Good morning. I'm Fran Witzel, the "funding guy" with Morino Institute. Welcome to this morning's Coffee & DoughNets.

We are very fortunate that Tim Draper has joined us today to answer your questions. Later in this session, three of you will be even more fortunate, since you'll have the opportunity to give Tim—and everyone else—the quick pitch on your netpreneurial business idea. More on that later, but we're going to have some fun here today.

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 began—I guess Al Gore invented it—where 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 fit—just 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 have—everybody 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 market—beyond 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 bit.

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 picture."

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 rational—no, 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 blue—I 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 exciting.

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 fastest.

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.

Mr. Witzel: Thanks very much, Tim. We are now going to do 45-second elevator pitches. No holds barred; you don't have to restrain yourself. Just remember that this will get into the transcript.

We want the audience to become VCs. Here is the deal: you are a new VC in town, and this is all the deal flow that you have—three opportunities to invest in. Your limited partners are going to be very irritated with you unless you start putting their money to work. Three netpreneurs will each have 45 seconds to give their pitch. After that, we will ask the audience which one of the three you would most likely invest in, and Tim will give his comments.

One more thing— I'm going to go from being "the funding guy" to Chuck Barris on the Gong Show. I'm holding an air horn, but we'll call it our spam detector. If you have any heart problems, leave now because this thing is loud. It's how we are going to cut you off at 45 seconds.

Mr. Draper: Since we are a meritocracy here, and since I'm bringing a little bit of California to the area, it's going to be the three people who catch these frisbees. [Mr. Draper hurls three frisbees across the room, each caught by audience members.]

Mr. Witzel: Give it your best, and I really admire you for coming up here.

curve ball, moneybelt high

Hopefully, this won't be too painful. My name is Marc Sumerlin. My venture I'm trying to start is called "Car Street USA." I'm an economist and basically what I would like to do is start a Wall Street-like market for car purchases. Car Street USA is going to start an online market for new car purchases. Basically a customer would be able to go on and view actual prices of specific cars and make bids for those prices. The key difference is, once they reach an agreement on a price, what Car Street will offer is the ability to purchase an option to buy that specific car. Now, that's the main difference between the competitors out there which don't really have a good link between the customers and the dealers. And so you would be able to negotiate a car online, you would walk out with an option to purchase a specific car for a specific price, walk into that dealer and if you don't like it, you don't take it. The option price would be split between Car Street USA and the dealer. If you capture 10% of the market . . .

slider, looking for the corner

fast ball, down the middle market

1. per transaction, free to put anything on the Web

2. bucks per trade after you make the trade

Second, and most importantly, is direct marketing. Every time somebody trades, you get some good information about that. We are going to sell that to a direct marketing organization, maybe do a deal with zoom.com. It's going to be some major viral marketing and some major, major strategic partnerships. So there it is, make a billion bucks.

Mr. Witzel: Very good. You beat the 45 seconds.

I'd like our three entrepreneurs to come up to the stage again— I feel like a game show host. I'm going to put my hand above each of these entrepreneurs. As VCs, I would like the audience to clap for the one that you would be most likely to invest in.

Mr. Witzel: I should have brought my applause meter with me.

Mr. Draper: You want me to do a little analysis?

Mr. Witzel: I sure do.

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