By PO BRONSON
NY Times Magazine, June 20, 1999
© Copyright 1999 The New York Times Company
For a homeless shelter's annual charity auction not long ago, Steve
Jurvetson, a venture capitalist, donated a breakfast with himself at Buck's
Restaurant. Buck's is a bustling diner in Woodside, Calif., a
single-intersection hamlet nestled into an oak grove at the base of the San
Mateo County foothills. The booths at Buck's are upholstered in ocher
Naugahyde and the menus have the feel of political-action newsletters and
the owners are mighty proud of their coffeecake. Buck's also happens to be
the place where Netscape and many other high-tech companies were hatched.
"Breakfast at Buck's" was sold off by way of the Internet site Ebay at the
end of February; 78 bids after the auction started, a budding Manhattan
entrepreneur named Mark Hernandez offered to pay $4,400 for the privilege of
flying out to Silicon Valley two weeks later to present his business idea.
That might sound like a lot of money to have breakfast with someone, but
Jurvetson is a venture capitalist with a reputation -- young, enthusiastic,
open-minded. He can be found at Buck's most mornings. He bounds in like a
kangaroo, exuberant, flashing a joyous smile, his youthful face tanned from
his noon-hour games of ultimate Frisbee. He is generally more dapper than
his colleagues, wearing a charcoal Czechoslovakian hand-made suit over a
cobalt shirt with faint royal blue pin-stripes. His tie picks up these
colors perfectly; the black wing tips on his large feet shine. In the
plastic window of his wallet is the bridal portrait of his wife of eight
years, Karla, who is a psychiatrist at Stanford. He has a prototypical
resume for a Silicon Valley V.C.: earned B.S. and M.S. degrees from
Stanford, designed microchips at Hewlett-Packard, learned management
consulting at Bain & Company, returned to Stanford for his M.B.A. and then
beat out 250 other applicants for a position at Draper Fisher, the venture
firm. Prototypical resume, except for the date column: as an undergrad, he
tricked the registration computer -- which blocked signing up for more than
20 units -- by penciling in just two units of credit on what were five-unit
classes. In this way, he was able to take eight classes at once and finish
in two and a half years with an A plus average. Think that's fast? The
conventional wisdom in Silicon Valley is that it takes three years to learn
the craft. Steve Jurvetson made partner in six months. He was 28.
<www.dfj.com>
Venture capitalists' favorite unit of measurement is the factor X. They live
life on multiplication scale, and anything less than X is inconsequential.
When they invest, they ignore 12 percent or 15 percent or 18 percent
returns. They start to take notice when they see potential for 10X returns.
In this lingo, Jurvetson blasted through college at nearly 2X the normal
rate, and made partner at 6X speed.
Now he's accelerating -- straight into what could be a precarious stretch of
road. Only 32, Jurvetson is in for the summer of his life, with no fewer
than 11 of the Internet-related companies he has backed (Wit Capital,
Goto.com, Tumbleweed and Netzero among them) at various points along the
road to an initial public offering. The brand name he has built for himself
with investments in a couple of other successful Internet start-ups -- his
firm's specialty and the hottest destination for venture capital -- will be
put to the test. That's because the market's taste for Internet stocks
appears to have soured: bellwethers are way off their peaks and new issues
are coming out of the box more cautiously. Dave Marquart, a Silicon Valley
veteran who was the only venture investor in Microsoft and the co-lead
investor of Sun Microsystems, warns: "To be a bona fide venture capitalist,
you have to go through a complete cycle. Those who've entered the business
since the mid-90's have never seen a down cycle. Everything has been to the
right and up -- very up."
To understand why Jurvetson is a folk hero for so many of those looking to
convert their dreams and visions into Net wealth, consider what happened in
February 1996. Sabeer Bhatia was an immigrant from India with zero
experience running a company, zero experience in consumer products and zero
experience in software. (He had been a hardware engineer at Apple.) He was
Jurvetson's age less two years, or J - 2. Bhatia had already been turned
down by 21 other venture capital firms. He had produced no prototype, not
even a graphic printed on a piece of paper. What he did have was what
Jurvetson called "hallucinogenic optimism" and one intriguing idea, which he
sketched out on a conference room white board. Jurvetson invested $300,000
to buy 15 percent of the project. Less than two years later, the company
that emerged from that meeting, Hotmail, was sold to Microsoft for $400
million. Jurvetson became an instant legend, the guy every young
entrepreneur wants to meet, even if it means paying 250X the cost of
breakfast at Buck's. Increasingly, successful venture capital firms are
sheltering themselves from the hail of unsolicited business plans by
invoking the Inverse Rule of Referrals: All good ideas come by referral, so
if it didn't come by referral it must not be a good idea. Here's how a
typical venture firm might catalogue the incoming slough: administrative
staff scans the first paragraph of the cover letter for a referral by a
"trusted third party," which is entered in a database. Partners scan the
database; they'll look at the plan only if they trust the referral. "It
makes being a venture capitalist 90 percent simpler," Jurvetson comments.
Draper, Fisher, Jurvetson has cultivated a reputation for ignoring that
rule. The firm is located in Seaport, a sailing harbor in Redwood City --
psychologically far from V.C. ground zero, Sand Hill Road (but close enough
to zip there in 10 minutes for a meeting). The problem with referral
networks, as D.F.J. sees it, is that as the venture capitalists age, so does
their referral network, cutting them off from the original thinkers. They
say they read every one of the 5,000 plans sent to them each year. Theirs
was the first venture capital firm to run an advertisement.
For about a thousand dollars a pancake, Mark Hernandez, right, won a
breakfast with Jurvetson to pitch his idea.
D.F.J. is a "seed" firm, meaning it gets in on the first round of financing
for nascent businesses. "Getting companies started is the hardest part,"
says Tim Draper, the firm's founder, "and it's the most rewarding -- both
financially and personally." To Jurvetson, it's even more rewarding than
being an entrepreneur. "I get bits and pieces of several success stories,
sort of a highlight reel," he says. Jurvetson has succeeded so far by
making himself accessible to the kind of young people who he figures come up
with unusual ideas -- as opposed to what the industry calls "Me, Too"
product. One recent month's "Me, Too" was on-line gift registries. He saw 30
business plans on that concept. The month before, it was Web-calendar
companies. He saw three Web-calendar plans out of Sun Microsystems'
employees alone. Having lunch in San Francisco one day, he bumped into an
old friend who said he had left Netscape to found his dream start-up;
without much tact, Jurvetson jokingly blurted out, "I hope it's not another
Web-calendar company!" His friend's face fell. They always think they're the
only ones with the idea. "Truly original thinkers tend not to be
entrepreneurs who've spent 10 years at Cisco and can be trusted to know what
they're doing," Jurvetson explains. "They tend to be 26 years old and
highflying. They often have a very childlike mind, with some naivete. We're
impressed by people who don't know what can't be done."
Just as the wild success of venture capital firms has made them magnets for
business plans, it has made them extremely popular with fund investors
(which tend to be pension plans, university endowments and insurance
companies). At a typical V.C. firm, money under active management has gone
up 40X; the number of partners to manage that money has gone up only 4X.
It's now common to raise $350 million to $500 million every couple of years.
When Draper Fisher Jurvetson mailed out prospectuses for its most recent
fund, the firm received 3X the pledges it needed. The partners drew the line
at $180 million -- but even that is a huge sum to deploy among early-stage
firms, and easily the biggest fund D.F.J. had ever raised. V.C. firms have a
fat incentive to raise more and more money, because they get paid in two
ways. First, when investors in a specific fund are paid back after a set
period of time has elapsed (typically 10 years), the venture firm keeps 20
percent of all the profits. Second is the gravy train: a 2.5 percent annual
management fee paid by investors, regardless of performance.
To deal with all the incoming money, most firms are ratcheting up the size
of investments, especially on secondary rounds, when a company that has
survived the seed stage needs large cash infusions. That means sticking with
start-ups that have a high likelihood of growing not just big but
gargantuan, with billions of dollars in annual sales. The Amazon of
pharmacies, the Amazon of insurance, the Amazon of auto parts -- consumer
markets so big that even a small slice of them guarantees a stellar payoff.
They're not really start-ups, they're bulk-ups. They put on weight fast and
flex their muscles and try to scare competitors off the beach. But as
Jurvetson sees it, something has been forgotten in this process. Sure, it's
cool to make so much money. And sure, it's cool to be able to buy hair dye
and condoms from the privacy of home. But on-line superstores aren't
creating new markets, and though they might evolve the technology of
E-commerce, they're not revolutionizing it. They're just big Web sites.
Where's the adventure in that kind of venture? Seed investing requires a
special kind of hunger. Jurvetson's parents were immigrants from Estonia,
and he was reared in Dallas by the creed that what he was to make of his
life was entirely up to him; there were no entitlements. In an undergraduate
psychology class, he answered a series of Enneagram questions meant to
divine his character type. He so fit the description of a Type 3, the
Performer (as in star performer), that he was asked back in following
semesters to lecture about the traits of Type 3's: tremendous need for
achievement, with an inner drive to do something beyond the ordinary. That
drive is why he belongs dead center in the creation zone of the new economy:
where there's constantly a new goal to keep him from getting bored, and
where he has all of Silicon Valley as an audience to perform for. He seems
very similar in character to the headstrong young entrepreneurs he deals
with, and perhaps that is partly why they mind-meld with him so well.
Venture capitalists live life on multiplication scale -- anything less than
the factor X is inconsequential. Jurvetson blasted through college at 2X the
normal rate, and made partner at 6X speed. At no time was this more clear
than the day he drove across the Dunbarton Bridge to meet Joe Chen, the
C.E.O. of a very new start-up, See U There.com. Chen had 12 employees
working in the living and dining rooms of his Union City home. Jurvetson
admits he's a sucker for this kind of raw fertile atmosphere, and he grooved
on it for a while that day, talking to the employees and soaking up their
ambitious energy.
The whole point of money is that it's transferable legal tender, that it
retains its value no matter who possesses it -- your million dollars is just
as valuable as my million dollars. With venture capital, that's not always
the case. Chen already had two other venture firms ready to give him the
million dollars he needed. "Literally, they are screaming at us, asking when
we are going to close the deal," Chen explained as we sat down at his
conference table in the garage. But he would rather have Steve Jurvetson's
million dollars. His pitch: a plan to build an Internet site to capture the
largely untapped $60 billion market for event planning. Jurvetson seemed
inclined to invest (and two days later, did). Chen is J + 1 years old. He
wanted Jurvetson's technical fluency, but also a certain kind of cultural
chemistry -- the difference between working with someone who is just like
your father and working with someone who is just like you. As Chen puts it,
"He's not some stiff suit walking in here." The hotmail story reached us
even in Singapore," says Eng-Siong Tan, the C.E.O. of a start-up called
Third Voice. Tan is J + 4 years old. "It resonated and became part of the
folklore of the valley that he was willing to invest where 21 other firms
had passed. We knew Steve would be someone who gets our idea."
Tan and eight other Singaporean engineers uprooted and came here cold. They
crammed into a cement-block storage warehouse in Foster City, their front
door an aluminum roll-up gate. In November, Tan pitched Jurvetson. Third
Voice would make software that allows users to post comments, viewable only
by other users, directly onto the front page of any Web site. It's the Web
equivalent of empowering people to spray-paint the State Capital. Jurvetson
got it: this could do to on-line chat what Ebay did to classified ads.
Today, Tan has come by to discuss some new hires, of which there will be
many in the next month. Internet companies are like Bazooka bubble gum. It
takes a lot of chewing and manipulation -- a tremendous amount of effort --
to get the first bubble started. Then, with the slightest additional effort,
a mere exhale, it expands 100X. For a while it's customary to double in size
every month. That's what Tan is about to go through. He's ready to exhale.
We meet with one candidate for vice president for business development, Leo
Jolicoeur, who brings experience from a couple of the more prominent
corporations in the valley. He has five other job offers already on the
table. As V.P. for business development, he would be responsible for
partnering Third Voice with major tech companies. He wants to know how
Jurvetson might help. "O.K.," Jurvetson says, "let's run down the list real
fast. Yahoo? I live on the same street as founder Jerry Yang and we walk our
dogs in the morning. Excite? The C .E .O., George Bell, is a college buddy
of our partner John Fisher. AOL? We sold them two companies last year.
Microsoft? We sold them Hotmail. That's just external. Then we have our
internal portfolio of 50 Internet companies. I can think of several right
off the bat to partner with."
"All right, I get the picture," Jolicoeur says. Later, Tan wants Jurvetson
to help recruit an engineering student from Stanford. "It's going to be very
tough," he says. "He already has a job offer from Drugstore.com and he's
leaning toward taking it. You'll go up against Doerr." Drugstore.com is
financed by the firm of the legendary venture capitalist John Doerr. The day
before this meeting, it had been widely reported that Amazon.com had bought
40 percent of Drugstore.com. The company looked to be a grand slam. "That's
no problem," Jurvetson says. "Drugstore.com is a 'Me, Too' product. It's got
six or seven competitors, and it's not even first mover -- that was Planet
Rx. Besides, what's cool about selling pharmaceutical supplies? We'll see
what kind of person this recruit is. I'll just ask him: does he want to sell
Preparation H, or does he want to launch a new product category that will
alter the balance of power in the world?"
The recruit signed with Third Voice.
The first of Jurvetson's 11 I.P.O.-bound companies -- Wit Capital, an
Internet investment bank -- went public earlier this month, right on the
heals of a disastrous week for Internet stocks. In late May, Juno Online and
Ziplink not only failed to post triple-digit first-day returns, they both
dropped below the offering price. Two other I.P.O.'s were postponed.
Suddenly the center of the Internet boom seemed to a lot of people like a
scary place to be. But Wit went out and and finished its first day up 85
percent -- a figure that would have been a disappointment just months
before, but now looked strong. And Jurvetson sounded as chipper as ever.
Yes, some of the insane pops of early 1999 probably won't be back, but
Jurvetson says that only means offerings are being priced more fairly and
supply and demand are synching up. But the Internet is the economy, he
insists; businesses that still think it's just a fad are in denial.
"We've seen I.P.O. windows open and close," he says. "The fact that some
I.P.O.'s -- other people's I.P.O.'s -- haven't done well doesn't really
matter to us. The businesses that we're backing . . . they're really good
businesses, and it's not like they're going to shut down without a huge cash
infusion from the public markets. Wit Capital -- they're just closing
business left and right. "It takes a really dramatic sea change for a
venture capitalist to revisit whether a sector is a good idea, and we just
haven't seen that," he continued. "We're actively investing like crazy.
We've done more deals in the last three months than we did in the previous
six -- with no eye whatsoever to the public markets, because we're thinking
about the public markets two or three years out." Of his I.P.O.-bound
companies, only one is considering putting off its public offering by a
quarter, he adds, and there is nothing in his voice to suggest fear or
unease about the future. That's what the Type 3 description doesn't capture:
This is a guy having time of his life. The default setting on his face is a
birthday-boy smile. And why not? "I get to have the Steve Jobses of the next
century come to me and make their pitch. I can't define a better recreation
activity, let alone a job, that would be better than that."
Mark Hernandez, the winner of the Breakfast at Buck's auction, is J - 3
years old. He shows up at Buck's wearing a navy blazer, khakis,
tortoise-shell Clark Kent glasses and his Stanford class ring. He resigned
from his position as director of Merrill Lynch's Latin American derivatives
desk four days ago to pursue a new life, though it's not clear just yet what
that life will entail. Their conversation swells and fades, never coming to
a head with the Pitch. Hernandez has a lot to choose from. Since winning the
auction, he has been besieged by other Manhattan entrepreneurs offering
finder's fees for connecting them with Jurvetson. On top of that, he has
invested his own money into four start-ups, and he obligingly runs down the
list, getting strategic feedback. Not until the plates are cleared does he
get around to his dream project: he's going to raise $5 million from
cash-rich friends on Wall Street and pair it with a special $15 million loan
into a highly leveraged kitty called Transformation Capital. It's a seed
fund! He'll be looking for 20 start-ups to invest in.
Mark Hernandez doesn't want to be the Steve Jobs of the next century. He
wants to be the Steve Jurvetson of lower Manhattan.
"Ever since I read that Hotmail story," he says, "I wanted to get in touch
with you."
Po Bronson is a writer based in San Francisco. His nonfiction book about
Silicon Valley, "The Nudist on the Late Shift," is due out this month.
source:
http://www.nytimes.com/library/magazine/home/19990620mag-tech-jurvetson.html
Tushar J. Mehta
email: [email protected]