The Startup Game: Inside the Partnership between Venture Capitalists and Entrepreneurs

The Startup Game: Inside the Partnership between Venture Capitalists and Entrepreneurs

by William H. Draper
     
 

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Entrepreneurs drive the future, and the last several decades have been a thrilling ride of astounding, far-reaching innovation. Behind this transformative progress are also the venture capitalists - who are at once the investors, coaches and allies of the entrepreneurs. William H. Draper III knows this story first-hand, because as a venture capitalist, he helped

Overview

Entrepreneurs drive the future, and the last several decades have been a thrilling ride of astounding, far-reaching innovation. Behind this transformative progress are also the venture capitalists - who are at once the investors, coaches and allies of the entrepreneurs. William H. Draper III knows this story first-hand, because as a venture capitalist, he helped write it. For more than 40 years, Bill Draper has worked with top entrepreneurs in fabled Silicon Valley, where today's vision is made into tomorrow's reality. The Startup Game is the first up-close look at how the relationship between venture capitalists and entrepreneurs is critical to enhancing the success of any economy.

From a venture capitalist who saw the potential of Skype, Apollo Computer, Hotmail, OpenTable, and many other companies, come firsthand stories of success. In these pages, Draper explores how to evaluate innovative ideas and the entrepreneurs behind those ideas, and he shares lessons from Yahoo, Zappos, Baidu, Tesla Motors, Activision, Measurex, and more. Also, in revealing his on-the-ground account of how Deng Xiaoping brought China roaring into the modern world and how Manmohan Singh unlocked the creative genius of Indian entrepreneurs, Draper stresses the essential value of farsighted political leadership in creating opportunity.

The author also discusses his efforts to bring best practices of the venture capitalist/entrepreneur partnership to the social sector.

Written in an engaging narrative, and incorporating many of the author's personal experiences, this book provides a much-needed look at how the world of venture capital and entrepreneurship works.

Editorial Reviews

From the Publisher

“Required reading. William H. Draper III, to give him his correct title, has lived an adventurous life, which makes his book more exciting than simply a list of high-tech firms he has backed . . ..If the subject interests you then this volume offers advice from a wise figure.” —The Financial Times

“Moving back and forth between the worlds of business and international diplomacy, Draper's book uses anecdotes from a varied career to illuminate the partnership between VCs and startups as well as the ever-changing role of entrepreneurship in economies around the world.” —The Huffington Post

“Reads like a first-person history of the venture capital industry. It includes lots of exposition for those not familiar with venture capital, a generous dose of advice, and anecdotes.” —Fortune

“Bill Draper has written a gem . . .a mix of practitioner stories with some autobiography mixed in.” —Business Insider

“Bill Draper is one of the most knowledgeable people in the world about venture capital investments.” —International Business Times

“His passion for helping startups get off the ground runs deep.” —San Francisco Chronicle

“It's not a stretch to say that the story of Bill Draper is the story of venture capital.” —The Wall Street Journal

“Draper comes across as eminently likable . . .If Draper's book were merely a good window into Silicon Valley's past, it would be well worth a read, but he leavens the anecdotes with practical tips for would-be investors and entrepreneurs alike . . .The passion comes through frequently in the book.” —San Jose Mercury News

“Whether you've experienced the joys and pains of Silicon Valley directly or just want to learn from those who have, you can't do better than this firsthand account of the storied three generations of Drapers. Bill has done a huge favor for those of us who are passionate about technology and innovation by chronicling their experiences. Theirs is a tale worth knowing.” —Eric Schmidt, Chairman and CEO of Google

“Bill Draper, who began investing back when Silicon Valley was only known for its fruit orchards, tells the story behind some of the most pivotal companies of the last half-century and offers a fascinating look at the inner workings of the venture capital industry.” —Elon Musk, cofounder of Paypal, cofounder, CEO, and CTO of SpaceX, cofounder and CEO of Tesla Motors, chairman of Solar City

“No single venture capitalist more embodies the best in venture capital; Bill Draper sets the bar high. It is not just his demonstrable success in business, but it is also his high ethical standards that earn him the respect and the following that he has in the world of business.” —President George H.W. Bush

“I wish I had this book when I started salesforce.com. This is more than a book about how to win over a venture capitalist, or an inside look at this mysterious and powerful industry. This is a book about innovation. Anyone trying to transform a good idea into a breakthrough company with massive impact must read this book.” —Marc Benioff, Chairman and CEO of salesforce.com

“This is an inspirational tale about using entrepreneurial talent and energy to improve the world. In this book Bill describes a life of meaning and impact that spans venture capital, public service, and philanthropy. We need more Drapers!” —William H. Sahlman, Dimitri V. D'Arbeloff, MBA Class of 1955 Professor of Business Administration and Senior Associate Dean for External Relations, Harvard Business School

“Bill Draper is one of the most successful and respected individuals in the venture capital industry. Having funded several hundred technology companies, he has seen it all. The Startup Game is not only a captivating account of Silicon Valley, its entrepreneurs, and the venture capitalists who backed them, but it is also an intriguing depiction of how the world of entrepreneurship works.” —John Doerr, partner, Kleiner Perkins Caufield & Byers

“An absolutely fascinating and well-told story by one of the great men—and gentlemen—of the Silicon Valley startup world. Must— indeed, required—reading for anyone interested in the American entrepreneurial adventure.” —Christopher Buckley, author and political satirist

“While Bill has a famous reputation as a venture capitalist, the best untold story is how strategic he has been in backing a cadre of world-class social entrepreneurs who are creating massive change. Consider the stories of Bill as a philanthropist as an unexpected bonus of reading this book” —John Wood, Founder and Executive Chairman, Room to Read

Product Details

ISBN-13:
9780230112391
Publisher:
St. Martin's Press
Publication date:
01/04/2011
Sold by:
Macmillan
Format:
NOOK Book
Pages:
272
Sales rank:
673,255
File size:
342 KB

Read an Excerpt

The Startup Game

Inside The Partnership Between Venture Capitalists and Entrepreneurs


By William H. Draper III

Palgrave Macmillan

Copyright © 2011 William H. Draper III
All rights reserved.
ISBN: 978-0-230-11239-1



CHAPTER 1

Three Generations

Tomorrow to fresh woods and pastures new.

—John Milton


Let's look at a few stories spanning three generations of Drapers, which add dimension to our emerging picture of venture capital and entrepreneurship. Let me first reassure you, however, that my goal in this opening chapter is not to present three Draper biographies. Instead, my goal is to help you place my stories and my advice in a larger context.


Lessons from the German Coffeemaker Machine

When people ask me whether venture capitalists are born or self-made, I tend to waffle. I suspect it's a little bit of both, with definite shading toward the self-made.

In the late 1920s, decades before my father, General William H. Draper Jr., founded his venture capital firm, he worked on Wall Street as an investment banker for Dillon, Read and Co. For most of that decade, since the end of the tough recession of 1920–1922, the stock market had been soaring. Business-minded Republicans had occupied the White House since 1921. Wallets and bellies were full. An unbridled optimism filled the air. Wise men were talking smugly about the "end of the business cycle"—meaning that from that point on, there would no longer be any economic downturns, and the economic escalator would only go up.

One day in 1929, before the crash, my father was bitten by an early version of what we would today call the venture capital bug. At the time, he had just received a huge bonus. As he saw it, he had two choices. He could use the money to pay off the mortgage on our family's new house and we would own it free and clear. Or, he could invest his entire bonus in a new business idea that he had recently come across: a German-made automatic coffeemaker.

This brings us to an important lesson about venture capital: don't invest any money that you can't afford to lose. After all, as the name implies, venture capital is a risky business.

I'm not exactly sure how my father made his decision, but he had other business in Germany and might have been intrigued by the famous German coffee klatches. The 1920s was the decade in which a whole new universe of consumer-oriented gadgets was introduced—partly because of the gradual electrification of America—and bringing on the next indispensable device must have seemed appealing. And there was the heady context of the summer of 1929—business was booming, and it simply seemed that one couldn't make a bad investment.

So he plunged. He put his entire bonus into the coffeemaker venture. That turned out to be a bad decision. Two months later, the stock market crashed, and the investment crashed with it. The mortgage on our house remained a burden, and for many years there wouldn't be any bonuses being handed out on Wall Street. My father had to work night and day for the next ten years to keep us afloat.

I was born in 1928, so I was only an infant when these fateful decisions were made. But I gradually became aware that in the Draper household, money was tight. I remember, for example, that throughout my childhood, my father would invariably return the Christmas gifts that my mother bought for him, because he felt that the family needed the cash more than he needed a present. My father was by nature a hard worker, but in those difficult years, he drove himself at a punishing pace as he struggled to hang on to his investment banking job, in the deepest and darkest economic depression that our country had ever faced. One of his jobs—surely an unpleasant one—was to close down several Dillon Read offices that were outside New York City. There were many periods, as I recall, when he worked all night at the office. I remember later visiting his office at 38 William Street and seeing the wooden rolltop desk that had served as his makeshift pillow. His hard work paid off. In 1937, he was promoted to vice president at Dillon Read, and the financial pressure eased somewhat.

There was a second thread that continued through my father's life in this period. He had served in World War I and had stayed in the Army Reserves after the war. (Every summer he took a short leave from Dillon Read to serve as a reserve officer at the Army base in Plattsburgh in upstate New York.) He eventually reached the rank of chief of staff of the 77th Division, a post that he held from 1936 through 1940. In 1940, he was called to Washington by General George Marshall to serve full time on President Roosevelt's Advisory Committee for Selective Service. He thereby began two decades in which he alternated between distinguished stints of public service and equally notable work in the private sector, both in the United States and abroad. (I'll return to my father's career occasionally in later chapters, because these stories help to make some of the larger points of this book.)

In 1959, my father made history in his business pursuits. With his friends Rowan Gaither and General Fred Anderson, he formed Draper Gaither & Anderson: the first venture capital firm on the West Coast and the first limited partnership in the venture world.

My father has had a significant influence on my life, my character, and my actions. Why is the coffeemaker story so vivid in my memory? Because he told it to me many times and drove the message home. He wanted me to take away lessons from this misadventure, including the need to spread the risk, to always save something for a rainy day, and to work hard enough to make good things happen.


Getting My Feet Wet

"Venture capital? Sounds risky. I wouldn't do it if I were you."

The man speaking to me, Clarence Randall, former chairman of Inland Steel, was sitting behind a huge, dark wooden desk on the top floor of the new Inland Steel building in the Loop, the heart of downtown Chicago's financial and retail district. I recall that the view was spectacular on that particular sunny afternoon in June 1959.

I knew that it would be difficult to convince Randall to agree with my decision to leave Inland. I had had great opportunities and had been happy at the company for the previous five years. The "Randall's Rangers" management training program, in which I participated, was what had initially drawn me to Inland. Each year, the company recruited five or six Rangers from the graduating classes of the nation's best schools, with the expectation that they would later go on to join the ranks of Inland's top management. Randall had invested his reputation and a good deal of Inland resources to make the program a success, and he kept a close eye on us, both during and after that first year. Doors were opened for us. After completing my year of training, I was assigned to the sales department and eventually given responsibility for all of South Chicago, arguably the most important district. I was one of just nine salesmen in the entire company and was proud to have a company car and my own territory.

It had been fun and a great learning experience. My wife, Phyllis, and I were living in Highland Park at the time, and two of our three children were born during those five happy years in the Chicago area. We came to treasure the solid values and strong work ethic that the Midwest is known for. I still love Chicago and the Midwest. We made many close friends, particularly Cathie and Pitch Johnson, who remain our best friends to this day.

I met Pitch on my first day at work at Inland Steel in East Chicago, Indiana—a rather grimy mill town—where we ended up spending several memorable years together raising our new families in a company housing project. Pitch had grown up in Palo Alto, California, and had attended Stanford for his undergraduate studies. We had both attended Harvard Business School, and like me, he had first worked at another steel company before starting at Inland. We both were enthusiastic about the challenges ahead—he as a foreman in the Open Hearth operations, and me as a Randall's Ranger. We bonded like glue.

So why was I leaving? My father had called to say that the money had been raised, the timing was right, and the documents had all been signed. Draper Gaither & Anderson—the first venture capital firm in the West—was about to become a reality.

Conspiratorially leaning forward across his desk, as if the KGB might be listening to our conversation, Randall dropped his voice to nearly a whisper. "I had a friend in the financial business who lived in Highland Park," he said, "and he went bankrupt because he gambled in the stock market. He and his family left town and never recovered. You have a secure job and are on your way to the top of a great company. Let your father do his thing, and you do yours. Stay with your business family here in Chicago, and avoid taking a risk on something as dangerous as venture capital."

But it was too late. My heart and mind were already in California. I thanked him for his generosity toward me and formally cut the cord.

Before leaving Randall's office, though, I decided that I had to ask him a question that had been on my mind for several months: why did Inland continue to manufacture rails for the railroad industry when everyone inside the company knew that the rail business was a loser for Inland? Randall, seemingly unsurprised by the question, explained to me how significant the railroad industry was to the security and economic health of the country and how important it was for Inland to continue to supply rails as needed regardless of their profitability.

"There's a shortage of rails," he concluded, gradually raising his voice to oratorical levels. "It is our patriotic duty. As long as I have any influence on Inland Steel, we will remain in the rail business."

Clarence Randall was not only a civic-minded businessman; he was also a dominant leader of a core industry that was then at the zenith of its power. This was the decade after World War II, when the country was rebuilding its infrastructure and meeting the long-deferred needs of its citizens, many of whom had made huge sacrifices for the war effort. Randall's heart was in the right place, and I knew he believed every word of what he was telling me.

Even then, though, I could see the handwriting on the wall. The U.S. steel industry hadn't modernized itself and had been shielded from foreign competition by protective tariffs. Aluminum, plastics, and other substitutes were moving in on steel's turf. Inland Steel's stock in 1959—the year I left the company—was at an all-time high: $59 per share. It never reached that price again, and it declined enough in subsequent decades to turn the company into a ripe takeover target. In 1998, after over a hundred years in business, Inland was acquired by ArcelorMittal, the largest steel company in the world.

On the way back to my office, I thought briefly about the perils and pitfalls that Randall had sketched out. But even then, I knew I didn't see the world the same way he did. Where he saw risk, I saw opportunity. To him, the private investment business—in fact, any investment business—was risky. To me, venture capital was fresh, new, and exciting, and the risk seemed to bring with it big rewards. I would be leaving a tired, stagnant, and bureaucratic industry to join a creative, fluid, and challenging one. From Randall's perspective, I was giving up the fast track to joining the leadership ranks—maybe even becoming CEO—of the best-managed steel company in the country. In my eyes, that opportunity was a long way off, and it seemed far more meaningful to help create a family of new companies than to manage one old one. I was still young, and I figured that if venture capital didn't work out, I could do something else.

Then there was the lure of San Francisco. As I said, I loved Chicago—its energy, architecture, friendly and open people, and no-nonsense atmosphere—but San Francisco was, in my eyes, the glamorous "city on the hill" (actually, seven hills). True, I had only been there once, back when I was twelve, and when I try to summon up memories of that long-ago trip, all that comes to mind is a Barbary Coast restaurant with what seemed like mountains of sawdust on the floor. But the city had captured my imagination, and even today it still exerts a magical hold on me.

The prospect of working with my father also had enormous appeal. Because of his involvement in World War II, his subsequent assignments in Paris and Berlin, and later his role as chairman of Mexican Light & Power in Mexico City, I hadn't had the chance to spend much time with him. If I joined Draper Gaither & Anderson we would be able to see each other every day, and I would have the unique opportunity to learn from a master.

Finally, and most importantly, there were my wife and children to consider. Phyllis was thrilled at the prospect of living near the Stanford campus. (To this day, she is an incorrigible, perennial student.) She wholeheartedly endorsed my proposal to live our lives and raise our children in a more temperate and snow-free climate. In short, she was eager to start a whole new life.

I left my office that afternoon feeling confident about my choice to move to Palo Alto and help get Draper Gaither & Anderson off the ground. But if I had pondered my decision for a year or a hundred years, I couldn't have begun to guess what was to come. I was about to witness the birth of Silicon Valley and participate in its dramatic and unprecedented growth. I would have a front-row seat as my adopted home transformed itself into the heartland of high technology, venture capital, and entrepreneurship. Silicon Valley would become synonymous with creativity, productivity, and economic growth—the birthplace of Apple, Hewlett-Packard, Google, Yahoo, Cisco Systems, Oracle, Genentech, OpenTable, Tesla, Facebook, Twitter, and literally thousands of other great companies.

The median, annual family income in Atherton, California—the little town twenty-eight miles south of San Francisco where we would eventually settle—was $3,857 in 1950. By the year 2000, it would exceed $200,000. By the beginning of the new millennium, Atherton was one of the most affluent locations on the planet.

It was Silicon Valley that made that possible, and it was venture capital that helped make Silicon Valley possible.


Landing in the West

Of course, what the future held wasn't apparent to Phyllis and me as we drove into Palo Alto in our new Chevrolet convertible, which we had bought in anticipation of the bountiful California sunshine. Unfortunately, we broke the latching mechanism for the top even before we crossed the Mississippi. We somehow got it shut, but we didn't dare open it again until we had figured out the cost of housing in Palo Alto and were sure that we could afford to put our limited resources into the car.

We made the trip out from Chicago a leisurely one, taking five days to cross the western half of the country. We had three small children in the back seat, so we didn't want to push ourselves. Every day, we would leave our motel at 7 A.M., drive all morning, and by 2 P.M. find our next lodging, preferably with a pool. It was exciting: a family voyage of discovery in a vast and beautiful part of the country that none of us had seen before.

Once we reached our new hometown of Palo Alto—then a somewhat sleepy college town of about 25,000 residents—we drove the tree-lined streets until we found Rickey's, an upscale motel that some friends had recommended. It was where Stanford students housed their parents, where visiting business travelers stayed, and where the local Rotary Club met. Most important for our purposes, it had a pool. On that warm July afternoon, the Draper family felt that we had arrived in heaven.

At that time, Stanford University was already the heartbeat of Palo Alto. In the course of fifty years, it had become a first-class university, on par with those in the Ivy League. The University of California, Berkeley, was the other great university in Northern California, but it seemed far away—across the Bay Bridge east of San Francisco.

Stanford University, amidst a blur of bicycles, was unique in many ways. It boasted an 8,180-acre campus adorned with miles of palm trees, large, sand-colored buildings with Spanish-tiled roofs, and most importantly a stellar engineering school aggressively on the move. If one were to give credit to only one man for creating Silicon Valley, it would be to Fred Terman, Stanford's dean of engineering and, later, provost. Of course it would be foolish to think that Silicon Valley was built by any less than an army of creative, energetic, talented, and dedicated souls, but Terman seemed to be the one who got it all started. He was the one who convinced others at Stanford to focus on engineering and put all possible resources into making the Stanford School of Engineering number one in the world.

Parenthetically, at the same time, President Whit Griswold of Yale, who had previously been my undergraduate history professor, dismantled an equally fine engineering school on the grounds that engineering was like dentistry, and Yale was not a trade school. Would New Haven, Connecticut, have become the home of Silicon Valley if Griswold had remained as my history professor in 1950 instead of accepting the position of president halfway through the school year?


(Continues...)

Excerpted from The Startup Game by William H. Draper III. Copyright © 2011 William H. Draper III. Excerpted by permission of Palgrave Macmillan.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

Meet the Author

William H. Draper, III is one of the West Coast's first venture capitalists and the founder of Sutter Hill Ventures in Palo Alto, California. Former Chairman of the Export-Import Bank of the United States and Undersecretary General of the United Nations, he is currently the General Partner of the venture capital companies Draper Richards L.P., Draper Investment Company, and Draper International.He is also a member of the Council on Foreign Relations and the President's Council on International Activities at Yale University.He received the Vision Award from Software Developers Forum and was inducted into the Dow Jones Venture Capital Hall of Fame. He has also received honorary awards from the Silicon Valley Fast 50, the International Business Forum, the National Venture Capital Association, Harvard and Yale Universities, University of California, and Institute of International Education. He lives in Atherton, California.


William H. Draper III is one of the West Coast's first venture capitalists and the founder of Sutter Hill Ventures in Palo Alto, California. He is the author of The Startup Game. Former Chairman of the Export-Import Bank of the United States and Undersecretary General of the United Nations, he is currently the General Partner of the venture capital companies Draper Richards L.P., Draper Investment Company, and Draper International. He is also a member of the Council on Foreign Relations and the President's Council on International Activities at Yale University. He received the Vision Award from Software Developers Forum and was inducted into the Dow Jones Venture Capital Hall of Fame. He has also received honorary awards from the Silicon Valley Fast 50, the International Business Forum, the National Venture Capital Association, Harvard and Yale Universities, University of California, and Institute of International Education. He lives in Atherton, California.

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