Before we discuss the unchanging truths of venture capital over pancakes, let’s see what HAS changed.

Today, investors can shop around for entre- preneurs online and vice versa. But from the 1950s through the early 2000s, VC was a game of access. There were a small number of venture capitalists who’d share whatever deals they managed to find.

Pops tells stories of driving up and down “the orchards” of Silicon Valley in the 1960s, trying to find any office that had a sign that said TECHNOLOGY on the front.

He’d knock on the door and say, “I’m a ven- ture capitalist. Can I speak with the president of this company?”

They’d push back and ask, “What’s an adventure capitalist?”

But once they understood that he had money and wanted to invest in their business, they’d usher him into a meeting with their president.

Early Prototypes of VC

The spirit of early-stage venture capital is centuries old. But initially, governments had a monopoly on funding new breakthrough technologies and discoveries: think of Queen Isabella funding Christopher Columbus’ quest for a new passage to India, or Genghis Khan funding the production of better military gear.

Things started changing around 1900. When Pops talks about the “ancient history” of venture, he goes back to the 1930s. At that time, a few companies started doing something that looked like modern venture capital, without using that phrase. These were family offices belonging to wealthy East Coasters, including the Whitneys and Rockefellers. These families had started to throw their weight behind potentially high-reward investments that banks and governments wouldn’t touch. They figured out that the biggest gains came from supporting early-stage investments in companies that hadn’t gone public yet, like Minute Maid and Eastern Air Lines.

This was the breakthrough innovation of venture capital: backing scalable businesses as a small, independent group. Venture capital is a way to fund innovation outside of the incentive structure of governments and corporations. Now, smaller businesses had capital to pursue incredible breakthroughs.

LP + GP Structure

In 1959, my great-grandfather, William Henry Draper Jr., started Draper, Gaither & Anderson (DGA) after a decorated military career. He ended up in California without much money—he certainly didn’t have enough to start a family office like the Rockefellers’. But he was into the idea of venture capital. Being near Stanford, with all those young people full of energy, inspired him to invest in their ideas.

DGA was the first venture capital company in the world that was founded with the model which is standard today: a partnership with Limited Partners (LPs) and General Partners (GPs).

The model is super simple: the General Partners manage the Limited Partners’ money. The GPs steward the capital day to day. They have an incentive to make it grow: they get paid some money annually based on the money committed by LPs, and then get paid a larger percentage if they return all the capital and more!

My great-grandfather and the other general partners at DGA raised $6 million from a handful of LPs who had money (including, weirdly enough, the Rockefellers). They reserved a 2.5% management fee ($150,000) to pay their overhead and promised 60% of any profits to their LPs. The other 40% of profits was called the “carry,” which the general partners would split among themselves.

Thousands of VC firms around the world now use this structure, with varying percentages for the management fee and the carry. (Now the carry is more often 20%, and the management fee is 2%).

Sutter Hill Ventures

In 1964, Pops took the VC torch from my great-grandfather by starting Sutter Hill Ventures. The business of venture was still small in the eyes of the money management industry as a whole, but the investments performed well.

Pops talks about deals in those days as if they were all handshakes. “Today, it’s completely different,” he says. “Back then, we’d say ‘You’re putting in the blood, sweat and hard work, and we’re putting up the capital, so how about we partner 50/50?’”

Through Sutter Hill Ventures, Pops became an investor in early copy machines, the first defibrillator, and early computer companies. These breakthroughs changed the world.

Attention From Wall Street in the 1970s

In the 1960s, a lot of term sheets (non- binding agreements showing the basic terms and conditions of an investment) were still drafted on napkins. Now we have 3x preferences, pro rata, and board seats.

If you ask Pops about these changes, he’ll say, “I knew that the industry was going to change when the Goldman Sachs CEO was in my office.”

Pops is saying that in the beginning, Wall Street investors ignored him and his friends. But then the East Coast financiers caught wind of the ~40% returns these West Coasters were earning. Wall Street was still chasing single digits.

After sniffing around Pops’ office, they unloaded as much of their capital as they could into startups, chasing those massive returns. In doing that, they bent financial history towards innovation and Silicon Valley.

Pops says, “After our meeting, the Goldman Sachs CEO went back to New York, filled a truck with cash, drove it to Silicon Valley, and dumped it.”

Because of this, and subsequent legal changes to allow pension funds to invest in venture capital, the scale of the money in VC had changed. This led to a more competitive industry.

Going Global in the ‘90s and 2000s

In the early 1990s, venture capital had
been focused on the United States. But the enormous growth of this new “Internet” technology started to attract builders from all over the world. My Dad was well positioned for this, as he’d started his own VC firm— Draper Fisher Jurvetson (DFJ)—in 1985.

DFJ was the first fund to raise an “Internet investment” fund, which attracted some bold, forward-thinking LPs with the foresight to invest specifically in Internet-related opportunities.

VC was on the cusp of going global. Through 1999, off of the success of companies like Hotmail (Sold to Microsoft), and 411.com (Sold to Yahoo), my Dad recognized that entrepreneurs were everywhere. At that point, DFJ was able to raise a global invest- ment fund, the first of its kind, called DFJ ePlanet.

Soon VC opened up beyond the West Coast and the US, to the whole world. After all, great technology was being built all over the world, and investors everywhere wanted the economic upside. My Dad launched the global DFJ Network as a franchise play on VC, becoming the first venture fund in more than 27 countries. This network invested in many international ventures, including Skype and Baidu. In parallel, my grandfather founded the first venture fund in India and returned 16x with his partner Robin Richards.

It’s a sharp contrast to the hyper-local beginnings of the business, when it took years for Wall Street to even notice what venture capitalists were doing. This explosive growth around the turn of the Millennium caused even more capital to pour into the venture industry, not only from Wall Street but from everywhere in the world.

Y Combinator (2005)

~50 years in, Silicon Valley was a powerhouse driven in large part by the network of students at Stanford, Hewlett Packard, Silicon Graphics, and Intel. For decades, every startup was rooted in the Stanford network. But a change started to brew in the mid-2000s.

The typical venture deal in 2005 looked radically different from the model Pops had used in the ‘60s. Competition and the scale of the dollars in venture capital had changed the stakes and the game. Deals were more standardized. Many clauses of these new contracts were about protecting people from downside, not just sharing upside.

Starting a technology startup had also gotten much cheaper. No one needed servers anymore; any 16-year-old with a laptop could start the next billion-dollar business over the Internet... with as little as $15k.

Paul Graham, Jessica Livingston, Trevor Blackwell and Robert Morris saw this coming and started Y Combinator. They rejected the standardized “best practices” that had started to weigh down the venture model.

Before Y Combinator, you couldn’t invest in more than 20 companies per fund, and a $15,000 investment was too small to be worthwhile. But Y Combinator wrote checks in unexpected amounts, including $15,000, because there were people (college students) who were ready and able to build from there.

Y Combinator reduced the cost of starting a company by flipping the model: they took equity for a small investment, and gave startups the resources and focus to pitch more investors at the end of their 3-month program. Y Combinator timed this movement perfectly with how cheap it had become to build for the Internet. Y Combinator describes companies like AirBnB, Stripe, DropBox, Coinbase and Benchling as “alumni.”

Today, Y Combinator invests in more companies every year than most funds have ever backed. The most recent batch had 250+ startups, and they do that twice a year. They have become the most powerful network in startup history in 15 years. Their innovations inspired me to start Boost VC with a similar model.

Y Combinator created new deal standards that shifted the balance of power in the direction of the founder. One of their most underestimated creations is the SAFE investment standard (Simple Agreement for Future Equity). SAFE allows startups to receive funding before the shares are valued formally.

Post Financial Crisis (2009 and Beyond)

In the most recent decade, venture capital has become a household name. Very few companies have reached a billion-dollar valuation without VC funding. We’ve seen new changes and innovations:

• Y Combinator began to flourish and grow from 10 deals in their first batch to 250+ in their 2022 group.

• AngelList, founded by Naval Ravikant and Babak Nivi, created a network where you can browse startups that are fundraising online.

• Carta aggregated everyone’s capitalization tables, and now has the best data set on venture capital investors in the world.

• A16Z scaled their fund size to tens of billions of dollars and paved the way for more MEGA funds.

• From Bitcoin to DAOs, we continue to experiment with new ways to fund breakthroughs globally.

You can fund and run a company in ways Pops could never have imagined when he started in this business.

In the future, I think VC will continue to expand, playing out on a bigger field with many more players. Future VC might look different, just as today’s VC looks different from those early family offices. But there are 5 elemental concepts which I’m convinced aren’t going to change. That’s what we’ll talk about from here on.