Bill Draper: Why venture returns have fallen dramatically and will likely stay that way

By Carmel DeAmicis , written on June 24, 2013

From The News Desk

Naval Ravikant of AngelList famously said that there's no such thing as proprietary deal flow anymore, an idea that terrifies many venture investors who've gotten used to all the good entrepreneurs coming to them.

The concept is less scary for Bill Draper, one of the earliest venture capitalists to set up shop in Silicon Valley. He remembers a time in the early 1960s before deal flow ever existed. Back then the concept of venture capital was so new, he had to go door-to-door, introducing himself to businesses like he was evangelizing a new religion. Draper would have to patiently explain what a venture capitalist was before asking them to exchange company equity for cash.

Clearly, he wasn't bad at it. He's even managed to stay relevant as the industry changed over the next 50 years. Over that time Draper founded three venture capital firms and placed early bets on big winners like Skype and the defibrillator.

Amid a lot of talk about how much the venture business has changed, and how much it needs to change, PandoDaily sat down with Draper to hear from one of the men who created this industry. He tells us which investment saved his life, offers advice on what industries VCs should pay more attention to, and responds to Fred Wilson’s recent PandoMonthly predictions that venture capital wouldn’t exist in 25 years.

PandoDaily: If you could give a State of the Union in terms of venture capital today what would you say?

Bill Draper: There's still too much money in Silicon Valley chasing too few deals, but I think that's okay, because of the high risk an entrepreneur takes on. When I was starting up in the venture capital business, the returns were much higher, because we saw every deal. It was a much easier business, because there was a lot of cooperation among venture capitalists. However, for the entrepreneur, today is much better. They can just walk down the street -- Sand Hill Road -- and drop in. The odds are that somebody will like their idea. So the possibilities for the entrepreneur are far greater today.

You think there are too many venture capitalists and too few entrepreneurs?

I'm saying two things: I'm saying the returns for the venture capitalists have gone down dramatically and will probably continue to stay low in and around Silicon Valley. For the entrepreneur, it's a very healthy environment, because the odds of their getting financed are very good. Very often at the earliest stages, the most sophisticated venture capitalist doesn't know if that's gonna work or not. So the risk for the venture capitalist has gone up, and the risk for the entrepreneur has gone down.

There will be Silicon Valleys in Russia and China and Brazil that are probably not as successful or dramatic as Silicon Valley. But they will be productive if they're near a good university. If it hadn't been for Stanford, there wouldn't have been a Silicon Valley.

What are some future technologies we should be paying attention to?

[T]he territory of biogenetics and the whole field of the human body. So much is in the brain now that we don't know about, but we're close to figuring it out. Years ago, I backed the first defibrillator in the world. Now, of course, it's saved millions of lives and made a lot of money and all that. But the most important thing was what it did for humanity. Another company was Hybertech. It designed the prostate cancer test, which came back and saved my life as a matter of fact.

We waste so much time commuting. How about a magnetic track that takes you 300 miles into the city, and then you're in a little pod that spins off. You can go where you want, and it will drive itself, because you just programmed it, whether it's Google or somebody else driving for you.

Tell me about your investment criteria. What does it take to wrangle money out of you?

In my case it's pretty simple. I never like to invest in a company that thinks about selling out. I always want them to build it bigger and acquire other companies. But sometimes, quite often, it's just is a practical thing that you have to sell out to maximize everybody's investment and time. Mostly in our investing we think in terms of the team first. Have they got a good vision? Are they energetic? Are they full of hope and fire and willingness to put in long hours and really get something going? Eventually the vision changes, as it has here [with Identified] moderately or vastly, or pivots. All these wonderful entrepreneurs are courageous people because it's lonely starting up a company and it's scary.

How important is the specific vision of the company? Do you always expect that the vision's going to transform?

No, I don't expect it, but it does happen quite often. So I want to make sure that the team has thought of all the angles as to why this is going to work, who else is doing it, and how they're going to find ways to be better than the competition. It isn't always clearly out there.

What do you think of Fred Wilson's recent pronouncement that in 25 years the venture capital business won't exist, at least not in its present form.

I don't understand why he said that. The business has been around a long time. People like to say that Queen Isabella was a venture capitalist, because she put the money into Columbus to get him to go bring back treasures.