Venture Profile: John Fisher, Draper Fisher Jurvetson

By Angel Mehta, Managing Director, Sterling-Hoffman Executive Search

A win-win-win-win-win business is how John Fisher describes the world of venture capital. A founding partner of renowned venture firm Draper, Fisher, Jurvetson (DFJ), his passion for venture capital remains obvious - even after witnessing multiple boom-bust cycles. Angel Mehta, Managing Director at Sterling-Hoffman, met with John Fisher to discuss his least favorite part of venture investing, why DFJ continues to pursue high-risk deals, and the possible end of enterprise software as a growth industry.

Angel Mehta: Does being a venture capitalist ever become routine? Boring?

John Fisher: I think it's the most wonderful business in the world, but occasionally, like anything, it does get routine. Having said that…Venture Capital is still a business like no other. It's a win, win, win, win, win business.

Angel Mehta: That's a lot of wins…[Laughing]

John Fisher: Well, we help entrepreneurs realize their dreams and when they get funded, they win (win#1). We help create tens, hundreds and, in some cases, thousands of jobs (win#2). State and local and federal governments are big winners as tax revenue increases and jobs get created (win#3). Of course, we make money for our limited partners (win#4), and we make money for our partners (win#5). Those are the five wins. What we don't do is bust unions. We don't lay people off in order to create efficiencies for the sake of financial engineering to cover interest expense associated with buy-outs and those kinds of things. We don't, generally speaking, invest in businesses that are heavy polluters of the environment -- heavy industries -- smoke stack stuff. Actually, these days we're investing a lot in clean energy deals.

I view venture capital as the purest form of capitalism. I view it as an unflinchingly good thing for all parties involved. Of course, every now and then companies and management teams end up not executing and some people lose their jobs because they need to be replaced. Sometimes companies don't perform and they need to be downsized because there's no cash available to support big payroll, etcetera. But that's quite different from the financial engineering that takes place in the LBO business where people get sacrificed in order to meet debt payments.

Angel Mehta: So the 'greater good' and the constituents that aren't on the board or listed in the shareholders agreement are always top of mind for you? Have you always been like that, or is the social consciousness something that has developed in you over time?

John Fisher: Always been the case. My parents instilled in me a sense of community and social responsibility from a young age; it's something that I believe in. For me, Venture Capital is a business that I feel is very consistent with my own personal ethics and one that I can say unequivocally I'm proud to be involved in.

Angel Mehta: Well then, what part of the job do you hate the most?

John Fisher: Well, the least attractive aspect of Venture Capital, the sort of dark underbelly of Venture Capital, is probably the all too frequent arguments about money. In most businesses, at some point, you end up arguing about money, but in Venture Capital, you end up arguing about money every other day. Sometimes you're arguing with your partners about investing in a company, or how to properly manage a company. Often times, you're arguing with other venture capitalists about whether or not you can get into the deal, how to properly manage, or properly finance the deal. We also argue about liquidity in a given situation, the timing of selling a company, raising money, going public, or taking dilution --- all these, more often than not, boil down to arguments about money. Sometimes, you have arguments with your management team about how to spend the payroll, whether or not to hire people, fire people, cut back, or build up, etc. There are also arguments about how much equity various people get: the salaries, and the bonuses.

It can't be avoided because, after all, we're in a financing business.

Angel Mehta: I know that DFJ was always perceived, even amongst venture capitalists, as one of the more adventurous firms. Is that still the approach or has that changed? Does it still make sense to fund those deals that have very little besides an idea?

John Fisher: In general, there's a critical notion that many people don't understand about early stage or high-risk investing. That is, the most that you can possibly lose on any given investment is one times your money. The most you can make is unlimited. The truth is that risk and reward are often directly correlated. It doesn't make any sense to be afraid of risk as a venture capitalist. What you need to be concerned about is: "How big is the upside?" The truth is that in the early stage of the venture capital business it is common to lose all of your money on the first third of your deals. It's common to make no meaningful return on the second-third of your deals and it's common to make all of your return on the last third. The baseball metaphor really applies: if you're a .333 hitter, you're at the top of the league. In the venture capital business, if you make money on a third of your deals; you should be doing fine so long as you're making more than three times your money on average on all your deals, you're making money for your limited partners across the board. A home run analogy really applies too. The magnitude of your winners determines the ultimate degree of success. So the home run deals make the difference between mediocre returns and superb returns. What really matters is the magnitude of the winners. You've got to swing for the fences every time you place a bet because, given the fact that the risk is high in all of these situations, you better make sure that the winners really pay off. So you will have to be very ambitious for them and only invest in companies that can, if they become successful and truly achieve their vision, become extraordinarily valuable.

Let's take for example a given 1999 fund that I'm somewhat familiar with. It happened to place a bet in a company called Google and by most press accounts and other accounts, this particular fund was significantly under water across its portfolio for that 1999 vintage fund. One spectacularly successful deal makes the entire fund worth something like four or five times the entire committed capital of the entire fund. Our business is all about the home run deals, the superstar winners, and if you're not taking appropriate risk, you're unlikely to get those big winners. If you're doing careful deals and minimizing risk and acting generally like a banker rather than a risk capital provider, you're unlikely to get superior return. You're only likely to get superior returns, if you take consistent methodical risks. DFJ has embraced this notion from day one.

Angel Mehta: Are you in agreement with the notion that the enterprise software business on the down slope and the real wealth opportunities are going to be found elsewhere?

John Fisher: Yes. What we have learned in the very recent past is that enterprise software has matured to the point where it is no longer a guaranteed annual growth business. I've been investing in enterprise software companies for 20 years. It's what I did at Alex Brown in 1984; it's what I did consistently in my early days here at DFJ. We never saw a year in which enterprise software overall failed to grow. I can't remember a single year between 1984 and 2001 when enterprise software failed to grow as a category; but it did finally stop growing between 2001 and 2002. It's a mature industry and we have to treat it accordingly. Rather than focusing as much as 50% to 70% of our portfolio on enterprise software which is what we have done in the past, we're now being very selective and looking only at what we consider to be exceedingly novel opportunities and they're rare.

Angel Mehta: How valid is it to make decisions, about people or deals, using your gut?

John Fisher: I believe that anytime you interview somebody in the process of evaluating them and their capabilities, you are brining to bear the sum total of all that you have learned in your life. That is what happens when people say, "I evaluate based on my gut." There's a famous adage that people have used to explain this general concept and that is, "I know them when I see them." You can go through the normal checklist of experience and background, and interview them for various personality traits and examples of leaderships, and question them on management theories, philosophies and practices. You can then go ahead and do all the reference checks, and you need to do all those things. However, at the end of the day, I can't tell you how many times I've done all of that and come up with a dud. It's a very disappointing outcome and you're not going to talk to a single venture capitalist out there that has a different story to tell. So, when somebody truly stands out above the crowd you often know it by instinct, but it's very hard to articulate it or analyze it objectively.

One thing I'd like to point out is that youthful entrepreneurs many times have been responsible for the greatest companies ever created. For example, Microsoft was started by a 19-year-old dropout, Dell by a 19-year-old college student in his dorm room, Apple by two 21 to 22 year olds, Yahoo and Cisco by Stanford graduate students, Sun by four 26 year olds and Google by a couple of 26 year olds. The fact is that these are among the most dominant, greatest companies ever created and they were founded by people who most recruiters would consider to be children with no management experience whatsoever. My viewpoint is that there are no rules about this kind of thing; you know it when you see it.

Angel Mehta: What has been your experience with entrepreneurs who stay on to manage? Have you found them to be successful?

John Fisher: The truth is, entrepreneurial brilliance almost never makes for brilliant management skills, and that flies in the face of what I just said a minute ago. Those are the individuals who had it all and they are rare birds indeed. In my opinion, they would include Bill Gates, Michael Dell and Scott McNealy.

Angel Mehta: Why do you think those kinds of entrepreneurs - the ones who can manage - are the exception and not the rule?

John Fisher: They're very different kinds of animals. Entrepreneurs march to their own drums. They're mavericks in attitude and they tend to defy authority, flout conventional wisdom and those characteristics can lead to trouble when it comes to managing an enterprise. Sometimes the best managers are those who are very steady, reasoned and very rational and maybe not always the most creative but certainly those that can keep the train rolling down the tracks in the right direction for quarter after quarter after quarter. People like that know how to leverage the skills of their creative people and their maverick people and marshal those efforts, energies and resources for the overall good of the company in a way that displays fine management. This subject is one that, like so many others, is always dangerous when you're trying to make generalizations. Nevertheless, generalizations do have a place in the world and should be made from time to time. It's just always dangerous because there are always exceptions.

John Fisher is Managing Director of Draper Fisher Jurvetson. On behalf of Draper Fisher Jurvetson, John serves on the boards of CMI Marketing, Entegrity Solutions, MFORMA, Raydiance, SafeView, Selectica, and Visto. John graduated Magna Cum Laude from Harvard College, and has an MBA from Harvard Business School. For article feedback, contact John at: john@dfj.com

Angel Mehta is Managing Director at Sterling-Hoffman, a retained executive search firm focused on VP Sales, VP Marketing, and CEO searches for enterprise software companies. He can be reached for feedback at: amehta@sterlinghoffman.net