In 1959 a 31-year-old steel executive quit a job that was going well. William H. Draper III left Inland Steel, packed up his wife and three kids and headed for the fruit orchards south of San Francisco. He had a hunch that steel was peaking. He'd heard Stanford was full of electronics talent. The business he wanted to try barely had a name. In his early meetings he had to explain what venture capital was.
Draper died Sept. 8 at 98, and James R. Hagerty's obituary in the Weekend Journal tells the whole arc. The family had reason to fear risky bets. In 1929, just before the crash, his father lost most of the family's savings on a German maker of automated coffee machines. The son went anyway. Yale, nine months as an Army patrol leader in Korea, a Harvard M.B.A. in 1954, and a rejection letter from General Electric. Then Inland Steel, in a house where coke dust blew in from the mill.
His father was starting Draper, Gaither & Anderson in Palo Alto, partly with Rockefeller money, and pulled him west. Three years later Draper and a friend, Pitch Johnson, set up on their own. They leased Pontiacs and drove the orchards. Any building with a techy name got a visit. They'd park in the unpaved lot, walk in and ask the receptionist for the president. He told that story in his 2011 memoir, The Startup Game. A few years later the firm merged with another to form Sutter Hill Ventures. One attraction, he admitted, was that the other firm had a receptionist and a Xerox machine.
The misses are the point
He backed LSI Logic, Activision and Quantum, a disk-drive pioneer. He also backed a dental-flossing gadget that went nowhere and a heart defibrillator that worked. He passed on an early chance at Apple (AAPL). He missed most of the 1980s running the Export-Import Bank and then the U.N. Development Program. In 12 years at the two posts, he visited more than 100 countries. He got in early on Skype. He sold Zappos too soon and missed the payoff when Amazon (AMZN) bought it in 2009. And an early stake in Hybritech, which invented the PSA test for prostate cancer, paid him twice. "That test saved my life," he said. He credited people over products. "I have always been good at selecting people."
Our read
This is Investments and Risk, IN04, with a Behavioral chaser. Look at the ledger. One of the best investors of his era passed on Apple, sold a winner early and funded a flossing gadget. He still did well, and his son and four grandchildren went into the same trade. He made scores of bets and let the winners pay for the duds. He didn't need to be right about any single company. He needed to be in enough of them. That's diversification, told as a life. Apple is held at weight in 24 of our books, Amazon in 19 and Tesla (TSLA), where his son Tim invested early, in 13. Nothing added.
Draper's lesson lands on the one stock you love. It might be the company you work for, the winner you've held for years, or a fund that's really one bet. Pull up your brokerage or 401(k) app this week and find the biggest single position. Then ask the Draper question. If this one goes the way of the coffee machines, does the rest of the plan still work? If the answer makes you wince, that's the conversation to have. You find the umbrella while the sky is still blue, and you spread the bets before you need them to pay.