Tim Draper walks through how venture capital has changed since the 1980s, from fund sizes to the rise of crowdfunding platforms like AngelList and accelerators like Y Combinator. He uses Jackson Pollock painting as a metaphor for why investing can feel like art.
Chapters
All right. So we'll start by this— this is a highly artistic class, okay? So you guys on the right side, okay, it's this picture. And you guys on the left side is this picture, right? Which one is better looking in your opinion? Like the one on the right? The same. Yeah. How much do you think it's worth more? Which one is worth more? The left one's worth more. Yeah, right. Good. As I said, this is a highly artistic class, right? If you're not in art, this is, to me, they look both pretty good, right? And this is about $140 million more than that. So this is painted by kindergarten students. student in Israel I got from Google image search. This obviously is from Jackson Pollock. To a certain extent, part of what I do is that, right? Trying to figure out the difference. I could easily put down one startup company here, another startup company here, And you'll have different people choosing different things. One will become the next Google or the next Facebook and the other one will not. So there's a certain aspect of this, you could call it almost black magic, you don't know what it is until it becomes a form. So there's an art component to this. So because of that, right, people can't really explain to you why the painting on the left is more expensive than the painting on the right. I mean, there are some— art critics could tell you why, there are all these reasons, but it's very difficult for you to become a multi-hundred million dollar artist, right? You can't really— and that's why it's difficult for venture. Right? So that's why it started out as more of a cottage industry, right? Basically what it means is that it's very difficult to scale. You may have a guy like Tim Draper who's just— I think he's wired differently in terms of early-stage investing. He sees something, he'll know this is going to be a $100 million painting, but that one is not. So people would have— this kind of conviction, right? So it has been very difficult to scale. One way to train is— I mean, you can't really train artistic instinct, right? But what you can train is pattern recognition, right? So venture industry started— you want to look at this as what is your first reaction? I'll tell you. What is your first reaction? This chart here, it shows the number of— the size of VC funds. Back in the 1980s, the total was $2 billion. So today I could find one company raising that much money, but this is the entire industry. It's a pretty small industry, right? And the main reason is it's been very difficult for many people to get in and it's just kind of hard to scale up. Right? Over time, what happens? You have many, many more players. Do you continue to meet new venture funds you never heard of? Mm-hmm. Right, you constantly meet people that tell you, well, we're in a VC fund, this is what we do. And they'll tell you credible stories like we backed this, we backed that, right? So over time it became this, okay, pretty competitive. So I show you the first part in the last slide and I'm showing you this second part, so this is new. This part is new, like we were looking at this. This is sort of the old venture industry. About 10— like right around 2000, the first internet Bubble. All these VC funds popped up, right? They popped up or we popped up to support these new companies because people knew that there was a new revolution coming, okay? So there are all these companies. When you have all these competitors, what happens? Who studied economics? What happens when you have multiple suppliers of a product? Price goes down. Price goes down, basically goes down to zero margin, right? It becomes a mature industry. So that's what happens, okay? So that is what happens through the year— around year 2000 timeframe, right? But guess what? No mature industry is immune from disruption, including my own, right? Our business is to fund disruption, and new technology, and the technology is actually disrupting us. It sounds a little bit ironic, right? But it's true, right? What happens? These crowdfunding sites come, right? So as of today, if you have a new business, you can actually go to AngelList and just raise money from whoever, right? Now people may think this is a competition to VCs, It's actually not, right? But what it does do— well, but did I— did you get a chance to read this? I kind of just assumed you already got it, right? The blue line is crowdfunding and red line is VC and then angel is the green line. You see crowdfunding completely took off. This is what it does to the VCs. They were not competing with us, they just gave us a lot of work. But that's good, right? In my mind, there's no such thing as bad deal flow, right? I could choose not to look at it, but if you give me more projects for me to look at, in theory, that should improve my hit rate of finding good companies, right? But what it does do is it creates a productivity or a workflow issue, right? The same old things that we used to do, doesn't quite work anymore. If you talk to— I think Bill Draper was here, he must have talked about when he was in venture 30, 40 years ago, it's basically driving down the road to see where the new companies have formed. Now we have the luxury of not having to drive down the road. I just get online or talk to people. But to a certain extent, it's a different kind of challenge, right? Because even if I spend all day, all night reading, I can't possibly review all the business plans or even sort of come across all the possible businesses out there, right? So this day of driving down the street and you pretty much cover everyone, or you look up— I even talked to a guy from Bill Draper's timeframe, they used to use phone books too. I was like, who uses a phone book to look for deal flow? So it presents a problem, right? It's a good problem to have. So overall we should have higher quality companies coming out. But the challenge, if you're not careful, you actually can't process all the deals coming your way. I think I've never had as many inquiries as I've ever had. I'm to a point where we can't really address them all. I mean, we've always had issues spending enough time looking at possible inbound leads, but I think this is in the last 5 years, It's taking us to a different level. So this is why the accelerator business model became an important piece of our ecosystem, right? If you think about it, why are there more business today, new business than 10 years ago? I mean, you may not realize that. To you, this is what it looks like today, right? I can tell you 10 years ago, they're probably 1/10 or 1/50 of number of companies compared to today. So there aren't that many startups. The reason being is there aren't— the capital requirement to start business 10 years ago compared to now is much higher. So you actually don't have as many competitors 10 years ago. By the same token, It's an advantage if you have a great idea, you don't need to raise $5 million to get started, you don't need to buy your own servers, you just go to Amazon Web Services. That wasn't available 10 years ago. But in my industry, to deal with that, the number— really the onslaught of all these people coming online, all these new businesses, That's when accelerators came onto the scene, right? So Y Combinator and 500 and Techstars, those were the— one of the first ones that come onto the stage. They effectively helped take millions of new startups, kind of helped them package them, helped them accelerate and then bring it to the VC pipeline. Some investors don't like it, some investors love it. Regardless, it's an important part of the ecosystem because it helps deal with the number of new companies coming into the market.
