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.

[email protected] 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.

[email protected]: 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.

[email protected]: 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.

[email protected]: 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.

[email protected]: 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.

[email protected]: 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

w at more than 3 million subscribers. That
makes them the second largest Internet access provider in the world.
Of-course, they’re the largest free Internet access provider in the
world. By growing so quickly they’ve built a number of strong
barriers: 1) The number of subscribers allows NetZero to command the
best possible connectivity prices (purchasing power). 2) They have
critical mass on the advertising side, which supports their revenue or
business model.

[email protected]: They’ve also built up tremendous switching
barriers on the consumer side.

Fonstad: Right. Their ZeroPort is essentially a My Yahoo that
sits above the browser with your email, stock quotes, and news among
other things. So you’re not likely to switch with all of your personal
information and preferences on your ZeroPort. Why would you want to
switch?

[email protected]: I want to get into that a bit. The AOL’s of the
world control the access and content as well through a portal entry
point. NetZero has the tool bar. Do you really feel that a tool bar
can be as effective and as sticky as a portal entry point?

Fonstad: Actually I think it’s more so because people want to
surf the Web. They don’t want to have the content controlled for them.
That’s one of the beauties and the opportunities of the Internet. It
enables you and I to enjoy the vast resources being offered. AOL makes
it more difficult for users to surf the Web. You have to get through
all of their content in order to even access the Web. So what NetZero
does is it takes all of the utility captured within that ZeroPort. You
have access to the things that you like to look at, sports scores,
weather, quick shopping channel buttons and you’re never forced to wade
through their content.

[email protected]: Now the viral marketing side. Lets talk a little
about DFJ’s pioneering efforts for viral marketing and how that vision
lives on today with your evaluation of companies and investments in
companies that have that viral flavor.

Fonstad: Sure. As you know, viral marketing was born through our
investment and work with Hotmail. Tim Draper suggested during Hotmail’s
first board meeting that they put a tag line at the bottom of each email
saying “PS- I love you, get your free email at Hotmail” (the PS-I love
you didn’t make the cut). We just saw incredible viral growth from
that. One email would go into India and four weeks later there would be
300 thousand new Hotmail accounts out of India. It’s a very powerful
marketing tool at zero cost because it’s an implied endorsement from one
of your colleagues or friends.

[email protected]: And today?

Fonstad: We have found applications for viral marketing in many
different dimensions of different companies of ours. Look at Homestead,
which develops and provides users with easy access to quick drag and
drop personal Web pages. Homestead creates small user groups (friends,
families, small businesses) which enable viral marketing. Lets say you
just had a baby and you want to notify everybody in your community (your
new Web page might have a picture of your baby and some neat
information). So friends and family are encouraged by their own friends
and family to sign up for their new Homestead account.

[email protected]: So the user is becoming the marketing tool.

Fonstad: Essentially, and it’s an honest one. In the sense that
you like the product, you use the product and you’re now mentioning it
to your friends.

[email protected]: NetZero concerns some investors as a branded free
Internet access service. Access is becoming more and more of a
commodity every day. I wonder if building brand recognition makes sense
when every site will soon be offering free Internet access.

Fonstad: It’s easy to offer the access, it’s not necessarily easy
to build a business a

round that. That’s the challenge and it’s
interesting to see what NetZero has done. It’s more than just a brand,
it’s what the brand stands for. There is a lot of utility and
functionality that NetZero users capture through a number of
applications that a lot of the other services can’t even offer at this
stage. More importantly, advertisers will not work with every start-up
that says: “Hey, I’m going to offer free Internet access!” They don’t
have the critical mass of users and the targeting capabilities to be
able to provide value back to advertisers and sponsors that support
these services.

[email protected]: There are certainly awesome investment
opportunities for Internet stock investors right now and this should
continue for quite some time. At the same time, a lot of junk is
crowding the public marketplace. Is it crucial for Net companies to
have a Benchmark or DFJ name behind them?

Fonstad: Well, we’ve been in this business for 15 years and we
know how to build companies and that gets reflected in the value that’s
distributed to those companies. So yes.

[email protected]: From an average investors standpoint, mostly at
the point of IPO, is it important to be looking at the VCs that are
backing these companies?

Fonstad: I think it would be a smart way to evaluate the
credibility of the companies now coming out of the chute.

[email protected]: Thanks for taking the time out Jennifer.

Fonstad: No problem

—————–

Viral marketing is a key growth driver for Internet companies. What public companies have this viral flavor? Christy Benedict wrote: “CMGI is big on viral marketing…
I think CMGI is the public equivalent of Draper Fisher Jurvetson” Discuss it here

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