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

   INTRODUCTION   

Breakfast at Buck’s

LET’S BEGIN THIS unusual journey in a unique place that is not exactly what it seems: Buck’s restaurant, pride of Woodside (population 5,352), on the well-manicured fringes of California’s Silicon Valley. Yes, unique is an overused word, but let me persuade you that Buck’s has earned that distinction many times over.

From the outside, Buck’s doesn’t give you much warning of what is to come. True, there is that twenty-foot-long, carved wooden fish—Woody—floating incongruously several feet off the ground at the far end of the parking lot against a stand of scruffy trees. The restaurant itself, however, looks as if it could be the modest anchor of any upscale retail strip in any small town west of the Rockies: a mix of dark-stained and pale wood trim, a street-long wooden overhang protecting the sidewalk against bad weather—a rare occurrence here—and the name of the restaurant itself spelled out in the same blocky typography that blankets the town. All that’s missing are some hitching posts and a watering trough or two.

But walk inside Buck’s, and all bets are off.

Most likely, your eyes are first drawn to a human-sized Statue of Liberty: pale green, with her requisite spiky green crown, but holding aloft a torch that doesn’t look quite right. On closer examination, her torch turns out to be a very lifelike chocolate sundae, drowning in whipped cream and hot fudge. Today, she happens to be wearing a stethoscope and a Hawaiian lei, but these accessories tend to come and go. Sometimes people hang their coats on Lady Liberty’s crown. (I’m one of them.)

Now your eyes begin to take in the rest of the place, which resembles what the Smithsonian’s warehouse might look like in the wake of a tornado as straightened up by the Mad Hatter. Treasures, junk, not-quite-right murals, and bric-a-brac cover almost every square inch of wall and ceiling space. In the main room, a scaled-down biplane is frozen in mid-plunge from the ceiling. Also hanging from the ceiling, a six-foot-long tiger shark appears to be morphing into a dirigible. Two pairs of cowboy boots—painted in jarring combinations of green, red, pink, and yellow—hang above the bar.

If your brain seeks relief by focusing on the two shallow, wooden display cases next to the front door, it is not rewarded. One, crudely lableed THANKS FOR THE MEMORIES, turns out to be a carefully mounted collection of silicon memory chips manufactured over the years by Advanced Micro Devices, a company founded in nearby Sunnyvale in 1969 with $100,000 in startup capital. The other display case contains a sample of twelve breakfast cereals—Corn Pops, Cheerios, Cookie Crisps, and so on—lovingly constructed to match the chip display.

Depending on the time of day, you may also encounter the proprietor of Buck’s, Jamis MacNiven, who (with his ever-patient wife, Margaret) founded the restaurant in 1991 and has been decorating and redecorating it ever since. He is a large, amiable guy with shaggy, graying hair swept straight back from his forehead. Outgoing, eccentric, loquacious, and hyperkinetic, MacNiven is my perennial candidate for World’s Most Creative Entrepreneur. In addition to being a restaurateur, he’s an author and part-owner of a dirigible. It was MacNiven who dreamed up Silicon Valley’s own soapbox derby, the Sand Hill Challenge, which played upon the competitive instincts of local entrepreneurs and venture capitalists to raise money for anti–drunk driving campaigns and other worthy causes. Some contestants took the Challenge—a run on fabled Sand Hill Road, which the authorities agreed to close down for the duration of the race—quite seriously. (The futuristic yellow vehicle hanging from the ceiling in Buck’s was designed and raced by Mohr Davidow, one of the Valley’s most successful venture capitalists. It took Davidow and his team 1,100 hours to build.) Others, as MacNiven records in his inimitable book (Breakfast at Buck’s), aren’t quite so serious:

Draper Fisher Jurvetson could always be counted for a team of transcendent whimsy. DFJ invests in original sciences, including nanotechnology, the world of microscopic gears and such. One year they erected a press tent and they all dressed in lab coats and displayed electron microscope photos of their Nano Car. It was a vehicle that was supposedly about a millionth of an inch long and had a tiny mechanical driver who would pilot it down the course. Because it was actually a quantum-mechanical car it had a handicap assigned to it; it was so incredibly fast that it had to run the course 10,000 times, back and forth. The team came forward with a pair of tweezers and Tim Draper dropped the car down a plastic tube onto the roadway. The crowd loved it and so did the magazine called Small Times, an engineering magazine devoted to nanotech. They took the press release and ran it straight, as if it were actually a scientific first.¹

I’ve been eating at Buck’s for years. So has my son Tim—founder of Draper Fisher Jurvetson, proud sponsor of the Nano Car, and the third generation of venture capitalists in the Draper family. It would make my storytelling easier if I could claim that my venture-capitalist father, General William Draper Jr., also ate at Buck’s, but that would be a stretch. (Dad died in 1974, seventeen years before Buck’s opened.) But because my father helped plant the seeds of what would become Silicon Valley, and because Buck’s is the distillation of much of what is so odd, special, and compelling about the Valley—a place where great ideas meet smart money—I think he’s with us in spirit when we sit down to eat at Buck’s.

One That Got Away

Ideas meeting money is the other thing that I meant when I said that Buck’s is not exactly what it seems at first glance. Along with a few other watering holes in the Valley, Buck’s is not just a restaurant with a wacky decor, an inventive proprietor, and oversized servings. It is also a place where people are sized up, plans are challenged and probed, and deals may well be closed on a handshake. Buck’s is where would-be entrepreneurs meet with venture capitalists, angels, and other people with deep pockets and broad networks. Or, going in the other direction, it is where would-be financial backers chase a good idea.

The latter case—money chasing a promising idea—is the circumstance in which Tim and I found ourselves during the late winter and early spring of 1995. In the spring of 1994, Jerry Yang, 25, and David Filo, 27—two Stanford electrical engineering students pursuing PhDs in computer-assisted integrated circuit design—found themselves with time on their hands. Their faculty adviser was on sabbatical that year, giving them more free hours than usual. As they later wrote about themselves (in the third person):

To their credit, and unlike generations of students before them, David and Jerry avoided the obvious and classic time wasters. They did not engage in countless Frisbee contests, hone their rock-climbing skills on the rocky edifices of the Stanford campus, start a home-brew club, or attend horror-film marathons. Instead, they became interested in the World Wide Web, just as it was becoming the world’s deepest bottomless pit.²

More specifically, Yang and Filo were compiling a list of their favorite websites. Today, of course, you can ask just about any elementary-school kid to explain what a website is, and he or she can give you some kind of answer. Back then things were different. Just a few years before—in 1990—there were only a dozen nodes on the nationwide computer network that had grown out of years of Department of Defense–funded research aimed at creating a catastrophe-proof communications network. Those nodes were all located in government agencies and universities and were accessible only to the highest-level sorts of nerds, but the development of the Mosaic browser in 1993 changed that. It provided non-technical people with a graphical user interface that they could utilize to navigate around in the new world of cyberspace. In that same year, with his PhD studies in a fallow phase, Filo discovered Mosaic and started finding and documenting interesting websites.

Beginning the following spring, Yang and Filo together took three more important steps. First, they wrote a software program designed to sniff out new sites. Second, they came up with an indexing scheme, which—as more and more sites came into their fold—they expanded into categories, subcategories, and sub-subcategories. Third, they decided to share their work freely with anyone who was interested, which they thought to be in the free-form, self-inventing spirit of the web. Because the database resided on Yang’s computer, they called it Jerry’s Guide to the World Wide Web. Once people started taking notice of the new resource, Yang renamed it David and Jerry’s Guide to the World Wide Web because he didn’t think he deserved all the credit.

The unwieldy nine-word name didn’t last long. Searching for a less cumbersome replacement, they came up with Yahoo, based on the sub-human creatures in Jonathan Swift’s Gulliver’s Travels.³ Gradually, their after-hours efforts in the electrical engineering department’s central computer facility became space-intensive, so Stanford donated a trailer for their use, legendarily littered with overheating terminals, pizza boxes, dirty clothing, and golf clubs.⁴

By April 1994, Yahoo was composed of a hundred sites and was getting a thousand hits a week. By September, those numbers were up to 2,000 sites and 50,000 hits a day. By January 1995, it was 10,000 sites and up to one million hits a day. Somewhere in this time frame, however, Stanford let it been known that this Yahoo thing was consuming too many resources to be sustained by the university as the hobby of two graduate students. Thus, Yang and Filo began looking for other ways to support their budding venture.

So in a very real sense, it was the need to move Yahoo off-campus that pushed Yang and Filo to commercialize their addictive habit. True, they had entrepreneurial aspirations for other web-based ventures—they were by no means immune to the lure of commerce—but their original plan was to keep Yahoo free and grassroots oriented. Neither was a businessman by training; in fact, up to that point, neither had ever held a day job. Somewhat reluctantly, they asked a friend named Tim Brady—a second-year Harvard MBA student—to write a business plan for Yahoo.

Their plan was finished in March 1995. It described a service that would be free to end users, with ads appearing only on the top-five most-accessed pages. The plan forecasted revenues of $4.15 million for 1996 (the real figure turned out to be closer to $20 million). It identified Filo as president and Yang as chairman and CFO—a bit of a fudge, because both knew that they were not prepared to run a business.

Yahoo was incorporated on March 5, 1995. One distinctive feature of the web portal—built into its core architecture—was the ability to track where users of the system went on the web. Although Filo and Yang originally conceived of the tracking function as a way to improve their categorizing and indexing capabilities, savvy observers realized that this key feature could also be used to sell targeted advertising.

As a result, potential buyers and investors were already circling. For example, Yang and Filo received a $2 million offer from America Online’s Steve Case (who made it clear that if they didn’t sell, AOL would develop a competing offering and bury Yahoo). Venture capitalists also began making the trek out to the Stanford trailer. Among them were Mike Moritz of Sequoia Capital, a representative from Draper International LLC (me), and a representative from our family fund, Draper Associates (my son Tim).

Actually, I had only an accidental involvement in the chase for Yahoo. Robin Richards, my partner in Draper International, knew of this emerging internet phenomenon. She had attended Stanford at the same time as Yang, and she had a strong inkling that he was onto something big. Obviously, I trusted Robin’s judgment—after all, we were then in the process of launching the first venture capital operation focused on India together—so I called up Tim and suggested that he take a look. Because I knew that I would be devoting all of my energy to India for the foreseeable future, I was simply pointing him toward an exciting new opportunity.

I introduced Tim to Jerry Yang over breakfast at Buck’s on a Wednesday, and we were both intrigued by what we were hearing. Truth be told, although I had backed one of the world’s first software companies years earlier—Activision, the game developer that my Sutter Hill Ventures partners and I helped bring into being in 1979—I had been away from the West Coast for a dozen years, so Tim was already more clued into the emerging world of the internet than I was. The following Saturday, Tim rode his bike over to the trailer to watch a demo, and he immediately realized that this could be a home run.

Tim invited the two brilliant and visionary PhD candidates to the offices of Draper Associates to make a pitch aimed at interesting his partner, John Fisher, in the potential investment. The pitch is nothing more (or less) than the sales presentation that the would-be entrepreneur makes to try and interest potential investors in a proposed deal. I’ll have more to say about pitches—what works and what doesn’t—in subsequent chapters.

On the chance that I could be of help to Tim, I sat in on that particular pitch. During the meeting, Yang and Filo came across as a bit nervous but highly confident in their technical skills. I also recall that Fisher expressed his polite skepticism about their ability to manage this enterprise, given their near-total lack of business experience. Yang and Filo readily agreed with this assessment, so they asked Tim and Fisher to come up with a CEO candidate for the fledgling business.

Perhaps this notion surprises you: that an individual with an idea might be willing—even eager—to turn over the day-to-day management of that brainchild to a CEO put forward by a group of investors. In fact, it happens all the time, although sometimes it’s not until a later stage in the company’s development.

Not that it’s easy. It’s almost never simple to find the right fit between a visionary and a potential manager of that vision. Tim mentally went through the names in his personal network. (Networks are critical to the successful venture capitalist.) He was trying to come up with someone who was ambitious enough to help transform Yahoo from an idea into a blockbuster and who was, at the same time, adventurous enough to take a flyer on an almost untested vision of the future.

Tim decided that the best candidate was his good friend Jay O’Connor. Jay, then in his mid-thirties, had a strong track record of helping growing businesses succeed. He and I visited the trailer together one sunny afternoon in late March and we were taken on our own guided tour of Yahoo, much as Tim had experienced a few days earlier. The setting in the trailer was not particularly encouraging—I remember that we had to step around Filo’s bicycle and climb over his skis to get close enough to his small computer screen to see anything—but the demo was nothing short of astounding. Filo asked me to give him a question that I wanted answered, so I asked him to tell me the current tuition at Yale, where I was a trustee. He typed in a few keywords, and almost instantly, a virtual bookshelf appeared on the screen where a few fat books whose spines spelled out Yale University in blue and white letters. (This was Yale’s earliest home page—in the spring of 1995.) After a few more keystrokes, up popped the figure: Yale’s $21,000-per-year tuition. Amazing!

As it turned out, Jay couldn’t quite pull the trigger to commit to joining Tim in his proposal to Yahoo. (Tim’s prediction to Jay at the time—I think if you go with this, you’ll make $10 million—turned out to be a substantial underestimate.) Jay went on to have a successful career at Intuit, where he helped build QuickBooks into a dominant small-business financial management system. If he ever looked back, I’m sure it was with a combination of chagrin and amusement.

For more than a month, Yang and Filo continued their discussions with the competing would-be investors, including Tim. They also kept talking with Steve Case at AOL. Finally, in April 1995, Yahoo announced that it had accepted an offer of $1 million in venture funding from Sequoia Capital, in return for 25 percent of the company. As part of the package, Sequoia would also secure Tim Koogle as CEO. This was Sequoia’s first investment in a dot-com, and it had been orchestrated by Mike Moritz, who—unbeknownst to us at the time—had also visited the trailer. Tim called up Sequoia and asked for the chance to get into the deal as a coinvestor, but Sequoia, not wanting to dilute their holding, turned Tim (and presumably other potential coinvestors) down.

Yahoo went public one year later on April 12, 1996. The stock closed that day at about $33, which put Yahoo’s valuation at something like $850 million. That meant that at least on paper, Yang and Filo were each worth $130 million, and Sequoia’s one-quarter position was worth something north of $212 million. Of course, none of them sold their stock at that time, and today the market capitalization is over $20 billion.

Why recount at some length the story of one that got away? After all, each of the three generations of Drapers has stories to tell about the ones that didn’t get away. Why not focus on those? It’s because I think the Yahoo story contains a lot of the elements of real-life venture capital, which is part of what this book is about. It conveys something of the love that great entrepreneurs put into their product or service. It captures a lot of the pain, joy, suspense, frustration, and elation that we venture capitalists feel as we’re closing—or failing to close—a deal. It underscores the fundamental fact that in venture capital, you’re going to win some, and you’re going to lose