“Venture capitalist at work” Tim Draper

We continue to bring you the principles, insights, and experiences of successful venture capitalists from Tarang Shah's book, Venture Capitalist at Work.

Tim Draper is one of the first venture capitalists in the U.S. and his company, Draper Fisher Jurvetson (DFJ), is the leader in venture capital investing in the world. Tim Draper prefers to invest in early-stage technology companies. One of his investments is in the company Skype. Tim is the founder of the concept of "viral marketing" (Viral Marketing - content that users will want to share).

What causes startups to fail according to Tim

There can be many reasons, but the most common are founders running out of money or energy. Entrepreneurs have to keep moving forward and provide revenue to keep their company afloat. The company must have the ability to exist as long as possible to become visible to customers. But cashflow can stop suddenly, for example the bank asks to pay back the loan, the entrepreneur just gets tired and gives up, or many other reasons.

Of course, there are many critical areas in a startup, but the main one is the attitude of the founders to their project and to each other: the lack of support, trust, and motivation. The founders' motivation should not be purely financial. The main message: solve a big problem in a big market.

Other reasons include: bad luck, losing a big client, or making the wrong decision.

What is more important to build a billion dollar company: people or market?

People, of course. A big market can only help you develop faster. It's harder to work in a small market. But in the end, the team and enthusiasm of partners and founders makes it possible to build something from scratch.

When Tim invested in Hotmail, his luck smiled on him and was greatly helped by the introduction of the concept of viral marketing.

In Skype, Tim saw a trend. It was a new peer to peer P2P (peer to peer network) technology which, among other things, allowed for the transfer of music files. It was something new, with its own complexities, but it was an interesting topic. Tim and his team met with the founders of Skype. If they had been ordinary, unremarkable people, DFJ would never have invested in them, but Niklas Zennström and Janus Friis turned out to be unremarkable people, so they invested in them. It was clear that Skype was going to have a huge market. Imagine the market of all the telephone companies and the opportunity to reduce the cost of the service to the customer.Thus, the project began with an interest in a new technology that provided new opportunities, including finding the right people.

How to distinguish the founders who can build a unicorn company from those who will fail.

All of the founders who were able to build great companies were strong, confident and charismatic. And the people that DFJ invested in were as focused as possible on what they were doing and very motivated.

"Mission helps entrepreneurs do extraordinary things. Building a business is a skill. Changing the world is a mission. And people like people who carry a mission."

A founding team of 2 or more people has more opportunity to move a project forward than a single founder DFJ has only had one project with one founder, but there was a good team behind it. Hotmail, Skype, and others had 2 founders each. And 2 founders is optimal, especially if they have different skills. They can close more tasks and make decisions as a team.

Which market is better for a startup to go into?

It is better to go into an existing market. For example, with Skype, they analyzed the market for phone services. It was huge. There was an understanding that in the long term, the cost of services would go down, but the number of users would grow rapidly.

Does the timing of market entry play a role?

Every major company has had predecessors that failed because the market had not yet matured to the technology or the technology could not be monetized.

It's not so much important to the startup as it is to the venture capitalists.

Too early when the company is the only one in the market or is using a completely new, unfinished technology, using a lot of resources and a lot of bugs. Too late when there are already 3 or 4 companies on the market and they are bigger and growing faster. However, Google was too late in the market, but still managed to grab its share. Before facebook came along, social media already existed. More important here, not the time to market, but the product you create. You can use newer technology, But still, if you want to work in one of these areas, you will have one big disadvantage - these companies have already become big.

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