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VC Legend Bill Draper On Startups, Breaking Up Big Banks And Castro

First Posted: 01/27/2011 9:56 am Updated: 05/25/2011 6:25 pm

You wouldn't expect a book that explores the partnership between venture capitalists and entrepreneurs to contain the first-hand account of a fiery face-off with Fidel Castro.

But William Henry Draper III, the 83-year-old author of a new book, The Startup Game, has lived a life that's stretched far beyond the venture capital industry he helped create.

Besides playing a crucial role in the birth of the VC industry, and the meteoric rise of Silicon Valley, financing companies like Hotmail, Baidu and Skype in their early stages, Draper also ran the Export-Import Bank under Ronald Reagan, and served from 1986 to 1993 as undersecretary-general of the United Nations Development Program.

In his new book, Draper recounts a 1990 meeting with Fidel Castro on a cool evening in Cuba's capital. Over dinner, Draper told Castro that he'd "never seen an economy in worse shape than yours" to which Cuba's revolutionary patriarch responded, "Our economy wouldn't be so bad if your country lifted the embargo." Draper shot back, insisting that the U.S. placed the embargo because of Cuba's human rights violations. Castro then turned to a comrade and asked him whether Cuba has any human rights problems. The nervous official replied, "No, no, Fidel. No, no."

Moving back and forth between the worlds of business and international diplomacy, Draper's book uses anecdotes from a varied career to illuminate the partnership between VCs and startups as well as the ever-changing role of entrepreneurship in economies around the world.

The Huffington Post recently spoke with Draper about his life, his new book, and what it takes to excel as an entrepreneur. Here are some highlights from the conversation:


HP: You prefer to visit entrepreneurs in their workplaces before they come to your office. What are you looking for?

I look for their respect for each other. They may not be friends outside the office, but good startup teams have a great amount of respect for each other. And they're not all alike. You don't want four salesmen. There needs to be diversification in the group to cover all the bases in the startup game. And then you want look at them very closely with regard to whether they'll be hiring other good people. In the beginning, if all the people are not top quality, there's a high likelihood that the quality will just get weaker and weaker as the company grows bigger and bigger.

HP: You tell entrepreneurs that 'the quality and reputation of the investors are sometimes even more important than the money that they provide.' How can an entrepreneur test the quality of a VC?

Entrepreneurs should talk to other entrepreneurs who have had experiences with that venture capitalist. And they should also pay the closest attention to who on that venture capital team is going to be their point person.

HP: You subscribe to the "Andrew Carnegie Dictum" which says that people should spend the first third of their life getting all the education they can, the next third making all the money they can, and the last third giving it all away to worthwhile causes.' With the first third of this dictum in mind, what are your thoughts on the fellowship Peter Theil launched in 2010 that gives $100,000 to 20 entrepreneurs under 20 years-old to drop out of school and pursue their ventures full time?

Bad idea. There are exceptions that we know about like Bill Gates, but I would definitely not want to encourage young people to drop out of school to start a business. Maybe run a business while they're in school, that's okay, but not drop out completely.

HP: The repeal of Glass-Steagall Act in 1999 enabled big commercial banks to swallow up the best boutique investment banks on the West Coast also known as the 'Four Horsemen.' The result, as you say in your book, was 'the loss of innovative, energetic, and productive service providers for young, strong but still small companies that had been patiently nurtured by VCs.' Are these kinds of service providers gone for good?

Nothing is forever. But times have changed. It's a lot harder to start a small investment bank today than it used to be. There are too many complications, too much competition, and it's just late in the game...There's always room for new ones, but I think the sad part is that commercial banks and investment banks are two very different animals, and they're now lumped into one big conglomerate. It hasn't been healthy for the economy, as we all know what happened in 2008: Big banks used the greater leverage from the commercial bank to put into risky investments. So I think Glass-Steagall was a good act in that it separated the church from the state -- the investment bankers from the commercial bankers.

HP: You were sent to Washington in 1981 to serve as the Chairman of the Export-Import bank under Ronald Reagan. You say in your book that, at the time, the country was 'exhausted and confused, not certain of where it would go next'.

Yes. High oil prices, long lines at the gas stations, and the problems Jimmy Carter had with Iran -- they had taken U.S. prisoners. The country was discouraged.

HP: Well, we're living in somewhat similar times, as we struggle to recover from the worst economic downturn since the Depression. For today's administration, what are the most important lessons to be learned from Reagan's efforts to revive the country in the early 1980s?

I actually told this to the current president in person. I said, "you're one of the best promoters of small business that I can imagine but you don't seem to like big business. Here in Silicon Valley, small businesses grow into big businesses. That's what we want, and that's what you want." Now I think he's actually listening to not just me, but lots of others who understand that you're either for business or you're against business. And if you're in the White House, you damn well better be for business because that's where the jobs are.

So I think he now understands that the real job growth comes from the private sector, and not from government. Now he's deploying the president of GE to his council, and I'm delighted to see him making some of those moves. I think the country is coming back and it's because entrepreneurship at all levels, even within big companies.

Also, Reagan loved entrepreneurs. He loved the freedom, the lack of government interference -- and all that fits in with entrepreneurship. But I say in my book that the one who did the most entrepreneurs was Deng Xiaoping. In China, he took off the shackles that Mao had on them, and now all of sudden China is lending us a trillion dollars. We at the Export-Import bank made the first loan to China for about $56 million [laughs].

HP: Your son Tim Draper says that 'globalization is also expanding the geography of entrepreneurship and promoting cross-border collaboration, thereby leveraging a global network of innovators.' Do you agree?

Yes. We were the first venture capital company to go to India. And we made 16 times our money in six years because cross-fertilization is much more productive and creative than a domestic startup. For example, think dogs: muts are stronger than purebreds. The dumbest thing our country is doing today in the area of immigration is to educate some of these brilliant Chinese and Indians at MIT and Stanford and then make them leave the country instead of allowing them to work here. I mean there's something really screwy about that policy. I'm a big believer in a controlled but very aggressive and open immigration system. I think it's very healthy for this country. We're a mixed breed, and a mixed breed does better than the pure breed.

...Silicon Valley will always be the mother church. but it sure as heck isn't the center of every idea. It does have a very good network of money, ideas, and education. But there will be Silicon Valleys in Moscow, Instanbul and Shanghai.

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