Founder and Managing Director
Draper Associates and DFJ
Tim Draper shared his passionate views with Global M&A Network about the globalization of the VC community, the DFJ Network for sourcing deals and recent investments, the downside of IPO exit and adverse effects of Sarbanes Oxley, the need for American government to change and drive entrepreneurship, along with his personal experiences with leaders from Singapore, Korea, Ukraine, Russia, Vietnam, Chile to grow the VC ecosystem.
Q.: As an insider, how has the Silicon Valley venture capital community evolved in the last decade?
Mr. Draper: Most significantly, the Silicon Valley has gone global. There are Silicon Valley model ecosystems everywhere from Hyderabad to Shanghai, Boston to Singapore. DFJ, through the DFJ Network has set up relationships and offices all over the world to try to support entrepreneurs wherever they may be. We knew that with the information and communications revolution, entrepreneurs could start up businesses anywhere.
For us, one turning point was when Sabeer Bhatia sent an email to India, and within three weeks we had 100,000 Hotmail subscribers in India. We knew then that the world would have near perfect information, and the opportunities to start businesses in new regions would explode.
Q.: Do you believe that there a tech bubble presently and how is it different from previous cycles?
Mr. Draper: I actually designed something I call the "Draper Wave". It is more an emotional curve than an actual data driven one. But it shows that since the late '50s, when my grandfather was a pioneer VC, it seems that every 8 years there is a VC wave, followed by a PE (or leveraged wave). It is as though each generation starts by creating jobs by starting businesses, builds up a frenzy of activity, reaches full employment in a crescendo, and then loses confidence, and the bubble pops, at which time the leveraged buyout industry goes in and restructures and remakes those companies until the leverage outpaces the growth, and then there is a recession, and people lose their jobs and the cycle starts again.
For example in 1983, Apple, Arthur Rock were each on the cover of Time Magazine before the VC crash in 1984, and then the LBO world brought us RJR Nabisco in 1990, and Michael Milken being thrown in jail in 1991. Then the VC business came through with the Internet revolution, which peaked in 2000, and popped in 2001. Then the PE business rose until the crash of 2008. By my watch we are three years into the next VC wave, led by social networking and wireless communications and apps.
Q.: So, presently, there is no need to fear a "tech bubble"?
Mr. Draper: I expect to have 3 more years before there is another "bubble of any kind," and as long as people fear a bubble, there will not be one.
Q.: In your observation, what pressures are faced by mature tech companies to buy assets, example Microsoft deal with Skype?
Mr. Draper: In the specific case of Microsoft, buying Skype was brilliant. They spent 4% of their market value to become the world leader in long distance telecommunications. They acquired half a billion customers overnight. They might even be able to build some synergies. That all from a company whose growth has been flat for a decade. In general, technology is fluid and changing. Moore's law is accelerating. New platforms and change is accelerating. Incumbents must adapt, acquire or innovate, or they will be left behind.
Q.: Which of your recent investments excites your imagination today?
Mr. Draper: We are very excited about a couple of recent investments we have made. One is Tango (it takes two to Tango). Tango is Skype for wireless devices, where you can do video calls without having to schedule them ahead of time. The other is Do@. Do@ is a wireless search tool that allows more relevant and efficient search from a wireless device. You really have to try it. It is great fun.
Q.: What global markets are you focused on and why?
Mr. Draper: I think it is important for a venture capitalist to roam around a bit to seek out new countries for VC ecosystem acceleration. I like countries that have new leadership and understand that they are in competition for the great minds and capital of the world. I think the US may be resting on its laurels here.
Since Sarbox (Sarbanes Oxley Act of 2002), all I have seen is animosity toward business in the US, where as many of the other countries have shown real plans to encourage the VC ecosystem. Singapore, Korea, Ukraine, Russia, Vietnam, Chile all have leaders that have appealed to me personally to help them grow their entrepreneurship and venture capital environment.
Q.: In reference to Sarbox - what creates the "animosity"? Also, why is US "resting on its laurels"?
Mr. Draper: Sarbox was set up by big government to watch over big business. It is expensive, and assumes that by overwhelming CEOs with paperwork and setting up independent groups to hear complaints by workers that that will keep bad apples from doing bad things, they will make our corporate world safe from those bad apples. It is ludicrous, and unnecessary, and painfully expensive for the smaller public companies.
When was the last time you saw our government thanking the leaders of business for the great work they do to create wealth and pay taxes so that government can spend their money so people can be safer, better educated and better cared for? When was the last time an article stated that a CEO should be better paid for the great work they have done to build value for customers, employees and shareholders? This sort of thing is happening in other countries.
We pay billions to educate the best and the brightest from all over the world in technology in our universities, and then we don't let them work here, so they go back to countries that will have them. Our government spending is right up there with the most socialist countries. We allow unions to decide how our children are educated, to run our government, and to enforce our regulations.
Q.: Can you provide examples of how the leaders in the countries mentioned -- Singapore, Korea, Ukraine, Russia, Vietnam, Chile are planning to grow their VC communities?
Mr. Draper: I can tell you what I learned in my travels. President Yuschenko of Ukraine allowed me to be the first American to come to Ukraine without a visa. He then explained that although in the past it has taken 6 months and 23 bureaucrats to start a business, now it will be one bureaucrat and 5 days. In Singapore, I came up with a new idea for a stock market at breakfast, and at lunch I was sitting between the head of the Singapore SEC and the head of the Singapore stock market. In Vietnam, I met with the DPM and Finance Minister who told me that they were learning how to outdo China in attracting business. In Korea, President Lee told me that he hoped to attract more entrepreneurs and venture capital since they had laid out the best wireless infrastructure in the world in Seoul. Russian President Medvedev and his team have offered DFJ a free office and free travel to Russia for our partners if we will help them set up a venture capital/entrepreneurial environment in Russia. I met with Chilean President Sebastian Pinera, who discussed the privatization of Social Security in his country and the effect it had had on the entrepreneurial climate there. In Malaysia, I saw ads for medical tourism, and in my discussions I learned that the government there is hoping to take advantage of a slow bureaucratic FDA in the US, where people will come to Malaysia to get the most modern treatments. Even President Sarcozy of socialist France just put together an eG8 conference to get a handle on the Internet and bring entrepreneurs to his own country.
Q.: In your experience, what are the nuances of investing in global markets?
Mr. Draper: I have found that entrepreneurs are the key here. The governments can make it harder to do business somewhere, but the best entrepreneurs are those who have a vision of the future and they cannot help themselves from pursuing it against strong odds. These are the people I look for. Where they are is secondary.
Q.: What are the challenges facing America today and is there a role to be played by the VC community?
Mr. Draper: If America wants to keep its edge, it must do away with public employee unions. Why the taxpayer has to pay a premium for a government worker is beyond me! These unions are an ongoing drag on the education system, on worker motivation, and on our country's economic value and growth. The VC community's goal is to make money for their investors while supporting entrepreneurs in their visions. They will go to the countries that are the most attractive.
Q.: So, would you agree that America is not a top destination for VC today in the global context?
Mr. Draper: No. I like America. I think there is hope. But we need to wake up and smell the competition. Our government is in competition with the other countries of the world for the businesses of the world, and if we don't respond to that competition, we will lose industry after industry.
We do have the best free speech in the world. We do have freedom of religion. We do have a right to bear arms and protect us from government overstepping. But we also have an inefficient and hungry government that is soaking up valuable resources that the private sector can do so much more with.
Q.: In an increasingly competitive environment, how do you source your deals? Is your due diligence process detailed?
Mr. Draper: At DFJ, we have a real edge in deal sourcing. It is our DFJ Network. Our network allows all the members to see opportunities that are not available to provincial VCs. We see every trend happening, and we see them in multiple locales. So it is up to us to make sure we back the right people, and help guide them in the right directions.
We do thorough due diligence on all our companies, but as the market for entrepreneurs heats up, sometimes we have to just do our best and with incomplete information, go with our gut.
Q.: How do you define market share and what is the relationship style between DFJ and its portfolio companies?
Mr. Draper: Ever since I stumbled upon the concept of viral marketing, we at DFJ have made it our business to make sure we take full use of virality. I think this is one of the areas where we stand out. I think all VCs do most of the other things we do, business modeling, monitoring progress, managing entrepreneurs (if that is possible), etc.
Each partner has his own style, and all partners help to improve the portfolio in any way they can, whether on the board or not. I like to help the companies with their viral marketing approaches and help the entrepreneurs with how to put to work the resources they have.
Q.: In your experience, what are the top action steps for an effective "viral marketing"?
Mr. Draper: Every company is different. It isn't action steps, it is a way of thinking. How do you get your customer to help you spread your service? It falls under the category of business modeling. Marketing costs can be lowered if there is some leveraged way of reaching a lot of customers.
Q.: What is DFJ preferred exit strategy presently?
Mr. Draper: We tend to invest for the long haul. Interestingly, we tend not to want to exit our companies if they are doing well. We like the compounding effect of riding our winners.
Q.: How do you define "long haul"; and if you were to exit, what is your preferred strategy?
Mr. Draper: Well, our partnerships are 10 years with 4 one year extensions, I guess we are talking about a 14 year time horizon for each fund. Current exits have real downsides. Mergers usually mean that the original visionary loses his ability to pursue his vision, and many people lose their jobs as companies get more efficient.
IPO's have the downside of higher regulation, and more scrutiny by small, unsophisticated shareholders. Companies that do IPO's usually lose their best board members because of the liability attached to them, and they also get shareholder lawsuits since any shareholder of one share can call for a class action lawsuit for any reason. Sarbox and other regulations have added the problem of being so expensive to the company that companies have to be very large to justify going public, so there is little liquidity available if a company pursues this path.
We saw these problems and helped create a new alternative. An XPO. Xpert Financial has gotten SEC approval to do XPOs, private IPOs for companies who want to raise money from the same institutions that the public companies use, and have some outlet for shareholders who want liquidity at better prices than they can get in the secondary markets.
Q.: How do you cope through the ups of the markets?
Mr. Draper: When the going gets tough...the tough get going. When the business gets too easy, we sell.
Q.: Finally, what book are you currently reading?
Mr. Draper: The Start Up Game, by Bill Draper, my father. I reread it regularly. It is the tone and voice of the book that helps people understand a better way to live their own lives. My father has a very positive outlook that can be contagious to anyone who reads the book. He is awesome.