Steve Jurvetson: The constant search for disruption

Few people have played as big a role in recent tech booms and busts as Steve Jurvetson, managing director of venture capital firm Draper Fisher Jurvetson in Menlo Park, Calif.

One of the leading venture capitalists in Silicon Valley, Jurvetson is best-known for his involvement in Hotmail, Interwoven, Kana, and more recently, Skype. He spends his spare time building and firing rockets of all sizes with his young son, and recently has financed a new movie,The Singing Revolution, about his parent's tiny home country of Estonia.

CNET News.com reporters Michael Kanellos and Carl-Gustav Linden recently sat down with Jurvetson to discuss how the downturn in the broader economy will impact venture capital firms. The investor said he isn't concerned as there is no lack of new "disruptive" ideas that his firm is exploring.

The following is an edited and condensed version of the interview.

How much has the downturn changed the environment for venture capital?
People say the venture market is up, or it is down, but it doesn't change that there are tons of entrepreneurs out there and their ideas keep floating. So we shouldn't ever imagine, as a prenatal, that the entrepreneurial pool is shrinking. There is a sort of a constant, and if anything, the pace of innovation keeps accelerating and the diversity of that innovation keeps growing.

I don't really care what the venture industry thinks. We try to be a bit more maverick: We want to invest in unique ideas that can change the world. We don't even care what industry they fall into, but ideally they're driven by some major disruptive force, as a different way of looking at the economy and venture opportunities. I know that 10 years from now we will be investing in something that relates to that.

If you look five years ahead, what do you see?
Over the next five years or so, there (will be) a lot of investment going on in emerging clean tech, and a number of them, like the electronics companies, will start to bear fruit. That's a smaller niche, one of the highlights of nanotech, creating new companies you did not even think about before.

But you don't talk about nanotech as an industry?
There is no business concept of nanotech. It doesn't describe the customer, and there's no synergy at the business level. The only synergy in the concept of nanotech is on the R&D technology level--researchers all over these disparate fields: biotech or biology and genetics, all the way to software to computer design.

Nanotech didn't disappear, it just went into the fabric of other industries, where the company that has got a nanotech solar cell, and if they're shipping a product they want to talk about a solar cell--they don't want to say, "Oh yeah, it's nano inside." But over half of our investments are in consumer Internet-related products, it's still the bulkhead, the stalwart investment category, it is the most consistent place to get a return on investment, we found.

The consumer market, on the other hand, seem so unpredictable. Why, say, is YouTube winning against other video-sharing sites?
Yeah, it's a thin line between stupid and clever. It's difficult to predict winners when there are 10 or 20 that you can identify. We've already invested in a peer-to-peer sharing video system years ago, and it is one of the stories that makes sense today, but it was way too early.

The cost of investing in these companies is very low. Does that mean you can make a lot of bets?
One of the reasons I think (Internet-related companies are) such a great place to invest is that the capital required to hit the market is much lower. Energy projects are much higher, and the same of course goes for pharmaceuticals. So the cost component is one. The second is network effects possible over the Internet; you can reach global customers like never before, so Skype is now 309 million users. I mean, measure that with a cost on a global basis to any traditional based model before the Internet.

The disruption point, in the case of Skype, in the case of Hotmail--is the most interesting one. They take existing businesses and turn them on their head, in terms of a business model. Hotmail was offering their product into a market that was used to paying for clients and servers, you paid five bucks a month for service for e-mail, as a separate bill item. Hotmail as a Web-based service changed forever the notion that it's just an application that runs on a network.

Skype is doing the same for VoIP. I mean we all remember the time when we paid our phone bill, we probably still do. I'm going to remember those crazy days in the 21st century when you actually paid a separate bill for a phone service. It's just an application, right?

But there is no way to say what consumers will buy and for how long they will buy it?
If I want to make a product that is appealing to consumers, like a piece of clothing or a video game, that's fad driven. Some companies do it and I don't know how they do it, but it's generally a bad place to invest.

But 25 years ago, couldn't Apple have been seen as one of those one-hit companies?
Would we invest in a new start-up where (Apple CEO Steve) Jobs would be at the head? We have been less enamored with consumer hardware, to try to build a device, be it a new recorder or a Segway, Palm Pilots, that have been venture backed. I say give it 10 years and they're going to be gone. Apple is the one counter example of a start-up doing consumer-facing hardware that is still around 20 years later--or stays a billion dollar company for a long period of time.

What you have instead are the flash-in-the-pan phenomena where they just don't get the next product generation, they don't have enough capital or resources to be able to compete with the big guys. And it comes back to why does a start-up ever exist? If there isn't anything disruptive in the market then the big companies have huge advantages.

Apple is maybe one of those examples; they launched during a disruptive foundation of the PC industry. That's classic for a start-up, But why are they still able to introduce new products that are innovative and world-beating in all these markets? That's very unusual. (Hewlett-Packard) was celebrated for a while when they were doing the printer business as one of their core businesses, and they were looked at as a exception from the general rule of no innovation from big companies. Now Apple is looked to as the hero for all big companies everywhere to say, "Wow , we can be like Apple, right?"

But HP is doing well.
HP is doing well, but I wouldn't say they're innovative; they just do what big companies do well. I would say that HP today is doing well in the same sense (as) most other big companies, same strategies: dominate the market, use supply power on sourcing of component costs, and be in really big markets and be No. 1 in those markets.

You have taken some nice rocket photos (which can be viewed here). When are you going to go commercial on rockets?
We have heard pitches from maybe three rocketry companies. My partners have encouraged me to look a little bit more into them. There is definitely some innovation going on in motors and in composite materials. And there is one really cool one, I can't speak so much about it, out there that I really like. They've figured out a way to electrically control solid fuel repellent, and that's been one of the biggest nemesis of solids. I mean solid boosters are great but once you light them you can't turn them off, you can't throttle them like a liquid fuel. But I think a rocket investment would have to have some non-rocketry application to really get big enough.

But isn't it more interesting now when NASA wants to establish a base on the moon?
...And there's the Google prize (a $30 million competition for the first privately funded team to send a robot to the moon) and all. Oh yeah, but we don't like regulatory environment, we don't like highly capital intensive businesses. If you hold it up against a Skype or a Hotmail then, gosh, I can put $2 million in here or $200 million there, which one should I rather do? I could make 100 $2 million bets."