Family Office Connections: VC investing trends

Our own Tracy Tuens sits down with Tim Draper, a Silicon Valley venture capitalist and founder of Draper Associates, DFJ, and the Draper Venture Network, a global network of venture capital funds. Tim shares how VC (and direct investing) has morphed during the last year through a global pandemic.

Transcript

Tracy: Welcome to "Family Office Connections." My name is Tracy Tuens, managing director at Boston Private. With me today, I have a very special guest, Tim Draper. Prior to getting started today, here's a brief bio on Tim. Tim is regularly featured on all major networks as a proponent for entrepreneurship, innovative governance, free markets, and Bitcoin and has received various awards and honors, including the World Entrepreneurship Forum's Entrepreneur of the World, and is listed as one of the top 100 most powerful people in finance by "Worth" Magazine, as well as the top 20 most influential people in crypto by CryptoWeekly, number 1 most networked VC by AlwaysOn, and number 7 on the Forbes Midas List, as well as number 48 most influential of Harvard Alumni. Global Guru also lists Tim as one of the top 30 startup gurus in the world.

He's a supporter and global thought leader for entrepreneurs everywhere and is a leading spokesperson for Bitcoin, blockchain, ICOs and cryptocurrencies. Having won the Bitcoin U.S. Marshals auction in 2014, invested in over 50 crypto companies, and led investments in Coinbase, Ledger, Tezos, Bancor, and others. He created viral marketing, a marketing method for exponentially spreading an electronic service from customer to customer, instrumental to the successes of Hotmail and Skype, among others. Arguably, social media, crowdsourcing, and growth hacking are outgrowths of viral marketing. To promote entrepreneurship, he created Draper University, a residential and online school based in San Mateo to help extraordinary people accomplish their life missions. The schools train 1,200 entrepreneurs from 84 countries and have built 400 companies. He started Innovate Your State, a nonprofit dedicated to crowdsourced innovation in government as well as BizWorld, a nonprofit organization that teaches young children of elementary school and intermediate school, and college-age how business and entrepreneurship work.

Tim has served on the California State Board of Education and led a movement for local choice in schools, culminating and becoming a proponent for statewide initiative for school vouchers. He also led a statewide initiative to create competitive governance with Six Californias, followed by another initiative for Three Californias. Tim received his Bachelor of Science from Stanford with a major in electrical engineering and a Master of Business Administration from Harvard and he has two doctorate degrees from the International University and Trinity College of Dublin. Finally, Tim wrote a book called "How to Be the Startup Hero." Welcome, Tim.

Tim: Great. Thanks for having me, Tracy. This is going to be fun.

Tracy: Our discussion today, Tim, I thought we would include 3 main points, the impact of COVID-19 in the world of venture capital, how is the industry evolving as the pandemic continues to shape our ongoing way of life. The next point I thought among the three would be, are we undergoing what is a renaissance for the future of entrepreneurship, innovation, and new concepts amid the struggle of the pandemic? And three, what does this mean for family offices and how they look to put capital to work in venture going forward?

Tim: So actually the one that strikes me is how this is going to affect family offices. I actually think that...and it kind of answers your question. I actually think that old line venture capital, the way it's been done for many, many years, is going through a major transformation where it used to be that a few venture capitalists sort of controlled a lot of capital and then they hunted for various companies. Now I think that there is a new form of venture capital which attracts all the entrepreneurs to a place and then builds those entrepreneurs to where they're fundable. It's a new model. And so as a family office, I would suggest that you start thinking of moving away from the existing model and moving toward another model. I mean, the old line Sequoia, XL, Benchmark, DFJ, whatever, I think has evolved and now it feels like we've benefited from it because we've got the Draper Ecosystem but also YC, and Boost, and 500, and Techstars I think are starting to lock up supply. And so there is a bit of a power shift from the people who pensions all, put their money into these bigger venture funds and those bigger venture funds sort of decided where they would put their money. Now, there is a lockup of supply of primary-sourced venture deals, the ones that aren't just where angels threw money into them, that is now sort of where the bottleneck is and where the... So there's been a power shift. I think people are going to start to recognize that and are recognizing that over the next three or four years.

The thing that I think the pandemic has done is, you know, people say, "Oh, it can track the time." Well, yeah. People were locked in place and they had to start exploring using Zoom calls and then they opened up Bitcoin wallets, and they learned VR, and they tried a variety of different things that they may not tried for many months or years if they had still been able to like hug people. So I think that, yes, there is in some ways a contraction where the...a time contraction where we've taken a leap. People are using remote medicine now and they're using remote education where they might not have otherwise. Another way to look at that is when there's a shock to the system, entrepreneurs have this great new open field to go innovate and they are innovators.

You can see, and it's not just entrepreneurs, you can see all around the world, people are trying new things and innovating. And New York has outdoor seating for the restaurants. So many things have evolved to make sure that businesses keep going. The UN predicted that, well, 1 million people may be dying from the disease itself. A lockdown is going to kill 135 million people because of starvation and cutting off the supply chains to other countries and so many other things. And so I think politicians, when they put a Band-Aid on something, they should be really thinking about what are the secondary and tertiary effects of their proposals. But that aside, it has shocked the system. When there's a shock to the system, you get all sorts of interesting things that happen. When the financial crisis hit, that was a shock to the system.

And Satoshi Nakamoto came up with Bitcoin. People were losing faith in the dollar and he came up with Bitcoin and Bitcoin is one of the...it's actually three of maybe the biggest technological advances for the next decade, whether it's the currency Bitcoin, the blockchain, a stable place to keep money and to keep perfect track of money and data, and smart contracts where those smart contracts are new ways for us to put together legal documents that aren't subject to interpretation by lawyers. So this is... Yes, you mentioned renaissance, I think that there's a renaissance coming and it's this. People are going to move from fiat to crypto. I mean, crypto is just better. Bitcoin is just a better currency than the dollar. It's better than...it's certainly better than the Argentinian peso or the Nigerian naira.

And after we just printed $15 trillion of them, it's better than the dollar too. It's a better store of value. It's easier for me to send. If I wanted to send Tracy money right now, Bitcoin would be the easiest way for me to send it. I don't have to call a banker, I don't have to wire money, I don't have to...and if you're in another country, I don't have to call Western Union and have a translation. It just happens. It's automatic and it's frictionless. So there is just a better currency, keeps perfect records on the blockchain, which means that once all the accounting systems have been built around the blockchain, which is coming, we're not going to really need to use dollars anymore. And taxes will be built into the blockchain and the accounting systems will be built into the blockchain and we won't need...I mean, the accountants will be able to give us more advice and spend less of their time doing bookkeeping and auditing and, you know, whatever, accounting system that they have to do, because it'll all be built into the software.

And then I believe that we're going to be able to... I suspect that my next fund, I mean, we're closing up one now, but my next fund will probably be all Bitcoin where I'll invest the money in Bitcoin, it will go to my employee. Those companies will all pay their employees and suppliers in Bitcoin and then the entire system with the LPs and the GP will be on a smart contract so when there's a distribution, it will automatically fall into your account and we won't have to go through a transfer agent or whatever else. And it'll save me a fortune in legal and accounting. And I think that that is a new form that we are moving toward. And I think this is a really exciting time. I think it's actually...it's transformative from, you know, the pandemic renaissance and it's changing the nature of finance, banking, commerce, all those things.

But it's also transformative from the standpoint of a anthropological lift where we kind of went from being tribal where everybody is operating around one geographic territory or another, and those lines, those borders were like, "Don't cross this border so that we don't have a war and don't fight each other and we can both prosper because we haven't crossed the line," to now when...where we're global and the internet helped this, where we're all better off because we're global and open and, you know, the world is...the geographic borders become less relevant. Well, there are also politicians that are going to fight that. They're going to say, "No, we need borders. We need trade wars, we need whatever." But the visionary politicians, the top politicians are going to go, "Wow. This is exciting. If I open my borders, if I encourage more trade, if I bring in Bitcoin, if I bring in 5G, I'm going to be a center that's going to attract all the best people and all the entrepreneurs and all the money and all the businesses to my country."

So it's interesting, we're at a time where we're going from tribal to global, how the politicians are retracting and pulling back and saying, "No. I like it the way it is because I can control everybody. Stay in place, wear a mask, do whatever." And then half the politicians are saying, "We're open. We're encouraging more people to come in. We want more trade because our people will benefit from that rather than my individual power." So you're going to see a bifurcation and the politicians that go the freedom route are going to be the huge beneficiary over the next four or five decades. This is a huge leap. It's a huge change. I think we're about to go into this and this is quite an exciting time.

Tracy: Very, very exciting. And you've brought up some absolutely fantastic examples, specifically, crypto and Bitcoin, specifically the ability to work contracts, the smart contracts without legal, you know, oversight, those are two prime examples of how things are shifting. But you also mentioned the shift in the dynamic at the venture capital level relative to family offices and relative to another area which I think is really striking, the fight for global talent. So it's almost this real strategic view of what's going on globally meets really an industry, which is a cutting edge, innovative, new concept industry. You know, this is such a big monster to wrangle. How do we encourage family offices to really make an impact with the money that they do place in venture, how do they make those selections, and how could you give them some insights into that?

Tim: Well, when you have a big shock to the system like this, whether it's the pandemic or the open globe, it does...money does...entrepreneurs do better in dynamic climate. When things get static, the big companies do better. And so we're about to go into another dynamic period. So it's a good time to be backing entrepreneurs, funding venture capitalists, that kind of thing. And actually, you probably want to move the money from the old static venture capitalists to the new dynamic venture capitalists that originate their own deal flow.

Tracy: Is there a compression there in the industry of players?

Tim: I think that the power is going to shift to where when somebody has primary deal flow and some of those companies become quite valuable, there will be a very competitive offering amongst the people who just have been sitting back and waiting for companies to come to them. So I think that is a shift. So I would shift in that way. And if you go direct, if you invest directly, well, first, make sure you have enough [Inaudible] and that your judgment is good. But if you go direct, I would move toward this decentralized world. I would put my money toward the how artificial intelligence, Bitcoin, the blockchain, smart contracts, surveillance, how they are going to affect the biggest industries in the world. That's what I do. I look for... I mean, right now, what's going on, I can... First of all, banking, they have no idea what's about to hit them. And as soon as the women move over to Bitcoin, which is happening, in fact, it was 1 in 14 wallets about 3 months ago and now it's 1 in 12 wallets that are owned by a woman, as soon as they shift, that's 80% of the purchasing power. And all retail will want to accept Bitcoin because they don't have to pay the banks 2.5% to 4% every time there's a credit card swipe. That is going to be a major shift. Banking is in for a big comeuppance. They've had a heck of a ride, but it might be time to call it a day.

So banking, that's one of the biggest industries in the world. All commerce is going to change. I think insurance is going to change because I can actually create an insurance company with an actuary and maybe surveillance and a smart contract with my clients. So here's what I do. I say, "Okay. I'll insure your house and you pay your premiums on this smart contract in Bitcoin. Everything's fine. And before you even issue a claim, you have Bitcoin in your wallet because I have seen from my surveillance that your house just burned down." So that you don't have to come and fight for your claim and go to lawyers and, you know, combat the insurance company. This is a new form of insurance. We're seeing it in all sorts of data forms, whether it's life insurance, car insurance, house insurance, you know, umbrella insurance, whatever. Data is going to determine that.

Okay. And so that changes the whole nature of insurance. Suddenly, that makes you think, "Wow. I can have an insurance company that's really already built into a smart contract." So as soon as the wind whips up to 120 miles an hour and blows over whatever it is that I had insured, the money shows up because the surveillance knows that the wind blew at 120 miles an hour, so it would have happened. But it is government. Well, government is a form of many insurance companies. I mean, what, 80% of government...all of governance is really insurance, except for when they actually do spend on infrastructure, which we haven't seen in California for years, or they spend on education, which we haven't seen in California for years. So it's insurance. Most of government is insurance. It's your healthcare insurance, it's your workman's comp insurance, it's your unemployment insurance, it's your social security, it's your pensions. It's all of that. That...it's all insurance.

Why are we having the government operate those when I believe that we could have...my social security could be set up in Chile. My workman's comp could be set up in a government that's 11 miles offshore. The Estonian government, it was the first breakthrough here where they started to allow residencies outs...for people who've never even set foot in Estonia and so I was the third resident and a virtual resident of Estonia so I can now do business in Europe. I can set up a bank account, I can do a whole number of different things and I am not...I don't even have to go to Estonia. Well, that's the beginning of where governance starts spreading cross-border. And you see the bigger governments kind of pulling back and going, "Wait, wait, wait, wait, wait, I like the way it is." Like China, the dictator is saying, "No. No one can move. No one can get their money across the border. You guys have to stay here. And we're making everything illegal." And, you know, they're kind of making life miserable there. And Russia, similarly. The U.S. is trying to balance that because the U.S. has always been the innovators and they benefited hugely from the influx of visions that came from entrepreneurs around the internet. They don't want to lose that. At the same time, they are a big country and they feel like they could be self-sustaining without...well, they still closed down their borders. I think it's a big mistake. I think we're always better off when we have multiple people.

Like if, Tracy, if you had a farm and I have a house and we don't do a deal, I die of starvation and you die of exposure. Multiply that by 8 billion people around the world. That's a lot of people. They're all interconnected, they're all tied to each other. They're all doing things to serve each other, to try to make life better for each other. You know, you take a pen, this pen probably was affected in some way by 100,000 people from 35 countries. You take my smartphone, that probably was affected by 150 countries and probably 10 million people somehow had some hand in making that a better experience. We've got a really interesting time here where entrepreneurs are driving this change, they're driving things forward. They're making our world a better place. They're doing things that are connecting the world and catching things. So if you're going to invest, I would say, if you're going to invest directly, I would say anything that seems decentralized, so not tied to one government or another, anything that seems like it's using data in a new way, like using AI for diagnostics or using computational biochemistry for therapeutics or using data for insurance or for real estate, any of those industries. I always like to go after the biggest industries in the world and see what type of technologies inform them. So that's kind of a long answer to a short question. So I apologize.

Tracy: No, it's fantastic. No, it's fantastic and very insightful. I'm curious about your perspective on as we increase interconnectedness and globalization, clearly, we still have nationalities and we still have education. So as it relates to the venture community, and you kind of tapped on this a little bit with the direct investment, and that's a whole...takes a whole talent pool in and of itself to access, but how do we retain as the United States, our lock on innovation and entrepreneurship and new talent while we globalize at the same time? So that's kind of one question I would have. And the other is, you know, while we do code open-source VC, we still need expertise around how to evaluate. And you certainly have legacy interest in that for decades through your family and generations, how would you suggest a family office? So how do we maintain our corner of the market as we globalize on talent, acquisition, and talent management for idea generation, and then how do families really consider that balance of what do we do ourselves versus what do we really need help with as we evaluate the venture community?

Tim: You know, I'll answer the first part in this way, and that that is we created Draper University of Heroes, and it's an entrepreneurial school. People come from all over the world. We've had something like 1,200 students, and they've come from say, 86 different countries, and they've started 300 companies and they've generated about 3,000 leads from me, and usually pretty good quality leads. Then COVID happened and we had to kind of shut that part down. And so we had to innovate and we created Draper University Online and the entrepreneurial program and that has attracted a lot of people. So I've just been looking through all of the one-minute pitches and I realized that the quality is way up. So when you talk about just being in America, the quality's way up. Now, why is that? Well, it costs $12,000 to go to Draper University and to fly there and you have to live there and everything else in the Silicon Valley, but it only costs $500 to get online and join this thing for 2 weeks and you get a similar kind of experience. Well, we're getting people...I mean, okay, I've just watched about 10 of these things, incredibly interesting company coming from Myanmar, another one from South Africa, Georgia, another one from...they're from all over, Lithuania. I mean, places where you...I mean, I'm not sure we've had. You know, we've probably had students from all those. We haven't had students from Myanmar.

Tracy: Talk about a locked country. So it's amazing that you have that.

Tim: Yeah. So, we're thinking, "Wow. This is really interesting." We're getting deal flow we never thought we'd see. And deal flow really has become the lifeblood of venture capital and it's starting...people are starting to see it. These people with big funds are kind of going, "Oh, I'm having trouble finding good deals." And we're sitting there going, you know, we see 20,000 deals a year and we're doing 20 of them and it's a whole different environment where we're trying to filter them out, and then we're trying to grow them and guide them toward, you know, delighting their customers and making their customers into Salesforce and doing all that kind of thing. So I think that family offices are about to see a real shift so that the way they've managed their money all this time, it's probably time to make some shifts because the innovation that we had a lock on in the Silicon Valley is not a lock anymore. And so those groups that have figured out how to create a magnet for entrepreneurs are going to be the big beneficiaries of this. So we kind of look... It's interesting. I mean, I used to think of my competition as Sequoia, Benchmark, and XL.

Now I look at my competition, I think of that as Y Combinator, Boost VC, 500 Startups, Plug and Play, you know, Techstars. I mean, I'm thinking that they're actually our cooperators and it's a different thing and I think that the bottleneck will be there rather than coming from the capital. The capital will have less clout and the deal flow will have more clout. And those things swing back and forth, the pendulum will swing. But I think we're going into a period where that is going to be important. I think if you're going to go direct, think about where you're going to get your deal flow and how you're going to filter it down. And is it worth it? I mean, do you want to start it fresh or do you want to fund, you know, Draper Associates or the Y Combinator guys or the Boost guys, or the people who are kind of focused in that way? You know, my daughter has really been a major breakthrough in venture capital. She is only backing women and she positioned herself in an incredibly strong way where she gets primary deal flow from every female entrepreneur. And she just wrote this article. I think everybody should see it. It's called, "We're not a [inaudible] charity." Sorry about the word.

Tracy: That's fine.

Tim: And she said that because she's showing. Everybody comes to her thinking that they're giving money away when they fund a venture capitalist who's backing women. First of all, 40% of the people we're backing are women because they're extraordinary. If they're starting a business, there aren't that many women that are willing to start a business. And my daughter's recurrence has been fantastic. So, I think it's one of those things where, you know, she's at Halogen Ventures, I think it's one of those things where if you get a niche, that can also help. You know, if you are the place for blockchain, if you are the place for women or you are the place for AI, although I think AI spreads everywhere, I also think blockchain does, but if you're the place for computational biochemistry or you're the place for new space, you're just going to do space, I think that that kind of thing might work. If you want to be a generalist and just kind of fund companies and make it a hobby, I don't think that's going to work. I think you should just hand it over to venture capitalists or these new forms of venture.

Tracy: It's a fascinating shift as you're saying, the power dynamic going from being a technological innovator and new concepts design country to really needing to develop a magnet idea. And you've certainly done that with the Draper University where you bring together global citizens to innovate together. And there's a lot to be said for how that's going to go forward in terms of, you know, we'll call open-source venture capital. So, again, you're on the cutting edge of change and leadership and your industry. It's such a delight to hear your views on that. And I do feel like we've covered a lot of ground today from government, to tearing down borders, to, you know, looking at how to continue to encourage entrepreneurs, to look at this...look at COVID-19 as an opportunity, a crucible where it's definitely heated us up in terms of looking at new uses for different types of things and will...the shock to the system will develop a lot of new ideas. So any thoughts, any parting words, maybe, Tim, on this, on so much of what we talked about today?

Tim: Yeah. Actually, I want to let you guys know what we did around COVID. In the first couple of months, I just said, "Everybody stay home. You know, you guys, you know, we'll do Zoom calls. Everything would be fine." And then after a couple of months, I think people were starting to say, "Why am I doing this?" Like they were looking at their job thinking, you know, "I'm having mental health problems or I'm having whatever." And so I said, "We've got to connect. You know, we got to be touching at some point." And so one day a week, I said, "Okay, I'm just going in on Tuesdays. You guys can come, not come, whatever you want to do." Everybody comes and...and not everybody, occasionally somebody will Zoom call in, but what it has done for us is we're all...it's like at least one day a week, we can brainstorm.

There's some things that are great with Zoom calls and very efficient ways to reach lots of people, efficient ways to connect with somebody you'd been dying to connect with, but they live in Nebraska or whatever. But there's something that also that you miss and maybe through VR, or holograms, or something, we'll get closer to it, but there is an energy that's lost. And so I recommend having, you know, a safe place or whatever where you can all get together in person in real-time to somehow go over those things that matter. And then when you connect...reconnect with the people, it's like, "Oh, I remember why I do this. I do this for helping people. You know, I'm helping people. I'm not just staring into screens." And so, I recommend all you family offices, have a regular time where you meet with people in person. I think you'll be better off. Everybody's getting happier. The downside, it's very low and the upside is much...is very high. So, I think that that's kind of...I mean, I leave you with sort of that kind of thinking. Also, if you need to reach me, I'm tim@draper.vc, and I do read all my emails. I take all of Friday, I mean that's all I do.

Tracy: Friday is reading day.

Tim: Friday, I catch up on everything. Reach me if you have a business plan, you know somebody who you want to introduce me to who has a business plan, you want to invest, you want to ...something that is relevant to, you know, where you're going. Those are all always terrific. I always welcome them. But don't just put me on your list for spam or whatever because I'll put you on my spam.

Tracy: Tim, this has been fantastic and you are so approachable and so wonderful to talk with. And I want to thank the audience for participating and tuning in today. And I want to thank you, Tim, specifically for sharing your insights on venture capital and the industry at this pivotal time in our country's history and in the globe's history. And please do take Tim up, all the family offices listening, who are nationwide and global, please do take him up on any follow-up conversation you may want to have. And also for additional insights, leading news, and information affecting family offices, please visit our dedicated website at bostonprivate.com/familyoffice and there you can browse or sign up for regular updates from our team of experts. So, Tim, thank you again so much for this wonderful conversation.

Tim: My pleasure, Tracy, and thank you for those great questions. I mean, you really did put some time and effort into those questions. It got me going. And you warned me about the questions ahead. So I kind of had them in my head. So I kind of spewed so you can ask them all because I already had answered them all. But thank you very much for having me, and I hope people enjoy it.

Tracy: I'm sure they will. And thank you again so much for your time. We'll talk again very soon.

Tim: Okay. Bye-bye.