William Draper – Advice from a True Venture Capitalist
The Startup Game — Inside the Partnership between Venture Capitalists and Entrepreneurs was published this year by William H. Draper III, currently general partner of Draper Richards and the founder of Sutter Hill Ventures in Palo Alto, one of Silicon Valley’s first VC’s. William Draper is the real deal, having a part in the venture capital funding of icons such as Skype, Hotmail, OpenTable and many others while investing 40 years in the midst of fabled Silicon Valley. I want you to read this book too because I find myself in almost total agreement with his views on what makes companies fundable. So I’m dedicating this post to suggestions he makes to entrepreneurs seeking funding and success.
Sutter Hill Ventures has maintained a 35% internal rate of return (IRR) since it began in 1965. This is way above the average for VC firms. We can therefore have some confidence that William Draper and his associates have a knack for picking winners. They’ve also seen a lot of losers over the years. From this experience, I think they can give us an idea of what successful entrepreneurs do that separates them from the pack.
Bear in mind, you may not be a candidate for traditional venture capital funding — you may be a better candidate for organized angel investors, for casual investors, for debt financing, or some combination. But it doesn’t really matter because William Draper has seen and funded enough companies to have observed the patterns that lead to success in entrepreneurial ventures.
Here’s a sampling of his best observations:
“An individual with an idea might be willing — even eager — to turn over the day-to-day management of that brainchild to a CEO put forward by a group of investors. In fact, it happens all the time, although sometimes it’s not until a later stage in the company’s development.”
“Not that it’s easy. It’s almost never simple to find the right fit between a visionary and a potential manager of that vision.”
As you may know from my prior posts, I’ve observed that the more successful entrepreneurs combine a visonary with an execution master as the core of the founding team. In the ones that I’ve seen, the founders knew each other from earlier companies and knew they were compatible to begin with.
But if you find yourself needing to find an execution master, asking your investors to help find one is better than not having one at all.
“I had decided that the best place to hold a first meeting is in the entrepreneur’s own place of business. You get to see how the entrepreneur operates in his own digs, with his team right there on site. This way, you put the entrepreneur and his colleagues more at ease, and you are able to see how they interact.”
Mr. Draper is, as we are at Intelliversity, intensely interested in how well you and your team work together, in addition to seeing a formal presentation in a conference room.
“You have to make sure that you have the right entrepreneurial team. Nothing is more important. In fact, nothing is even a close second.”
Here he emphasizes the team, the combination of visionary leader and execution master. The right experience of the founders is also important:
“The entrepreneurs with the lowest risk of failure are those who know their field intimately; have run another company (or division of a company) similar to the one they plan to launch; and have an idea for a new feature, market, or technology that will support an industry breakthrough.”
As I understand Mr. Draper, these traits can be supplied by two individuals, both of whom know their field intimately. It may be the case that the visionary founder may not have run a company or division before and only the execution master has actually run one. That was the case for example with Yahoo and Google of course.
In any case, he reminds us that the visionary leader can’t turn everything over to the execution master — building the company takes both actively involved:
“If the product turns out to be wrong, the visionary leader will come up with a new one. If the market shrinks, the leader will steer the whole team toward another one. So it’s not surprising that Rock and I are less interested in the details of the plan and more interested in appraising the talents of the leader.”
William Draper learned from his failures as well as successes, and so should we:
“I have backed many companies as startups despite knowing in my bones that the founding entrepreneur was only capable of leading the company through the startup phase. The result? Almost all of these have failed…”
“Some of the best venture capital results come when the entrepreneur knows that he is unqualifed to manage a fast-movcing, quickly changing young enterprise for very long, and immediately asks the venture capitalist to help find an experienced CEO.”
William Draper wraps up the importance of the team as follows:
“In summary, there are no strong companies with weak management. If you’re a venture capitalist, you need to get the management right the first time. if you do, your job will be easy.”
Key takeaway: Think Like an Investor. Remember, as an entrepreneur, you’re one of the investors in your own company — investing not only your savings but your invaluable time and reputation. Here is a key takeaway: If you think like an investor, your company will be more successful.