Coast.
It's great to be in the Greater Washington area, where the Internet all beganI guess
Al Gore invented itwhere the opportunities are vast and the entrepreneurs are
starved for cash.
At Draper Fisher Jurvetson we have $400 million under management. We have a focus on
early stage businesses and on the Internet, so the Netpreneur Program audience is just
perfect for us. It's a very good fitjust don't come up all at once.
The way we look at it, our focus is to go from concept to company. That's our niche in
the world. Someone comes up with a concept at a pizza place, they put it on a napkin and
then they come to us. We try to take that concept, mold it into a real company and then,
eventually, get it to the point where rational people will invest in it, too.
We invest in companies for equity. That's a key term. Equity.
It turns out that the whole reason why venture capital is taking the world by storm is
equity. It used to be a debt world; now everybody's an owner. That's a critical,
fundamental philosophy that we haveeverybody is an owner. If you are an owner, you
are going to work a lot harder, you are going to make a lot more happen and you are going
to take more chances.
In Russia, for every 100 acres that somebody worked, they were given one acre to
produce stuff for their families and neighbors. It turns out that more than 50% of the
output of Russia in the agricultural field came from that 1% of land. The other 99% people
just sort of said, "Oh yeah, that's the field out there." Equity is critical.
Our job, although it varies and it keeps changing just as the Internet is changing
everything, is to act as the headhunter, investment banker, therapist, business model
developer and partner to a very small group of people who are getting something going
until they have the resources to hire real people to do those things. That's the way we
look at it. We spend a lot of time early on, then we let it grow on its own.
Sometimes, all we do is just hand you a check, then we come back later and everyone is
happy. That doesn't always happen, however, so what do we look for?
Brass Rings And Heroes
There are some overriding things you see in successful companies. They have
entrepreneurial drive. They have very strong management that has been hired in. They have
a properly motivated team, and often that has to do with equity. They have a frugal
culture. They understand that there is a big global marketbeyond Washington, beyond
the US, something everyone in the world can use eventually. Those are all keys to success.
Then they have this one brass ring.
It is sort of a "make your own luck" thing. That one brass ring might be the
deal Microsoft did with IBM back in the 70s when they created DOS, or it might be a
special knowledge that turns out to be very important to a lot of people. It's just that
one brass ring. For HotMail, it was that viral marketing thing, which I'll talk about in a
What we look for are heroes. We look for people who are going to change the world,
whose philosophy in life is, "I have a picture in my mind. I am going to let the rest
of the world know about it, and they are going to know that I did it." That turns out
to be a driving force behind most entrepreneurs. We say to them, "Okay, paint me that
What's the picture going to look like? It's got to be a good picture. It can't be a bad
picture. It also has to be a picture that's broad enough and big enough so that it makes
sense for a venture capital investor who only cares about the big winners. I don't even
remember my losers anymore. If I invest in 10 portfolio companies and one of them makes me
100 times my money, I don't care what the other nine did. Our thinking is that it's got to
be worth billions, so we are looking for a big vision.
You have to be willing to hire the top talent, and, often, that means, if you are the
entrepreneur, you are not going to run your company. They are two different things. A
company manager is completely rationalno, I won't even follow that up.
You have to be into big markets and high margins. We don't care what the margins are
now. In fact with Internet companies, we don't even care what the margins will be in 10
years. Long term, however, we want those margins to be big and growing. The margin has to
continue to grow in the future or else it becomes what we call "commoditized."
That's when competitors come in and drive your margins down. It's a problem that makes
companies flatten out at values of less than billions of dollars.
With the Internet, we have to go for the company that's the category winner. You have
to tell us, "There are six of us in the world going after this particular Internet
business, and we are the ones who will win." If you win, you win really, really big,
but if you lose, it doesn't matter where you are in the pack. Maybe number two makes you
some money, but you really have to be the one category killer. You have to get there fast,
move fast, raise the money, build the team and go. This is Internet time. It's moving,
it's contracting, it's changing in a lot of ways.
The Stars Align And Time Contracts
Where did this all come from? It started with corporate downsizing because people were
pushed away from their jobs. All this money was freed up and they asked, "Where do I
put the money? Do I throw it back into Frito-Lay or do I put it into this person starting
this business?" Suddenly, there was a huge influx of both capital and people into the
marketplace. I give some of that credit to guys like Michael Milken and
Kohlberg-Kravis-Roberts (KKR) who have been so demonized.
The global markets were opened up, a lot of new democracies grew around the world and
then the Internet showed up out of the blueI mean, all of the stars aligned for us
in the venture capital business. This is tremendous. The Internet gave opportunities to
everybody. It used to be that you at least had to have a BS in electrical engineering from
MIT or Stanford in order to even play in this technology world. Now, it's a marketing
game. It's a big, huge, wide open space of cyberworld and anybody can play. It's created a
real burst in venture capital and entrepreneurship, and it's very exciting for us. We are
trying to figure out how to best deal with it ourselves.
There has been time contraction. It took Hewlitt-Packard 40 years to become a $1
billion company, which was unprecedented at the time. Microsoft took 15 years, if you
count the years Gates was just fooling around. Netscape took two years and Yahoo took nine
months. Time contracts because there is an enormous opportunity and the marketplace is
undeveloped. It's been described as a big land grab.
Something else has happened. People are looking at their personal risk differently.
Risk profiles have changed. People are no longer worried about their job or how it's going
to look socially or financially if they leave their business and go start something.
"Hey, it's really cool. I'm starting a company." If it fails, it's just a notch
in your belt instead of 50 lashes.
Did I actually read that they're trying to fool around with the bankruptcy laws?
That is really scary because, suddenly, the down side is no longer protected and we are
going to have debtor's prisons. Write your Congressperson.
Get Big, Fast
The world has changed quite a bit for the venture capital business. It turns out the
network is everything. It's all that matters. If you are starting an Internet company, we
can take you to all these other Internet companies. Yes, we do have the most Internet
companies in our portfolio, and we can take you to more partners than anybody else. The
way we look at it is that you are halfway to a public offering once we fund you. You have
a little work to do in the meantime.
The other thing that's happened to us is that raising capital has become really easy.
In fact, we are almost saying, "We'll take your money and your money and your
money," rather than "Please, give me some money so I can fund these
companies." Anyway, my world has changed because it used to be "please."
What's interesting, and I think it's an outgrowth of this great, growing world market
and the revolution that's happening around the Internet, is that the amount of money
that's going into venture capital continues to go way up, and the returns continue to go
way up. That isn't a natural supply and demand curve. There is a real disconnect in supply
and demand. The way I see it, I have to get big, fast, just like you netpreneurs do, so
that's what I'm doing.
I'll tell you a little bit about the HotMail story. They tell me I'm a visionary now.
That's great, but it all happened because I was just sitting there talking to these guys
who had a new idea for Web-based email and we gave them a little bit of money. At the
first meeting they said, "We have it up and running on the Web." I asked,
"Well, now, how are you going to market it?" They told us that they were going
to put it on billboards along Highway 101.
I said, "Wait a second, you are on the Web. Can't you just get it out to all those
people? There are millions and millions of people out on the Web. They said, "Oh no,
that would be spamming." I said, "So that's bad, right?"
So then I said, "Everybody who's got an email address is going to be able to send
a letter to somebody, then they can send it to somebody else. Is there some way we can
just write some nice message to everybody, "PS, I love you, get your free email at
HotMail." Not being in the same emotional state as I was, they said, "Well, no,
we don't think we can do that, it's still sort of spam, you know..." I said
"It's just like a banner ad." We fought for a while, then they said, "Okay,
but no PS I love you."
So HotMail spread. The reason I keep telling this story is because it's so important to
entrepreneurs. HotMail spread like a virus because it came from human contact. It was
great. We could watch on a map how HotMail was spreading. Somebody logged one email into
India, and three weeks later we had 100,000 registered Indian users of HotMail. This is
why I believe the world market is going to grow from 10 trillion to 100 trillion. This
economy is going to just explode because everybody has the same information now. Everybody
can all be connected. One hundred thousand users in India in three weeks! This is really
The world is definitely changing. People always ask me, "What's going to happen to
the stock market? Are these things overvalued? I say, "No, they are undervalued, but
they are going to grow in fits and starts because revolutions happen in fits and starts.
I will finish with 10 tips for running a company. Got your pens out?
10 Tips For Running A Company
one Where do you start? Start with a big market. Go after something that has
hypergrowth, where the price-to-earnings (P/E) ratios are high and the air is clean and
the water is fine.
two Go for big margins. What that means is: What is your area of expertise? What
are you really good at? What are you specifically best at? What does your painting look
like and why is it that you are the only one who can develop that painting? Big margins.
three Super people. You are constantly on the lookout for superheroes. Your
absolute, sole reason to exist is to find as many people smarter than you as you can.
There is only one person who is smarter than everyone else, and I'm just assuming that
person is not here. For me, it was really easy. I am constantly on the lookout for really
great, smart people, and I think you should be, too.
four Build market share fast. If you are on the Web, build market share fast.
Grow. Move. Use a virus, use a magnet, use a whatever you can to get to be the biggest one
five Partner and create a network. Use that network and build it.
six Win. Grow big, fast, and just win. Be the winner. You don't want to be
Number 2. Just don't. It's not that much harder to be Number 1 than Number 2, just that
extra oommph at the finish line.
seven Get a customer. That should have been earlier. A customer is absolutely
critical to your success because you need the feedback.
eight Now, go get another customer so that the first one doesn't own you.
nine Build strategic relations with one or more of those key customers.
"Strategic relations" just means money has to go one way or the other, so it's
better to have it go towards you.
ten Take it public.
Now, we have an opportunity for a few elevator pitches.