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A Silicon Valley Venture Capitalist Moves to Ride the Net's Growth There are currently 500 million Web surfers, says Timothy Draper, leaving 5.5 billion yet to log on Draper, Fisher, Jurvetson, the Redwood City (Calif.) venture-capital firm, is one of the leading lights of Silicon Valley. Now, the original bankroller of Hotmail.com is seeking Net opportunities far from its stamping ground. One of the firm's principals, Timothy Draper, journeyed to New York in mid-October to address the New York Business Forum and explain why his firm is scouting out a Big Apple office. Business Week Online's Margaret Popper spoke to Draper at the ultrafashionable Hotel W, where he attended the launch of one of his firm's newest e-businesses: Estyle, an online shopping mall featuring the favorite fashions of Cindy Crawford and her friends. Here are edited excerpts of their conversation: Q: Why are you branching out from San Francisco? Isn't there enough to do there? A: I have a mission to spread the Equity Economy. I grew up in Silicon Valley when it was apricot orchards and dirt roads. There were a half a dozen venture capitalists who started to take risks on people's visions. They created the first equity economy, where you could swap just about anything for equity -- public relations, real estate -- you name it. Most of the country operates in a debt-based economy. People don't realize this, but cash is a Federal Reserve note -- it's government debt. The debt mentality has pervaded the economy for years. A debt economy is [structured around] a system of banks or companies with a strict management/employee relationship. A debt economy is based on the desire to take cash out of the business, whereas equity is about building up the business. If I had a choice between equity across a multinational business or government guaranteed cash, I'd feel a lot safer with equity. The odds of losing it are probably lower than the odds of losing government debt, although the odds of either are pretty low. Equity could potentially become a form of currency. You could walk into McDonald's and get your cheeseburger for shares. Q: What makes a region a potential base for an "Equity Economy"? A: You need a concentration of entrepreneurs, risk taking, and venture capital. Then the question is how you get those people together. You need a watering hole like the New York Business Forum -- a place where entrepreneurs can build a network. You also need a periodical that spreads the word. In San Francisco it's the Churchill Club and Upside magazine. In New York it might be the New York Business Forum and Silicon Alley. You want the CEOs of big business (such as General Motors or General Electric) to be coming to the region to see what's going on. That's because small companies make it by selling to big business. There must also be models for success in the region. Entrepreneurs who have made it so that others get the feeling "I can do it too." In California, you have HP and Intel providing these models. In the New York area, companies like Wit Capital, DoubleClick, and iVillage give entrepreneurs something to focus on. Q: Where have you created new funds? A: We created Zone Ventures in Los Angeles, along with the Zone Club and Zone Media. L.A. has many models for success, companies like Net Zero, Earthlink, and Goto.com. In Utah, Novell is the model. We created the Wasatch Fund. We started the Timberline Fund in Oregon on the Washington border between the Microsoft and Intel factories. We decided we wanted a fund in AOL territory, so in Northern Virginia we started the Draper MidAtlantic fund. In Pittsburgh, the home of Lycos, we have the Draper Triangle Fund. Q: So why a new fund in New York? A: New York is fantastic. It has all the models for success. It has a huge network -- people can just walk out on the street and go from building to building. It has three powerful industries that are going through an apocalypse. There is Wall Street, which is being disintermediated. There is advertising, which is being overthrown. And there is the media, which is transforming. New York is perfect. The Web is being built. Now we can focus on things like content. Q: A lot of Internet companies are artificially supported by venture capitalists who pour money into them whether or not they turn a profit. What value do these companies have once they've done their IPOs and there's no venture funding to continue to prop them up? A: If you had bought into all the IPOs from the beginning of the Internet craze to now, you would've made a ton of money. These companies are so smart to be losing money. They get their cash immediately, hold very little inventory, and deliver when they can. This business model is far more powerful than the traditional retail model. A retailer buys stuff and holds it -- the manufacturer gets paid 90 days later. Q: Don't these companies have to start making money at some point? A: You don't have to start making money if you're growing. Your cash flow might start being positive before profits arrive. If you grab market share, you win in this category. You're the Nike of shoes, or the Microsoft of operating software. People are being completely rational in growing as fast as they can. Q: How long can the pace of Internet growth last? A: Right now we have a $10 trillion world economy. Of the world's population of 6 billion, 500 million are allowed to participate in that economy. All the rest have governments that limit people's access. The Web pierces that veil. When 6 billion people start participating in the world economy, it's going to grow to $100 trillion. The stock market will bounce up and bounce down, but the underlying fundamentals of the market are changing. Q: How fast can the Internet pull in the other 5.5 billion people? A: I came up with the idea to put the message at the bottom of hotmail e-mails. I said to the marketers: "Why don't we just put at the bottom of every message -- P.S. I love you. I'm using hotmail?" Their first reaction was, "we can't do that!" It was a big struggle to get them to agree, and finally they said, "OK, but no 'PS I love you'." I sent one e-mail to a friend in India with that message on it, and three weeks later hotmail had 100,000 registered users in India. We had just opened up the world. Q: Are you thinking of expanding overseas? A: We [Draper, Fisher, Jurvetson] have a plan to create the Equity Economy, and we're not going to stop at our shores. Q: How does the European market differ from the U.S. market? A: The best thing the U.S. has is a lenient bankruptcy law. An entrepreneur knows that the worst thing that happen is to go bankrupt. Now, that isn't pleasant, but [in the U.S.] at least you know you won't lose your house, your car, or your kids' education. If an economy focuses on the downside, it will get the downside. Q: With equity so much more tightly held in Europe, do you really think you can convert Europeans to the "Equity Economy?" A: Betting on the stock market is fun, more fun than playing the lottery. All those people playing the lottery will be investing in the stock market. It has an absolute value of more than one, and the lottery has an absolute value of less than one. Governments create lotteries. That tells you all you need to know. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ |
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