(This is a relatively long read, but definitely worth it)

As Co-Organizer of Venture Hacked, I am lucky enough to have the opportunity to pick the brains of some of the smartest and most talented VCs in Silicon Valley. Most recently, I had a chance to speak with Joel Yarmon, a successful Venture Capitalist at Draper Associates, one of the most prestigious venture firms in the country.

Prior to joining Draper, Joel served as the Technology Director for the United States Senate and also co-founded an IT startup called Iceware Technologies. I had the pleasure of chatting with him and hearing a lot of insights into how he invests in startups, where his best deals come from, and what he looks for in an entrepreneur (hint: your idea doesn’t matter, YOU do).

Can you describe Draper Associates’ fund and how you invest in startups?

Draper Associates is an enterprise and consumer venture fund. I joined Tim Draper, my partner, 8 years ago to be his partner managing the fund, running it from a day-to-day basis, managing existing investments, and funding new investments. In the time that I’ve been here, we’ve deployed tens of millions of dollars to startups all across the country, and even across the world, in markets generally in the tens of billions of dollars, preferably, hundreds of billions of dollars in market size.

Every company I invest in, I believe can get to 15–20 million dollars a year in recurring revenue and sell for hundreds of millions, or eventually go public. While we focus on big markets, we’ve also invested in everything from Bitcoin startups, to drones, to fashion, to 3D printing, and everything in between. Our checks range from 250k to 500–600k, first money in, and always in syndicate with other sophisticated investors, where the startup is generally raising 750k to a $1.5 million.

I’m a big believer in making it a fair deal for entrepreneur and the venture capitalist — I have to own enough to want work hard for you as the entrepreneur, and you as the entrepreneur need to own enough so that when you do get that 20–30 million dollar acqui-hire offer, you decline and keep going. The VC’s shouldn’t own enough that you would want to sell because you’ll make more now versus raising another round, diluting even more, and then having to sell for an even higher price later to make the exact same amount of money if you were to sell earlier on.

I’ve been doing this 8 years with Tim and I continue to manage Draper Associates’ existing portfolio and in the process of raising our next fund, called Pipeline Capital Partners, which in addition to my capital, and Tim’s capital, will have capital from outside investors; it’s the exact same thing as what I’ve built and developed at Draper Associates, but has the ability to take outside LP money and move faster and continue to do deals.

What do you look for in seed-stage startups?

It’s very broad in the consumer and enterprise spectrum. I’ve developed this framework that I invest out of, and for me, it is the following:

1. Has to play in a TAM of tens, or preferably hundreds, of billions in market size, or if less than 10, it is growing 50% YoY: drones, digital currencies, 3D printing.
2. Has to work from “Nerds to Normals,” meaning that the business has to work everywhere, it can’t just be a business that works in places where people are well-off like San Francisco, it has to work just as well in Seattle, Salt Lake City or San Antonio.
3. Has what Peter Thiel would call a “beyond the event horizon” type business. I played competitive hockey and was a ski racer, the hockey term would be “skate to where the puck is going to be.”
4. It doesn’t have be a high science business, I’ve invested in companies that are in the parking space even the divorce business; it just can’t be a “me too,” fast-follower type of business.
5. Has to have a relatively simple business model with margins that work.

So what are we interested in? It’s very broad, but once it fits this framework, I invest from my gut; and specifically, at the seed stage, it’s my job to invest in people and their dreams.

How do you communicate feedback with startups that aren’t a fit?

The job of a VC is to provide quick and direct feedback, and the next best thing to a “Yes” is a fast “No” and feedback on why. It’s not my job to be an entrepreneur’s best friend, but rather to provide direct advice, to ask the hard questions, the dumb questions, and the smart questions to let them really benefit from the 8 years, 21 board seats, and 160+ deals of experience that I have had. A lot of companies just aren’t a fit for various reasons, but sometimes what I’ll give to the entrepreneur is my personal response and then with their permission, I may forward their deck over to a peer at another firm if there’s a fit.

Ultimately, at the end of the day, the entrepreneurs are risking their lives doing their startup. As a VC, the very least that I can do is provide as much guidance as I can to send them in the right direction.

Where are deals sourced from, can you describe that process?

The best deals for me come from my network. I’m also a big fan of incubators, like Tech Stars, Angel Pad, or Founders’ Co-Op up in Seattle. These help to have a good first filter. I’m a mentor to Tech Stars and a big believer in what they do, so I get to chat with companies before demo day, and if I see something I like, I can make them an offer before a bunch of other investors see them, which is kind of nice. But for me, the most important deal flow is from past and present CEOs, people I’ve met at conferences, and even people whose businesses I’ve met and declined. When one of my CEOs or past CEOs has a friend looking to fundraise and they send their friend my way, it says that my work product is effective and that I’m doing something right. So referrals from people I’ve invested in or invested with I treat like gold.

With AngelList and the SEC rulings, does it make it easier to fund startups?

I’m a big fan of AngelList, we’re investors, I like the guys, and I want do more deals on the platform, but I don’t use it as a method for primary sourcing just because I have a ton of deal flow elsewhere, it is a great place to go to find deals, however. With he JOBS Act and equity crowdfunding, it can become a tough game. To be a good seed investor, you have to know a lot about a little and a little about a lot. The startups aren’t publishing as much information and not all the same information that’s required by companies that are publicly traded. All investors need to use a great abundance of caution when they’re writing checks out of their personal balance sheet to invest in companies, it’s a risky business. Venture Capital returns from the year 2000, to 2010 were negative. You would have done better burning half your money and taking the other half and putting it in your mattress. After doing this for 8 years, I know how difficult it can be, and just because there’s lots of money, and Silicon Valley seems to be the center of the nation in many respects, doesn’t mean you can just throw a dart at a wall and make money.

Some say deal origination is a frustrating process, how many startups do you have to review before you say yet to just 1?

I would disagree that it’s a frustrating process. I love my job. I don’t look at myself as a money manager, I look at myself as a geek first, who happens to add a little bit of value through dollars, and hopefully, a lot more value through my experience, my relationships, and the other intangibles that I can bring to the table. Venture Capital is very unstructured, I don’t spend very much time in an office; I spend a lot of my time meeting with people, doing calls like this, and traveling — I am the Silicon Valley VC willing to go further than one Tesla charge to do a deal.

Generally, the framework is:

Look at 25–30 companies to do 5–15 calls to do 5–10 first or second meetings to do 1–4 final meetings to make 1–2 offers. Then maybe 1–1.5 will decide to work with me.

That funnel is constantly moving, as there are better and worse times to raise money as a startup. There are certainly fundraising cycles in the Valley. If you’re a seed stage company, you can raise pretty much at any time, but the larger amounts of capital that you need to raise comes from partnerships. Typically, the partners of these funds have families, they go on vacation, they probably have kids, and so the first VC fundraising cycle is generally January 15, after the Consumer Electronics Show, to the middle of May. Then a lot of VCs go on vacation, at which point, it’s difficult to raise series A and later rounds during the summer. The fall fundraising season is the last week of August to Thanksgiving. Inside of that window, any number of things can happen, Venture Capital is not formulaic, it’s a business of learning by doing, and there is no one recipe to funding a company. AngelList is systematizing some of it, but by and large, most of the capital that’s deployed is still deployed the way that it was 10 years ago, very much a face-to-face process and finding the right people. The idea always changes, but you hope that the people don’t.

What advice would you give to founders looking to set themselves apart from others?

I wrote a blog post about this on Amazon Startup Blog; generally, you should know your VC, do your diligence on them, make sure they haven’t invested in something directly competitive, that their prior investments are complementary, and you’ve done some research to know who the best partner is to pitch to. Come up with a realistic plan for how much capital you need, enough capital to get you 12, preferably 16 months down the line, and don’t base financial plans on your best case scenario, even your middle case scenario — plan it for the worse. Too many companies and a lot of VCs spend money like it’s going out of style. Plan for the worse. If you’re wrong, so much the better, everything worked and you’re off to the races. Usually, I’m not wrong, usually it takes more capital and more time to get to wherever your plan calls for because this is a startup and it’s tough.

Expect that it will take 3–4 months to fundraise and that, especially in San Francisco, it’s going to cost you more to do everything: to hire people, to get office space, to travel around the city because it’s so clogged. You also don’t want to hire or expand too quickly or increase your burn in anticipation of having customers; it’s important to do a lot of experiments, a lot of customer acquisition funnels, a lot of meetings with different VCs, and different advisors, don’t just try to raise from 5 or 10 of the top groups on Sand Hill and when none of them fund you, you call it quits.

You have to kiss a lot of frogs and have to kick a lot of tires before finding partners that are right for you. I think these really help to prove the entrepreneur, and at the end of the day, signing a deal with a Venture Capitalist is the next closest thing to a marriage, so you really need to do your homework, invest in the relationship, understand the value that Venture Capitalist will provide to you, and make sure that you’re optimizing not just for dollars but the overall value that that individual VC can provide to you, and then architect your investor syndicate such that, collectively, they can provide enough value to get you and your startup to the next stage. That’s the group you want to work with.

How has your diverse background helped you be successful working with entrepreneurs?

As I mentioned, to be a good seed stage investor, you have to know a lot about a little and a little about a lot. I don’t think it helps as much when you come from Wall Street and do seed stage, because your understanding of the application of technology isn’t necessarily there. I built my first computer when I was 9 and I built my last computer in November, it’s sitting under my desk right now. I’ve always been a big geek, jail breaking iPhones and what not, and I’ve got probably 30 or 40 IP addresses on my home network, which is run with enterprise gear. When you have a real love for technology and you grasp that, that helps you break down some barriers with the entrepreneurs when they sit down and they think of you, the VC, as just a money guy that they have to walk their idea through. Once they realize that I get the tech and understand it, a lot of the pretense is dropped and I can dig in, not only into the business but also into the entrepreneur themselves as a person and vice versa.

I came into venture through a very circuitous route; I think that really has given me a great advantage when it comes to chatting with entrepreneurs, who may similarly have a very diverse background. I don’t think there is a right way or wrong way to get into venture. Certainly, there are more people who came from Ivy League schools and worked at banks and are now in Venture Capital. Are those people valuable? Yes. Does the press, and even Venture Capital, often lament the lack of diversity? Yes. And so we could probably benefit from having more VCs from different walks of life. I think that my background and the successes that I have been fortunate enough to have, have certainly convinced me that, as I start my own firm and look to bring partners and employees, I shouldn’t be looking to buy what everybody else is buying.

What resonates most when a founder is pitching you?

I always invest in people first. I meet people all the time who are the most passionate, most driven and most excited about what it is that they do, and why they want to do it. Their passion and energy is more infectious than any idea being pitched.

Once I qualify the market size, the “Nerds to Normals,” the simple revenue model, the margins work, and it fits into the consumer and enterprise tech space, I toss the idea out into the open. So much of what I do comes from not just my brain, but from my gut. It is something that is uniquely intangible, and it’s one of those things where you know it when you really feel it.

It is very rare that you will hear a truly unique idea. Most ideas are not completely new. They’re building upon something else, or taking advantage of an existing market, or they are aggregating something which is very long tail. Look at some of the greatest businesses today: Before Uber, there were taxis. Before Pinterest, there was Facebook and Twitter. Before Hotmail and Gmail, there was the USPS and the fax. Yet these are some of the greatest businesses which have literally changed the face of the planet, but it’s not really the idea, it’s the people behind the idea, who act as catalysts, who execute on an opportunity to drive real change and create real value for people everywhere.

Is there anything we have not covered that you’d like to share with first-time entrepreneurs?

The reason that I do what I do is because I believe strongly in this country. America from the beginning of time, through today, with our LLC laws, corporate laws and corporate protections, and even the way the tax break works in some states, promotes and allows people to take risks. And when you take a risk, you often end up with some of the greatest companies the world has ever seen. I mentioned a bunch of them, and those companies were all created here and it is our responsibility as people in and around the startup scene, whether you are on the financing side or the startup side, to continue to embrace those protections and to start your company here, and to have a mindset that this is far and away the greatest place on earth to have a company, to run a company, to hire people, and to live. It’s not just in California, it’s in Washington, Texas and Nevada; Oregon, Utah and Illinois and maybe even Anchorage, Alaska.

When you think about what it is you want to do with your life and when you think about the risks that you want to take, and when you look back on everything the world has had and the world has seen, I hope that for a greater and greater portion of people out there, that means not only coming here to get a great education, but wanting to stay here, and not wanting to go work for some big slow moving, stodgy company, but wanting to take a risk at literally changing the world. Regardless of whether or not the economy is good or bad, it’s never been a better time to start a company than right now, and I encourage everybody who is thinking about it to take the plunge, because you don’t have that much to lose and you have everything to gain; and when you turn around in 5, 10, 15, 50 years, there were never be that “What if?” question. You can work the rest of your life at public company XYZ, but now is the time to take a risk to join something or to start something, and I’ve been privileged enough to work with some people that literally have or are in the process of changing the world, and I couldn’t be more excited to continue to do that going forward.

Thank you, Joel.

Be sure to follow Joel on Twitter twitter.com/joelyarmon and stay tuned for more success to come he gears up to do big things with Pipeline Capital Partners.

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