In San Mateo, we talked with venture capitalist and the founder of DFJ Venture and Draper University of Heroes, Timothy Draper about the key investment criteria and investment process. Furthermore, Tim shares his thoughts about Bitcoin and Six Californias and advice for young entrepreneurs.

The transcript of the interview is included below.

INTRODUCTION

Martin: Hi, today we are in Hero city in San Mateo and we collected all the greatest heroes of San Mateo. One of them is Tim. Tim, you are one of the founders of DFJ venture capital. Who are you and what do you do?

Timothy: I started Draper Fisher Juvertson and then I started Draper University of Heroes, which is this new school. It all came from my venture capital work at Draper Associates, so there are sort of three entities but they’re all moving forward and they all do great things. I guess I’m a venture capitalist and I’m a headmaster.

Martin: What does headmaster mean?

Timothy: A headmaster is someone who runs a school. So I run this school, and it’s a great school for extraordinary individuals who have a little bit of a spark in them and we want to ignite that spark and we want to turn them from ordinary citizens into heroes. The way we do that, we go through a real process, we go through… We teach future, we don’t teach history. We teach future, we teach business in a very modern or advanced way, where marketing is crowd sourcing and viral marketing and social media. And in design we do very odd design work, we do an egg drop, where they drop an egg from the eight flour and they have certain materials that they can use and they have to protect their egg or they don’t get breakfast. And then we have survival training where the students have to go through real survival, both urban and rural survival training.

Martin: In the forest?

Timothy: The rural part is out in the forest, the urban part is thing like this: we say “Ok, you have four hours, go get a job offer on paper and bring that paper back”.

Martin: That sounds fun.

Timothy: And so we do those kinds of things. Survival training is with real US military special forces people who take them through maneuvers and it’s quite exciting. Because we want an entrepreneur hero to understand physically, emotionally, and intellectually where their limitations are and where there are no limitations. Particularly, where there are no limitations. And then, at the end of the eight week period, we have them do a 2 minute presentation to a panel of venture capitalists. So then they can bring their brilliant idea to a panel of venture capitals, and some of them will get funding, some of them start businesses, some of them start revolutions, they do a little bit of everything. It’s very unique school. We also operate just as a team, everything is team based. So, in school normally you get an A or B or C. You get an A for not making any mistakes, while we encourage people to make mistakes. So, our team based approach gives, we give points to teams who do extraordinary things, either positive or negative. More points for positive than negative, but if something they try fails, that’s still okay; we encourage that kind of behavior. And I think that high volatility or the vicissitudes of activity generate more creativity and spark more intellectual power than just sitting in a classroom and falling asleep. So, we’ve got a new school. And it’s a school that I started because it is something I knew something about, which is entrepreneurs, because I’ve been funding them for 30 years. That’s where I got started, as a venture capitalist, I built up my business and we’ve had some great success with. Our best successes have been when we have industries that are getting fat and lazy and bureaucratic, and then an entrepreneur comes into that industry with just a new idea and they create a wedge in that industry and slowly, but surely, they grow to be the leader in that industry. That happened with Skype, and it’s happening with Tesla. It definitely happened with Hotmail, Hotmail eliminated the need for the post office to send messages to each other. So, we’ve had a lot of great success where we took on big challenges like that.

DFJ VENTURE CAPITAL – KEY INVESTMENT CRITERIA

Martin: Tim, let’s talk briefly about the DFJ venture capital. How’s the fund basically structured? What are the key investment criteria and segments?

Timothy: It all started with Draper associates. Draper associates is the seed investor group that continues to operate as a seed investor. And then I brought on partners, Josh Fisher and Steve Juvertson, we created DFJ, and Draper associates still operates independently of DFJ. So we do both. DFJ does more venture work and Draper associates does the early stage work, so just to get that. We are, we operate as a series of partnerships, and those partnerships are set up with investors, who we call limited partners, who have limited liability, they put their money in, but they’re not liable for anything beyond that money. And then we take that money and we pool it with other investors and we invest it in this variety different companies, as many as 20 or 30 per fund. And then we help manage those companies, we sit on boards of some of them, we guide them in different directions. And then, as those companies evolve, sometimes they get acquired, they go public, in which case then we can usually generate a really good return for our investors. And that’s how the system works. And the way we’re paid is, we’re paid a management fee and a carried interest, an interest in the profits of the business.

Martin: What are some kind of industry segments that you’re focusing on. I’m pretty sure you’re not investing in everything, but maybe you’re focusing on health care or on some kind of hardware or software, something like that.

Timothy: My key focus right now, I mean my focus continues to evolve because our business is really one where being a good generalist with a lot of narrow fall side is generally better than being just focused on one thing. But, what I like the best right now…

  • I like Bitcoin, because I think Bitcoin could do for finance, commerce, credit cards what the internet did for media, communications, and information. So, I actually think that this technology is one that we can, as a world, ride for many, many years to come. And so I actually love Bitcoin for a lot of reasons. One is, for all the merchants in the world, who’ve been paying 2,5-4% percent to credit card companies for all this time, they won’t have to do that. For all of the people who send money to another country to take care of their family, and pay 10% to Western Union, they won’t have to do that anymore. The money will just go. The wealth of the nation, the wealth of the society is always tied to the speed at which the money moves through the system and Bitcoin moves through the system faster than any money anywhere. So, I think Bitcoin could end up being a major transformative industry for all of us. It could really make our lives a lot better. So, that’s number one, Bitcoin.
  • Number two, I actually think that, with the advent of these electric cars and the self driving cars, I think there are going to be opportunities in telematics, where you add more and more software to the car and then I think that’s going to be quite valuable. I also look at industry where they are getting a little bit fat and bloated and bureaucratic, and I would say that education of youth, we call it K12 education here, I don’t know what it is in Germany, but it’s from 5 years old to 18 years old, that education is operated very much by monopoly – combination of teachers unions and the textbooks manufactures in the States, the Department of Education. They operate as a monopoly. The great things that are happening in education are all around MOOCs, which are the online schools, the new kind of educating that is tied to search engines and to social networks and to other ways to educate people. That’s all changing things very quickly, so I actually think that there are some great opportunities in education.
  • Another big, bloated oligopoly is the big pharma. Any time they say big anything, so big accounting, big pharma, pharmaceuticals, whenever they call it big anything you know that it’s an oligopoly that needs to be challenged by an entrepreneur. I actually believe that there are going to be some great opportunities in medicine, we have big pharma and the FDA here in the US and they have sort of the relationship that’s a little bit too comfortable, and any new drugs that come in, you could cure cancer tomorrow, but you might be dead by the time anyone ever allowed your cure for cancer to go through FDA. It often takes 100s of millions of dollars like, multiple hundreds of millions of dollars to get a drug from “Hey, this cured cancer” to into somebody’s body legally. That’s clearly not going to be something that lasts forever, I think entrepreneurs will be able to go after both sides of that equation. I think there could be an entrepreneur that challenges the FDA and there could be an entrepreneur that challenges the drug companies, both. And I know one, called Theranos, it’s one we invested in, and she has figured out how to challenge the blood test market. Where the way you normally get a blood test is you get a needle in your vain and then they keep putting more and more test tubes into the vein to get more blood, while what she can do is with the prick of a finger, she can drop two drops of blood into a micro fluidic chamber and bring back 50 tests, and not only does she bring back 50 tests, but each of those tests then is logged in, so if you go and you get your blood tested today, and then you get it tested in a year, or in five years, or in 10 years, you’re going to have a line drawn for each of those blood tests to see what’s happened to your body over time. It’s amazing research and it’s amazing opportunity for people. That one’s called Theranos, very exciting.

Martin: Let’s talk about the venture capital fund again. How is the typical investment due diligence process working?

Timothy: The investment process is different every single time. But, there are some things that we’re always looking at. When I got started in the venture capital business, I was knocking on doors and saying “Hey, are you looking for money?”And any new construction where they had something software I was trying to knock on their door and find out what was going on. Well, now we’ve build a brand and so Draper associates and DFJ are big brands and we get lots and lots of business plans. So now we have a process where we filter those business plans. The things we’re looking for are uniqueness, market size, and then are you riding a new technology that looks like it’s really going to change the industry, and is the industry fat and bloated and bureaucratic. Once it’s gone through those four checks, then we’ll meet with the entrepreneur and we’ll, and the way we judge an entrepreneur is really all on how enthusiastic are they and how well do they along as a team. We’re looking for more of the softer side of how businesses run, how passionate are they about their business. They all say “I’m really passionate about whatever, you know, watching people cook”, or “I’m really passionate about, whatever”, but just saying it doesn’t present it and I think if they show incredible enthusiasm and great knowledge of their business, that usually pushes us over the top and we’ll fund them. Now, that’s at the seed level. That’s at Draper associates level. If it goes up to DFJ, then it really has to have sort of, got to the point where it’s, product is just about out, it looks like it’s really going to work, customers are starting to ask for it, there are some benefits like that. And for DFJ growth, it has to be to the scale where there are many customers using it and the business is scaling up and it looks like it’s going to be a huge market. So, then we do, of course before we write the check we do background checks on a lot of people, not every time, but most of the time. We run checks on customers to see whether they would respond well to something like this. And then we negotiate terms and we just work it out and get to know the people as well as we can in the very short time.

MAJOR TRENDS – BITCOIN

Martin: Tim, let’s talk about two major trends. One you just shortly acknowledged, which is Bitcoin and the second thing, which is also very visible, show on your cravat…

Timothy: Yes, Six Californias…

Martin: Yes. So, let’s start with Bitcoin. Can you briefly explain to somebody who’s quite new to this topic how it works? How the Bitcoin system is distributed, how the information is stored and exchanged when the transaction happens?

Timothy: So, Bitcoin is, turns out to be the most efficient, safest, most stable currency in the world today. People just don’t recognize it yet, because it’s had so many troubles getting to this point. But my Bitcoin is safer than my money in Smith Barney, in Morgan Stanley. And the reason is that the technology is so advanced and the way they’ve set up security is so advanced that your money is actually safer in the form of Bitcoin than it is in any other currency anywhere in the world. The idea generally is that you have a private key and you have a public key. The private key you keep to yourself and the public key is the one people send money into. You need the private key and the public key in order to send the money out of your Bitcoin wallet. So, it’s more secure. It’s much faster, much more efficient; because if I owe you money, and you’re in Germany and I’m in the US I have to get the money translated in marks… Is it still marks or is it Euros?

Martin: German mark we had something like 15 years ago, now it’s Euros. But the next time you are in Berlin, I can pay for you…

Timothy: I’ll buy something with mark. So, you turn it into Euros and in that translation you lose money to bank over here and you lose money to bank over here. When it converts to…

Martin: Another currency.

Timothy: So, it turns out that that can be done much more efficiently and much cheaper when you do it in Bitcoin. If you have Bitcoin I just send you Bitcoin and it’s done. And you have Bitcoin. And you can do whatever you want with a Bitcoin, you can buy things, sell things, whatever you like. And there are lots of new businesses, there’s one called Snapcard that makes you so you can shop with Bitcoin on any site in the world. So you go to the checkout and as soon as you check out they say “Would you like to pay in Bitcoin?” and with Snapcard you can just do that. The other thing you can do is you can just swipe a credit card, we have a company called Atlas where you swipe a credit card, but it’s really Bitcoin debit card and you can pay for things. It comes straight from your account to the retailer and the retailer gets the exact amount of money, they don’t, there’s no 2,5-4% transaction fee. So, Bitcoin has all of these great opportunities. Now, the other thing Bitcoin is, is a technology. There’s something called Blockchain and it gets checked by all these people out there, so every time there’s a transaction, the Blockchain is being checked by many, many people. So, the Blockchain is always stable. What that also means is that you can use the Blockchain for something called the Smart contract. So, we could have the smart contract, we can make a bet on the outcome of the Germany-US soccer game, and we make bet of one Bitcoin, so you bet a Bitcoin and I bet a Bitcoin. We put those Bitcoins into a secure escrow and then, when the game comes out, the outcome of the game, let’s say Germany wins, suddenly both of those Bitcoins go right to your account. And so that any time there’s an event, the smart contract can actually disperse to whoever it’s supposed to disperse to. So, for all shareholders in a company, it can all disperse to the shareholders, if it’s tied to, anything that’s tied to an event can be done without lawyers or accountants or anything, it’s just done in the Blockchain and it shoots out to the people that, who deserve the money.

Martin: If I compare Bitcoin with PayPal, what drives the cost advantage of Bitcoin in terms of infrastructure costs, compared to PayPal? Because…

Timothy: Well, the good thing about Bitcoin is that it’s the crowd, it’s an open source. So there isn’t some company with a bunch of overhead charging us for that extra overhead.

Martin: Because I have my own device which is part of the infrastructure, and that’s why I don’t have this overhead cost, I bear it anyway, but with my own device.

Timothy: Yeah. And PayPal is now accepting Bitcoin, for as I understand. I think they’re… So, they understand that this is much better way to go. PayPal, when you use your PayPal account, you also have to pay your credit card guy. PayPal is kind of expensive. I think there are a lot more efficient ways to move money around.

MAJOR TRENDS – SIX CALIFORNIAS

Martin: Ok. Let’s talk about the second trend. You are one of the proposers of separating California into six sub states. Can you tell us a little bit more about background and the reasons behind it?

Timothy: We’re actually dissolving the existing California and creating six new states. So, technically, that’s what’s happening. Nothing new here, Massachusetts turned into Massachusetts Maine and Vermont. Ohio left Pennsylvania. West Virginia left Virginia. South Carolina and North Carolina split. We accepted Hawaii and Alaska at the same time into the United States. It’s just nothing’s happened for a number of years. We haven’t,… I think our democracy has gotten a little complacent, because we haven’t done anything because we’re just thinking “Oh, everything works, no problem, we don’t have to worry about it”. Well, it doesn’t really work. Lot of things have gone wrong. First of all, government spending as a percentage of GDP is now almost 50%, so that’s a big problem. It means that incentive of most of the people are to create more government and then they will be supported by less and less of a private sector. So you need a big private sector to generate a real positive outcome for a government. Well, in California, it’s even more insidious than that, because… I grew up in California, so 45 years ago in California, California was the number one in education, the best state in the union for education and in the best country for education in the world. And we’ve benefited from that, we’ve built incredible Silicon Valley, we’ve benefited from that incredible good education system that we had 45 years ago. Well, in those 45 years, the education system has gone from 1st to 47th.

Martin: In the world?

Timothy: California is now the 47th, so the third worst in the US. And the US has gone from fist to about 18th in education. That’s a bad sign, because education drives everything else. During that same 45 years, the number of prisoners we have in California has gone from, has quadrupled. We have four times as many prisoners and we have much more recidivism which means they keep going back to jail because they can’t get employed. We have huge job, we have big unemployment here, particularly in the rural areas, big unemployment. And we’re almost pushing jobs away because 45 years ago we were number one, as the best place in the world to do business, and now we’re like number 50, we’re the worst state in the country to do business. And the country is getting harder to do business. So, we’re looking at that and saying “Something has to change”. First of all, governments have to innovate just like every other sector of the world. They have to think in terms of how do we move forward, how do we become more efficient, how can we provide better service to our constituents, how do we do it for less money. All those things that all the other businesses in the world do are not happening in government because they have these monopolistic fighters. Well, if we have six Californias, it’s set up so those governments all have to compete for us, for the constituents, so they have to improve. If something’s not being done right, they have to improve. It’s interesting, in California we also have all these other issues that are, where there are different value systems, if you are Inland vs. whether you’re on the coast. And there are many other issues, so people are enjoying the idea of six Californias because they’ll get a choice and they’ll feel better about the choice. The thing I want is I want a government that is innovating, competitive, driven and I want the value that I deserve as a constituent and a tax payer of that government. So I look and I say “I’m not getting the service. We pay the most here, we get the worst service in California”. So, it’s time and it has to come from this state because it is the one that is operating the most like a monopoly. Because they got the nice weather, we got great weather, nobody wants to leave. But, it is a huge state and it really needs, we need to be closer to our constituents, we need the government to be close to its constituents. We are feeling more and more distant from the people in Sacramento who make all the laws for the state.

Martin: Totally get the point that once you have more countries, and they compete and maybe innovate, because if they’re monopolistic they don’t have an incentive and if they are more they compete for it. One implication and one question. One implication would be: this should apply to all other states, not only in the US, but also abroad as well. So, maybe having smaller kind of political entities, this is the one implication that you would agree, I assume.

Timothy: I think it is better to at least have it so the people feel represented, so that they are attached to their government. Here we call it we’re the people. We are the government. But I feel in California it’s going to be a little bit we-they. We’re the people and they’re the government, as opposed to we are all, the government. I think you only feel that if you are close enough so that you’re feeling like you’re being represented, you’re being heard. And we’re clearly not being heard here. Now, will this spread around the world? I hope so. It’s interesting that competitive governments is already starting to happen. Singapore, 45 years ago, was one of the poorest countries in the world. Now they are one of the richest, because they created this platform for growth, and the platform made everybody much more successful. Same thing in Korea, Korea was very poor country after the war and now it’s very, very wealthy country. China is looking the same way; Japan, after World War II was a very, very poor country and now it is very wealthy country. That’s all because of the platform that the government laid out for growth. Russia was a very wealthy country, and then the Bolsheviks came in and they made business illegal, and it became a poor country. And only now they’re starting to realize that a free market is going to improve their situation. And Estonia. Estonia has, the president of Estonia lived in the Silicon Valley for 9 years, he then went back to Estonia and he made, he created a whole new government, that’s the most efficient government in the world. It’s all digital signatures, it’s all digital voting, it’s, I can set up European bank account in 24 hours through the Estonian government, I can become an Estonian virtual resident and have the benefits of being a part of Estonia.

Martin: So, we talked about the implication of this having more and more states compete for the voters. The other question that arises from my point of view is: how do you manage different political levels? What I mean by that is like, in US, a state law or federal law, in European Union, for example, you have this kind of very regional law, then you have the German law or country law, and then you have European law, where as more and more laws are generated on a more European level, which will then not help the competition.

Timothy: Yes, I think that’s one of the… Well, that highest level is also competing, they’re competing with the United States, Asia, whatever…

Martin: But I can move that easily, yes?

Timothy: It’s harder to move, yeah. But as we can move more easily, the governments are going to have to recognize that and realize that they are going to really have to compete for us. Having those levels, I always believe that the best government is the most local government, the one who is your neighbor, saying “Please don’t build that thing because it’s going to be looking right into my bathroom”. I think that’s the most, that’s the best form of government, or “Please smoke outside”, or “Please don’t smoke around here”. I think government is really important for when something you do affects something I do, or/ and we are in each other’s way. Some sort of set of rules, set of laws for that, it’s very important. Beyond that we should all we push locally, the information should be spread globally, but the actual application of the law should be local. And I see with the EU and with the US, both seeing more and more power centralizing on the central government and not being pushed away. The genius of George Washington was that he was, in fact, the king of America, and he pushed power away. He said “I don’t need to be the king, let’s have the king rotate. Let’s have it be a president, we’ll call it something else, and let’s have it rotate”. The greatest leaders are the ones that are able to push power down, away from themselves. Gorbachov did that, and so did Deng Xiaoping. Deng Xiaoping said “It’s okay to have a free market here, it’s okay to make money”. As soon as he said that, a billion Chinese were freed up to be entrepreneurs or to be business people and to make great things happen. That’s amazing, that’s like releasing whole pile of people from jail or whatever. It really freed their country. And he did that by, in a fact, by pushing the power down to the citizens and allowing the citizens to do great things for themselves. I believe that that is absolutely mission critical for any great country, it’s for the leader to know what the issues are that they should be leading on, and what the issues are that they should be pushed down to the local level.

ADVICE TO ENTREPRENEURS FROM TIMOTHY DRAPER

Martin: Tim, we always try to help first time entrepreneurs to make less errors, so they become more successful when starting their own company. What would you advice them to do, imagining that the friend comes to you and asks for advice?

Timothy: Well, I think my advice to most entrepreneurs is: you’re not stretching far enough. You’ve got an idea, so do 50 other people around the world; they all have that same idea, they’re all building their business. Why aren’t you stretching to something a little higher than where you are? I think some entrepreneurs think “Oh, if I’ve only done a better sales job in the meeting, I would’ve got the money”. I don’t think that’s usually true. Most venture capitalists, angels, they’re looking and they’re saying “How big is this idea and how good is this person?” And I think they’re looking beyond the sale. So I think that would be the advice I’d give. Also, go for it. I mean, you only live once, you ought to do what you can with your life, and if you are, if you know this is your mission in life, why are you waiting?

Martin: Tim, thank you very much.

Timothy: My pleasure!

Martin: And the next time you want to start a company, think about what Tim said, stretch yourself and become a hero. Thank you very much.

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