Venture capitalist Tim Draper is known for the success of many of his investments. In fact, his visionary spirit has led him to invest in some of the projects that have led to the most innovative breakthroughs of our time: Hotmail, Bitcoin, Tesla, Twitter and Coinbase are just a few examples.
The renowned Silicon Valley entrepreneur has a portfolio consisting of several dozen unicorns, as well as a handful of various digital currencies. Among the famous startups in which he has invested his capital are Baidu, Skype, SpaceX, as well as some crypto-currency companies such as Ledger and Robinhood.
But he wasn’t always successful. Draper was also one of the first investors in Theranos, a blood analysis company that raised a lot of expectations in the sector, but ultimately ended in abject failure; even then, it’s true that the venture capitalist always leaned towards the flashiest projects.
A long-time advocate of bitcoin, Draper is also known in the digital currency community for his wealth of crypto-currencies. In 2014, he acquired a total of 30,000 bitcoins that were part of the funds seized after the closure of the illicit Silk Road exchange; a fortune he still holds and which is currently valued at around US$1.7 billion.
Draper’s 5 investment rules
There’s no doubt that the billionaire knows a thing or two about investing and, in general, Draper hasn’t been shy about sharing the lessons his vast investment experience has taught him. In a recent interview for Cointelegraph magazine, he outlined some of the rules he considers when investing. Also last year, the entrepreneur shared some of these tips with Zain Jaffer in an interview for his YouTube channel.
Below, DiarioBitcoin compiles some of the key tips Draper gave in both interviews. It’s worth noting that, in general, the venture capitalist mostly referred to investing in startups -especially for the 2020 interview-; however, we think these lessons can be taken into account when investing in any project, including crypto.
Know the company or project
One of Draper’s main rules for investing in a project or startup may seem obvious, but sometimes goes unnoticed: it’s important to do your due diligence by studying a project in depth before investing money in it. What’s more, during this period of analysis, it’s important to check that the project meets certain standards.
During his recent meeting with the magazine, the billionaire mentioned a few characteristics he likes to keep in mind when evaluating. Firstly, he said that trust is the key to a company’s success, not only that it gives its users confidence, but also that its managers trust it.
In the same vein, he said that part of knowing a project is also knowing who’s behind it. He stressed that it’s crucial for members to have good relationships with each other. According to Draper, only one person should be responsible for making important decisions, and there should be no rivalry between co-founders, as this can be a crucial risk factor for a company.
He also drew attention to the regulatory scenario or policies governing the market for projects or startups. He stressed that success depends to a large extent on the ability of companies to operate freely, without excessive restrictions or regulations.
Don’t invest too much money too quickly
When it comes to investing in a start-up, Draper admitted to Jaffer that one of the most common mistakes he’s seen is for investors to invest too much capital too soon. In this regard, he said it’s best to go slowly, as a new project is likely to require several injections of additional capital, especially if it’s destined to be successful.
“It’s better to build a long runway when it comes to seeking funding, rather than exhausting half of it,” he told Magazine. The venture capitalist acknowledged that by the time an entrepreneur gets to presentation number 25, he already has a clear idea of his business, the competition and the market. Ultimately, he says he’d rather see this 25th launch than the first.
On the other hand, he reiterated one of the main rules of investing: don’t put all your eggs in one basket. In other words: diversify. He told Jaffer that the question of how much to invest in each project depends on the investment strategy being pursued, but that ultimately, he always prefers to have a versatile and varied portfolio. This, he says, is the “discipline” of the good investor.
Think long-term, with a 5-10 year horizon
Immersed in a fast-paced, ever-more technologically advanced world, many less experienced investors can lose sight of the long-term game. This situation is common in the digital currency market, where many traders bet on the sometimes wildest projects in the hope of making a quick profit. However, the opposite side of the coin can also be unprofitable, as you risk losing sight of the concrete outcome.
Asked by Jaffer about the time horizon an investor should take into account, Draper told the story of an investment that would take at least 15 years before leading to anything tangible, and warned against it. “What I wouldn’t do is overthink it…. I think you should start thinking in 5- to 10-year increments.”
To keep a cool head and focus on the game during this period, the entrepreneur also advised investors to concentrate on a mission, not money. Draper believes investors should avoid focusing on how much profit they think they’ll make, especially if they’re investing in an early-stage project.
He says he prefers to think about how the company he’s investing in can change the world. “I like the world as it will be thanks to this mission,” he said by way of example. It’s certainly a rule he’s been able to live by himself (just look at his bitcoins).
Rarity is a good indicator, but beware!
Draper told the Magazine that eccentricity is good for business and gave examples of “off-the-beaten-path” start-ups he’s invested in, such as Hotmail and Tesla. The argument behind this rule is that successful projects are often those that dare to innovate, which can sometimes make them seem strange, at least at first.
The winners are often a little strange. Their ideas are sometimes left in the middle, and I often say to them: what are you doing?
But such investment advice also needs to be taken with caution, always with a commercial eye. Last year, Draper told Jaffer that successful investing sometimes means ignoring the natural entrepreneurial bias, especially if you’ve made successful investments before. Just because some entrepreneurs have innovative, visionary or even eccentric ideas, as we do, doesn’t mean they have the business or even sufficient attitudes to run a great project.
“You think that everyone is like you and that everyone can do exactly what you’ve done. But that’s not really true. You have to sit down and ask yourself if you think this person is really capable of making all the sacrifices you’ve made to get where you are, to achieve the success you’ve achieved,” he commented.
Using fear as an incentive
On various occasions, Draper has emphasized the place that emotions can have in investing, and one he considers invaluable is fear. After years of experience, the entrepreneur has found that fear can be a crucial driver of innovation. In an interview with Jaffer, he gave an example of how fear in the face of a scenario can lead to innovative solutions.
I look at it and say, “Climate change? That’s great. Let’s see if we can get an entrepreneur to discover a business model that can help us solve the climate change problem.”
“Another difference is my perspective. Other investors ask what can go wrong. I ask: what if it works, what if it works and something really extraordinary happens to humanity and society? Then it would be worth a try,” he told Magazine, adding that emotions such as passion are also important to him when evaluating a project.
However, he doesn’t lose sight of the fact that to become a successful venture capitalist, he has also learned to deal with other types of fear, for example: the fear that can be aroused by ranting about whether to pull out of a project when it doesn’t work. In his view, a good investor must be prepared to pull out, as well as admit defeat when things don’t work out, even if this may arouse fears and even dampen ardor. This lesson is part of a larger one: embracing change.
A visionary bitcoin advocate
In his recent meeting with Magazine, Draper reiterated his belief in bitcoin. “I’ve always been optimistic about bitcoin, to me it represents freedom, cross-border freedom. I also like the element of trust – freedom and trust are a great combination,” he told the portal.
He also applauded El Salvador’s decision to adopt the flagship crypto-currency as legal tender, something he had predicted in the past. In 2020, he said he would do the same if he were President of the United States for at least a day. He had also challenged Argentina’s former president, Mauricio Macri (while still in office), to decree bitcoin as legal tender in that country. This time, Draper admitted that news of bitcoin’s adoption around the world had encouraged him.
In general, he was enthusiastic about all the developments triggered by the emergence of bitcoin and its underlying technology. He mentioned that blockchain, smart contracts, second-layer solutions and non-fungible tokens (NFT), among others, are all “great innovations”. He admitted, however, that his great passion is and always will be bitcoin, “because it’s totally decentralized”.
The visionary, who has already predicted that the largest digital asset could reach a price of 250,000 USD by 2022, shared his vision of a world without borders. He told Magazine that he believes nationalism and borders will be a thing of the past in around five years’ time, in a world where everyone will be able to choose which government they want to belong to. Given this scenario, he predicts that bitcoin will be the currency of the new decentralized world, and he has no intention of exchanging his bitcoins for fiat cash.
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