I had an opportunity to sit down with Tim Draper and talk about a wide range of startup/venture capitalist investment topics. Draper is the father of venture capital; his investments have led to some of the most innovative advancements in the marketplace today, including Skype, Bitcoin, Tesla, and many others.
Draper was an early investor in my own company, Vungle, in each round of funding, which eventually sold for $780 million in 2019. Draper has invested in so many companies over the years and has advice for anyone who wants to begin investing in startups.
Here’s the advice he gave me for moving forward as an investor in startups:
Don’t Invest Too Much Too Soon in One Company
One of the biggest mistakes Draper has seen others make is investing “too much in the first ones that you invest in….Don’t put in as much as you think you want to put in [because] you are going to be tight at some point.” Draper cautioned me to invest somewhere between 1/2 to 1/6 of what I might be tempted to invest, because it is highly likely that this company will require another infusion of cash later (and again and again). Preserve some cash for later because, as a company grows and things are going well, you want to have enough money to be able to increase your support and financially encourage your winners.
Invest for a 5-10 Year Time Horizon
Some investments take longer to come to fruition than others, but Draper warned me not to get too bogged down in long-term plays. I asked, “What type of horizons should I be thinking about when I make my investments?” He told a story of an investment that was going to take at least 15 years before there was something tangible and warned against that. His advice? “What I wouldn’t do is think too far out…. I think you ought to start thinking in 5- to 10-year increments.”
Ignore Your Natural Entrepreneurial Bias
If you have been a successful entrepreneur and now have money to invest in others, it can be tempting to project your own experiences and your own character traits on to those who are asking for funding. Draper got to know me over the course of years working together at Vungle, and he saw my drive and business sense. He warned, “At first you’re going to think, ‘Hey, I did it—anybody can do it! And you’ll start throwing money around. You think everybody’s like you, and they can all do just what you did. But that’s not actually true. You need to sit back and think about whether you believe this person is really capable of making all the sacrifices that you made to get where you are, to achieve the success that you achieved.”
Focus on the Mission, Not the Money
When participating in early stage investing, you need to avoid focusing on how much profit you think you’ll make. Draper advises, “If you were thinking, ‘Hey, I can do this so I can make money,’ don’t even start . . . You do it for the mission. If you can adopt the other person’s mission, if you see somebody and you say, ‘I like that mission; I like the world the way it’s going to be because of this mission. Let me get on board,’ that’s a much better way of investing than saying, ‘Hey, I can triple my money in six months here.’”
That doesn’t mean you won’t make money; it just can’t be your primary focus. If you do it right, you will make money, but in the early stages of startup investing, you can’t approach it too rationally. You need to connect with the mission. Draper expanded, saying, “In the early stage, you say ‘How big is this market?’ but more importantly, ‘Is this business going to be able to get a wedge into that market? Are they going to be able to get in there so they can start expanding into that market?’”
As I thought back on my own initial pitch to Draper, this piece of advice rang true for me personally. Everyone had coached us to be fully prepared to review the economics of our idea—how large the market was, when we would get to profitability, etc. When we started presenting all the facts and figures to him, he seemed disinterested and aloof. My own personal sense of the meeting was that the pitch wasn’t going well, that we were somehow losing him as a potential investor. During a break in the meeting, my partner and I had a chance to regroup and then go back in the meeting having adjusted our pitch strategy to speak more passionately about what we didn’t like about the current market and how our company was going to change the industry. When I mentioned this to Draper, he responded, “That’s probably right. I look for the passion.” As a matter of fact, Draper has developed a series of questions meant to draw out an entrepreneur’s passion for his/her company. It’s important to him that whatever answers they give, they should be from the heart. Answers that are too rehearsed can be a red flag that this is not an entrepreneur worth investing in.
Invest in a diverse portfolio of missions that resonate with you and entrepreneurs with passion. Spread your investments so you aren’t afraid to fail and look for projects with a 5- to 10-year time-frame. These bits of practical advice will go a long way in developing a strong startup investment portfolio for any investor. What a privilege to work with this VC legend, and how great to have the opportunity to talk about these ideas. Many thanks to Tim for giving me the time and titanium-level advice on how best to approach startup investing.
If you’d like to read or watch the other sections of my discussion with Tim, click below:
You can watch the whole conversation below and see other videos on my YouTube channel here.