The “D” in pioneer VC firm DFJ, Tim Draper attracted controversy when he claimed to be the inspiration behind Hotmail’s viral marketing strategy—a case study every respectable growth hacker knows about. Why did Hotmail grow so fast, and do VCs such as Draper add value to the startups they invest in?
In this post, I also address the pros and cons of Draper’s “promotion-focused” attitude: encouraging Founders to go test things, but also a tendency for delusion.
Why Is Tim Draper So Successful?
Tim Draper is an extraordinary character by any measure. Recent photos are almost sure to show him harboring his bright yellow Bitcoin tie. Another famous cliché is a drenched Draper high-fiving students of the eponymous Draper University in a swimming pool.
In tech conferences, where I’ve often seen him speak, he’s bound to swashbuckling his way through any debate, flamboyantly defending decentralized finance or enthusiastically taking a non-conformist stance.
His bravado approach to life is perhaps why Draper made the early bets that made his reputation as a shrewd Venture Capitalist with an eye for disruptive ideas. According to Crunchbase, Draper is credited with successful investments in Hotmail, Baidu, Skype, Tesla, Bitcoin, and Twitch. All these companies defied the odds to change an industry or create a new one.
Tim Draper is a typical promotion-focused Venture Capitalist
I believe that Tim Draper is a typical promotion-focused VC. He’s trying to win, is not afraid of taking contrarian positions, and pushes the envelope sometimes into delusional territory.
I explained in the article referenced below how a theory championed by E. Tory Higgins, a renowned psychologist and professor at Columbia University, can be applied to explain how a handful of VCs win persistently—while others fail to do their jobs properly.
Learn More: Why Venture Capital Due Diligence Fails
Draper relates in a podcast episode recorded a few years ago that when the Skype Founders told him they would go after the telcos, and cautiously enquired whether he was on board, he told them that it was an even better business proposition. It shows his focus on the “What can go right?” side of the venture equation.
When Skype’s Founder Niklas Zennström told me that he was pivoting to go after the phone companies, I said “Even better”!
Tim Draper (Source: 20VC)
On the not-so-shiny side, this character trait also led Draper to keep defending Theranos’s Elizabeth Holmes even after her wrongdoing became clear.
Hotmail: The Textbook Case for Viral Marketing
The Hotmail case study is probably the most studied example of a successful viral marketing campaign. Therefore, it’s only fitting that there should be some contention about who came up with it.
Hotmail’s viral move—adding a line at the end of every message touting the email service’s free nature—undeniably contributed to its success and Microsoft’s acquisition for $500 million in 1997. Tim Draper has often said that he came up with the idea, even having to “pound the table to get [the Founders] to do it”.
I detailed Hotmail’s case study in the article referenced below, showing how virality and network effects are close but different concepts.
As a result of the Hotmail experience, Draper’s VC firm DFJ is now widely credited as the earliest promoter of “viral marketing”, a Holy Graal most startups are trying to find to reach product-market fit.
Do VCs add value to the startups they invest in?
The jury is out on this hotly debated topic, and everyone seems to have a different opinion. Studies that looked into the issue are decades old or treat the issue from only one point of view.
I’ve provided anecdotal data to counter-argue Vinod Khosla’s provocating claim that VCs add negative value. As the Hotmail case study shows, Venture Capitalists can be instrumental in pushing or backing Founders to launch potentially contested features.
In her book, Y Combinator’s Jessica Livingston asked Sabeer Bhatia where Hotmail’s viral marketing idea came from. Bhatia confirmed Draper was supportive of the idea, but that it originated with Bhatia’s co-Founder Jack Smith.
And the next thing we know, [Tim] claims that this idea was his. He’s given a number of interviews literally claiming that he was the father of web-based email—without him it would not have happened. I can’t believe he’s just taken credit for everything. […] He blatantly claims this at conferences, which I don’t think is right.
Sabeer bathia – hotmail (Source: Founders at work)
Who’s to credit, then? The truth probably lies in the middle: an association of disruptive characters who jointly develop an idea that has huge consequences for their businesses and beyond.
