I had an opportunity to record my conversation with the great Tim Draper, a visionary startup investor whose financial support has created billions of dollars of value in the wide variety of industries. His investments include Baidu, Tesla, Ring, DocuSign, and many others. He has invested through major economic ups and downs over the last 30 years, including during fearful times of the .com bubble and the Great Recession of 2008.
In his experience, fear is simply a motivator, a concept he shared with me (along with ways to mitigate fear when considering investing in startups).
Here’s what he said:
See Fear as an Incentive to Solve Problems
We talked about fearmongering in the media and in everyday conversation. Draper was very emphatic about the role that fear plays in his investment strategies. With decades of experience, he is ever optimistic about what entrepreneurs can do. He said, “The world just gets better and better, and the people who spread the fear are just incentivizing great entrepreneurs to solve those problems . . . whenever I see that spreading fear, I just realize what they’re really trying to do is fire up my front cortex and get me to think creatively.” He has a conviction that we can innovate our way to more and more greatness. He gave this example: “I look and I say, ‘Climate change? Great. Let’s see if we can get an entrepreneur to figure out a business model that can help us solve climate change’ . . . I don’t know where it’s going to come from, but it will be a great entrepreneur—and that entrepreneur will come up with something great.”
Diversify
I asked Draper about how he strategizes the sectors he targets. He advocated for and acknowledged the wisdom of diversification, saying, “I would spread it so that you’re well diversified.“ When I pressed him for specific tactics on how much to invest in a company overall and what types of rules he adheres to (by company), he said that each investment is unique. The ideas of ‘rules’ relates more to one’s overall portfolio than one particular company. He said, “The discipline is in distributing the capital in a wide variety. I don’t go above a certain amount in any one deal.”
Follow the Entrepreneur on When to Sell
Naturally, the exit strategy is a critical factor for every investor, and it’s easy to make mistakes. Once you have a winner, it can be tempting just to sell to one of those larger players (FANG, for example), but Draper advises following the entrepreneur’s lead in that regard, rather than waiting for a specific, predetermined price. He told a story of how he once “pushed an entrepreneur not to sell a company when he was interested in selling, and that was a big mistake. The company went to zero. He had an opportunity to sell it. He knew that it was maybe a relative high, and I didn’t. I thought, ‘No, no, this thing is going to the moon,’ but he knew a lot better than I did. He knew his customers . . . In that case, I was a horrible VC.”
Don’t Be Afraid to Walk Away from an Idea that Isn’t Working
As an experienced investor, Draper has seen that investments don’t always work out. He said, “As a venture capitalist, you’ve got to be willing to walk away. You’ve got to be willing to say, ‘Okay, we blew it. It’s done.’” Draper warned that this is not always easy for many investors to learn this lesson. He said, “Most of the venture capitalists I know were straight-A students and top of their class, and they don’t know how to walk away. They don’t know how to fail. It’s like, ‘I wasn’t wrong. We must need more money,’ and then they throw more money in there. ‘I wasn’t wrong; we need more money, more money, more money’ and so all of that money gets blown into some company that’s just gone sideways.” You have to be willing to live with the thought that it just didn’t work. Cut your losses and walk away.
If you’d like to read the other sections of my discussion with Tim, click below:
You can watch the whole conversation here or check out other videos on my YouTube channel here: