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VC Tim Draper Reveals What He Looks for When Investing

(McLean, VA -- May 6, 1999) Venture capitalist Tim Draper, whose firm has backed such Internet success stories as Hotmail.com and about 40 other trail blazers, spread unconventional wisdom Wednesday about what it takes to make it big on the Net.

Draper appeared at the Coffee & DoughNets session of the Morino Institute Netpreneur Program, where a packed room of over 350 eagerly hung on his words and peppered him with questions during the session.

Draper Fisher Jurvetson, which Draper founded and where he serves as a managing director, is an early stage venture capital firm with $400 million under management.

"Our job is to act as the head hunter, the investment banker, therapist, business model producer or developer and partner to a very small group of people who are just getting going," Draper explained.

Q. What's a frisbee worth?

A. 45 seconds with Tim Draper.

Three lucky netpreneurs had a chance to deliver their "elevator speeches" before a crowd of over 350 people. Marc Sumerlin pitched Car Street USA, an online market for new car purchases. Frank Llosa described a "411 on steroids." Joel Brody asked for a million bucks for Araby.com, an online trading community.

After a few air horns signaling end of time, the audience was asked to put on their VC hats and vote on who should get funded. Based on the applause, everyone got at least a little money...

 

Unlike conventional venture capitalists who usually back start-ups once they are up and running, Draper is content to invest in an idea scribbled on a napkin and batted around in an hour-long meeting.

It was in one such meeting that Draper came up with the idea of "viral marketing" for hotmail.com, where the company marketed itself discretely in email messages and which recipients then passed on like a virus.

In one dramatic example, he said, hotmail sent one email message to India and within three weeks had gotten 100,000 registered users for the email service. Eventually the start-up was sold to Microsoft Corp.

Although the session started just after 8 a.m., the room was filled with electricity. Nearly every hand shot up when Draper asked how many considered themselves entrepreneurs.

Talking about what he looks for in a start-up, he listed entrepreneurial drive, strong management, a motivated team, a frugal culture and what he called "one brass ring."

"And that one brass ring might be what Microsoft did with IBM (supplying the PC-DOS operating system) or it might be something where you have a special knowledge that turns out to be really important to a lot of people... For Hotmail, it was viral marketing."

In short, Draper said, his firm is looking for "heroes -- people who are going to change the world." And that takes visionaries, those whose ideas will create companies with billion-dollar valuations and make an investor like Draper perhaps 100-times return on his initial investment.

To get that home run, he's willing to take risks on a flier. "We don't care about what the (profit) margins are now," he said. "In fact, with Internet companies, we don't even care what the margins are in 10 years, but long term, we want those margins to be big and growing."

And that growth is occurring at a faster and faster pace. He pointed out that it took Hewlett-Packard 40 years to reach $1 billion in valuation, Microsoft 15 years, Netscape two years and Yahoo nine months.

Venture capital backing is an important component to those kinds of success stories, and Draper pointed out that the money is available for those who have what a VC wants.

"The amount of money that's going into venture capital continues to go way up and the returns continue to go way up," he said.

So what does Draper look for in a start-up? Here are his Top 10 tips for starting and running a company.

1. "You start with big market." Go after a market in which you can experience hypergrowth.

2. Seek big margins. To get those margins you have to figure out what you're really good at -- what sets you apart from others and makes you unique.

3. People. "You are constantly on the lookout for super heroes," he advised. "Your sole reason to exist is to find people who are smarter than you are."

4. Build market share fast. "Use a virus, use a magnet, use whatever you can to get to be the biggest one, fastest."

5. Form partnerships. "Partner and create a network and then use that network and build that network."

6. Be a winner. "You don't want to be number two. You just don't. And it's really not that much harder to be number one than number two."

7. Get a customer. "A customer is absolutely critical to your success because you need the feedback."

8. Expand. "Then go get another customer so that the first one doesn't own you."

9. Build strategic relationships with these customers. "And strategic relations just means money has to go one way or the other, and it's better to have it go towards you usually."

10. Go public.

Copyright 1999, Morino Institute. All rights reserved.

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