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Early Stage Investing, Draper Fisher Jurvetson Style

One of the most widely publicized and talented and successful venture capital firms in the world is Draper Fisher Jurvetson. You remember Tradex Technologies (acquired by Ariba), GoTo.com (public), NetZero (public) and Kana Communications (public)...right? These, among many other high-profile private and public Internet companies, are DFJ partner companies.

Draper Fisher Jurvetson was founded in 1985 by Tim Draper. The firm was the first to focus on Internet related investments and has held its focus there since 1994. Today, DFJ holds investments in over 200 high-tech related companies and has pioneered many of the phrases, concepts and trends within the Internet industry. This ofcourse includes viral marketing, a concept developed by Mr. Draper that has become a fundamental business tenet for the new economy.

Reporter@Large had the opportunity to sit down and speak with Jennifer Fonstad, a Director at Draper Fisher Jurvetson. Fonstad currently serves on the boards of NetZero (NZRO), eBenefits, Global Sight, Ivus, Saltare, Troika Networks and WorkExchange.

Reporter@Large: Looking at DFJ's partner companies is like looking at an NBA All-star lineup. Why are the best entrepreneurs coming to DFJ for money, guidance and support?

Fonstad: Well, our primary purpose or value add is to work closely with a company to help build their business. We bring to bear our network of contacts and partners. The challenge for many start-ups early on is to get potential partners and customers to take them seriously. We have a network of over 200 companies that we bring to the table with every investment we make. Of-course, we also have a lot of experience with what works and what doesn't work. We know what it's going to take for them to be successful.

Reporter@Large: What is DFJ looking for when evaluating a potential investment? Is the primary focus on great people or is it the idea?

Fonstad: Despite all the excitement that you see today, it's still very difficult to build a successful company. We certainly do look for opportunities that have large market potential, but the people are really critical in executing on that idea. So we invest in strong people, large markets and business models that match the opportunity.

Reporter@Large: Just like in the public markets, Internet companies and industry trends also seem to move in waves at the private level. Are you seeing any trends now and any that may be emerging?

Fonstad: Oh sure. We're making a number of investments in applications for wireless infrastructure. Business-to-business (B2B) verticals or marketplaces are also hot right now.

Reporter@Large: Any specific interests within the B2B space?

Fonstad: We're early stage investors so we never pre-suppose what the opportunities are. We have a good view of what is coming on the horizon but we will invest across numerous categories.

Reporter@Large: The three characteristics/strengths that DFJ looks for in potential investments seem to be switching barriers, barriers-to-entry and viral market potential.

Fonstad: Switching barriers and barriers-to-entry are actually quite similar. A barrier-to-entry means that if you have a hot new marketplace, there is going to be one of two things: 1) either it's not that exciting so you're not going to have new competitors or 2) it's a very exciting opportunity and you're going to soon have a lot of competitors. In order to build a successful long-term business, how do you take what you've got and build barriers-to-entry? Part of that is switching barriers. You're basically erecting different dimensions of your business to make entry more difficult. A good example is NetZero. There numbers are no