If you want a no nonsense approach to getting funded by one of the top venture capitalist in the field, check out the interview by Reena Jadhav of Ivy Brain with Tim Draper the Founder and Managing Director of Draper, Fisher & Jurvetson (DFJ), a leading Venture Capitalist firm.

In the interview Draper says, “It’s a good time to be an entrepreneur.”

“The pendulum is somewhere in the middle.  Where in 1999 it was a fantastic time to raise money as an entrepreneur, in 2002 it was a very touch time to be an entrepreneur because the venture capitalists had to be very tight with their money.  So now the pendulum is sort of in the middle. “It’s a good time to be an entrepreneur. Anytime is a good time to start a business.”

But what about the effect of the economy on starting a business?

Draper says that no one really knows what the effect will be from the changing economy; however he strongly believes that “where there is change like this, entrepreneur’s figure out new businesses to start.”

When asked if he was still investing, he answered with a very strong, “Absolutely.”

Reena talks to him about what types of business venture capitalists were looking for and asks, “Where’s the gold rush?”

Draper says, “It’s hard for me to answer for all the big money out there.  And I can’t even answer for my partners.  Several of my partners are going after clean technology, some after health care and some internet consumer deals.”

“I tend to be looking things that are very critical to a new industry.  So they come at a new industry and they can kind of turn it on its ear.  And when an industry is being turned on its ear, there is a lot of new creativity that comes out of it.”

As an example, Draper gives the media business.  “The media business has become a big typhoon of chaos and not it’s a really interesting time for an entrepreneur to come in and say ‘wait it never really worked well this way, let’s try this.’  And now there is a new distribution channel, so the content people are getting very creative.”

Reena asks about the process of getting funded, the “venture capitalist (VC) checklist.”

Draper talks about how, historically, businesses got funded “through referrals.”  “Now it’s a little different and we have kind of led the way here at DFJ because we can invest in people anywhere in the world.”  DFJ has 36 offices worldwide and each of their offices “can cover an entrepreneur anywhere.”  

“We look at every deal in pretty much the same way.”

Step 1 is to look over the business plan.

It can be short but it just has to have certain information in it.

Straight from the horse’s mouth, this is what your business plan must have:

Background and education.
Passion.  Life’s work.  Draper stresses that it must “feel like something they were meant to do with their lives” Market coverage, competition. “Is the market well covered . . . and do they talk about their competition . . . do they understand what is happening in their market."

Step 2, the first cut.  Can the business be big enough?

The question they ask when proceeding to step 2 is “Can this be a global monster business?”  “We are looking for a market size, total available market of over a billion dollars.”

“They have to be able to get into a market that’s big enough so it can justify a large value to the company in the long term.”

Step 3.  We look at their approach to the market

Draper says they need to be “. . . peeling off a market. A big piece of that market for them.”

Step 4.  “Is the technology feasible?  Is it reasonable?” 

“Is it going to be a good enough opportunity?”

Step 5 (finally) I meet them

When they make the cut to see him, Draper says, “it’s pretty much all about the people.” 

Draper is looking for passion and commitment “Is this deep in their soul, something that they want to have happen and don’t care about the money, it’s like go go go go – this has to happen.”

Also Draper looks to see if “they all get along”  “Do they have respect for each other . . .”
“If they are already fighting then, ultimately, the business will fall apart for people reasons.”

What it comes down to is “the best scenario is to have a driven entrepreneur surrounded by people who totally believe and are going for it.”

Step 6.  The decision process.

Draper stated that their decision process “requires a group of us.”
“We can’t just individually say this is the deal we want to do, we need partnership approval.”  The partnership looks at the deal, asks questions and votes.  If the partnership votes to go ahead, “we’ll make an offer and if the entrepreneur accepts it, we’re off to the races.”

After funding.  Draper’s group spends time “getting to know the entrepreneur.”

They look at “how to move the business forward.” And they spend the time to get to know their strengths and weakness and “what needs to be added to the business.  What needs to help them succeed?”

Reena asks about why some businesses get rejected.

Draper says that “all the reasons are completely different.”

Sometimes funding is not rejected but postponed because the business “hasn’t quite fully formed yet.  In which case we may keep an eye it and we might come back and fund them later.”

Draper weights the risks of funding now vs. funding later and, although they will invest in any stage of a business, their decision as when to invest is “subjective and intuitive.”

But the main reasons for complete rejection are:

1. The entrepreneur is just for the money.

However, when entrepreneurs are rejected it’s primary because of how they respond to this question:  “Why are you doing this?”

“If the real reason is just to make money, that isn’t enough.  It just doesn’t do it.”  Because we know when things got tough, people who were just in it to make the money fled the sinking ship.  Whereas the people who were in it because they had a mission or a vision for the future, and they were going to get it done no matter what, were still in business in 2005, even they went though this where they had to cut the whole team back or change the whole business or whatever in 2001.”

2.  Lack of drive and purpose

“The other things that an entrepreneur has to keep in mind are that when they are in the office it has to feel like a train leaving the station.  It can’t feel to us like it is up to you. ‘If you fund it I’m in business, if you don’t, I’m not’   It has to feel like we’re doing this, we could use some money, it will help.  But we’re doing this whether you put money in or not.”

“There is something that really encourages us when we know that the business is moving forward and if we see progress over the course of a month of due diligence, then it really encourages us to put money in it.”

3.  Founders aren’t getting along

If you go back to step 5 for getting funded, Draper said that he looks to see if  “ . . . they all get along” and that  “they have respect for each other . . .”

So, even with a good idea and good market for the idea, without passion, drive, and a life work goal and supportive people behind you, you don’t have a great chance of making it.

Reena asks how competition plays a role in getting funded.

This should be addressed in your business plan under market coverage and competition.

Draper says, “We will fund a company if there are 3 of them in the world.  If there are 80 of them, it makes us feel like aren’t enough barriers to entering this business.  Like a restaurant.  It’s very easy to start a restaurant.  Very difficult to make money with a restaurant.  It’s the same kind of thing with technology.  If it’s a business that is sort of an obvious thing and people all want to do it, either it’s too late for us to invest or you just don’t want to be in it because it’s too competitive.”

Go for it!

So, if you are an entrepreneur and you have a unique vision that could potentially make over a billion and you have passion, dedication and a capable and compatible team that believes in your vision, follow Draper’s great advice and go after funding.

“I think there is a great opportunity for an entrepreneur who is truly out there to make a major change in some industry.  And I think that entrepreneur will generally get funded.”

What if you are interested in Draper’s end?  Is there a secret formula for success in the venture capitalist business?

“No formula for success,” says Draper.

“When we invest we know that we are going be wrong generally more than right.   But when we are right, we can make enough money to just keep ourselves going and keep our investors happy and moving forward.”

“It’s not a coin toss necessarily because we do see patterns for things that don’t work.  For things that do work . . .

It’s a big enough market, it’s a unique enough company, the product is unique and the team has this feeling where ‘we’re moving ahead, and people all want to jump on the boat.  People will want to get into their business.  There will be a natural attraction to it.  But it’s a situation where there are unique people that want to get on that boat and the masses won’t have anything to do with it.”

“If you feel that attraction to this entrepreneur and the vision and the business, I feel that that’s when you want to invest.”

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