Steve Jurvetson: Only investing in the unknown

Since I started covering start-ups for Red Herring back in 1998, no venture capitalist has entertained me as much, or made me as envious, as Steve Jurvetson of Draper Fisher Jurvetson. He's of the few real dilettantes in the field, and he actually makes money from a studied lack of focus.

In comparison, most tech VCs, including titans like Vinod Khosla (at Kleiner Perkins) and Marc Andreessen, who just launched a new fund, focus on industry segments or coherent visions for certain markets. Khosla, for example, is a modern industrialist currently investing in companies attached to renewable energy or green products. Andreessen is all about Web start-ups.

Jurvetson? If other people are investing in it, he thinks it's passe.

Recently, I talked with Jurvetson about his funding philosophy in general and some of his investments particular.

Fringe science

Jurvetson's self-appointed brief is to "invest in unique ideas that can change the world." He wants to invest in "the next waves before they happen," and that means that he is constantly working outside of his comfort zone, at least when it comes to technical knowledge. And as he says, "Firms that claim domain focus are late movers." You can't find the next big thing by mapping it to what you know.

Jurvetson believes that real breakthroughs come "at the intersections between the sciences." In other words, "a chemist working on a chemistry problems is less likely to change the world. The real insights from outside, from the edge."

For example, Jurvetson points to how ideas from life sciences have cross-polinated into to create new engineering concepts (for example, winglets on airplanes). Combining life sciences (microbiology and mycology in particular) with industrial processes, he says, yields "wonderful workhorses" for food and energy production as well as waste management. "You gotta love the bug," he says. "And if you can borrow a process from nature, chances are it's going to be less polluting."

He's currently looking into chemical investments, especially those that turn waste chemicals into things that are useful. "There are many multibillion-dollar industries hanging off the edges of refineries."

Draper Fisher Jurvetson, has invested in both Tesla and Reva Electric (Reva makes low-cost electric city runabouts). He knew little about the auto business when he got into the field, and admits he's been very lucky. Regarding electric cars, he says, "You couldn't possibly have put a business plan together that foresaw what is happening today."

He's also a fan of space start-ups, and not just because he's an avid model rocketry buff. SpaceX, he says, will be profitable after one launch, successful or not. In the space launch business, the penalty for failure is 10 percent -- that's how much the company must refund to its client if the launch vehicle blows up on the pad. The trick, of course, is getting the launch contracts, but with those odds, Jurvetson says, he'd be a fool not to invest. Furthermore, there's "no technology invention risk." SpaceX, he says, is an integration challenge, but the science is already known and proven in practice.

Space tourism, though, is out. Too expensive. "You can get to zero gravity pretty cheaply," in an airplane. Rocketry is overkill.

"I can't invest in areas of comfort," Jurvetson says. He likes "quirky things around the edge." He invested in nanotechnolgy in 2001 and 2002, synthetic biology in 2007, and between that, transdermal drug delivery, geolocation technologies, and a tool that enables Nielsen-like media research by listening to what people are doing over their mobile phones.

An emerging area of interest: Backyard energy farming. We'll wait and see on that one.

How technology has changed

I asked Jurvetson if the economy for investing is fundamentally different from what it was during the last bubble, putting aside the current economic slowdown. Jurvetson thinks it is. "Because of the rate of technology change," he says, "forecast horizons are shrinking. Market share can shift more quickly and the pace of change is increasing." He says the rapidity of technology change that we are accustomed to with computer products is increasingly being seen now in energy, biology, clean tech, and other fields -- because information technology is becoming a bigger and bigger part of those fields.

"IT is permeating more industries. Moore's Law knocks down simulation capabilities. We don't need wind tunnels anymore, for example. You can run experiments more quickly."

Due to the connection between IT and bigger industries, like energy and transportation, Jurvetson says, tech VC "can now touch trillion-dollar industries. VCs didn't used to talk about things like telecom. But you will not pay for a phone bill 20 years from now." He points to Skype (a DFJ investment) as a disruptor in that field.

"If there's not something disrupting the market," he says, "we shouldn't be playing in it."

I asked him what he thought of all the Web 2.0 businesses without business plans. "It works," he said, "only if you have unbelievable viral effects and a very low cost of distribution. You need retention and lock-in. If you slip into a real industry, you can lose your shirt quickly."

Companies like Twitter, he said, "don't need to add distraction." One of Jurvetson's early big venture successes was funding Hotmail, another company that made no money -- until Microsoft acquired it for $400 million in 1997. But it's only in communications where these crazy economics work out; he points to Skype, Hotmail, ICQ, Facebook, and MySpace as companies that don't or didn't need to to actually make money to become valuable to their investors.

Entrepreneurship is different now than it was during the last wave of VC frenzy, Juvetson observes. He told me, "All the arbitrage-seeking opportunists are gone," and that "diversity in ideas is higher." He says he's seen more real innovation, and more passionate entrepreneurs lately. "There's less soul searching now. People believe in their ideas."