Early Stage Investing, Draper Fisher Jurvetson Style
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 now 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.
Reporter@Large: 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?
Reporter@Large: 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.
Reporter@Large: 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.
Reporter@Large: 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.
Reporter@Large: 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.
Reporter@Large: 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 around 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.
Reporter@Large: 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.
Reporter@Large: 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.
Reporter@Large: Thanks for taking the time out Jennifer.
Fonstad: No problem
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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
