The Draper family is to Silicon Valley venture capital what the Gallos are to California wine. The three-generation dynasty began in 1959, when William H. Draper Jr., a retired U.S. Army general, created Draper, Gaither & Anderson—the first VC firm west of the Mississippi. The family's youngest investor is the general's grandson, Tim Draper, co-founder of the prominent early-stage investment firm Draper Fisher Jurvetson. Connecting those two formidable players is William H. (Bill) Draper III, the general's son and Tim's father. Bill Draper helped shape the modern VC industry, most notably at Sutter Hill Ventures and at Draper Richards, where he is a general partner. He has invested in companies such as Skype, Hotmail, and OpenTable. In January, Palgrave Macmillan will publish his memoir, The Startup Game: Inside the Partnership Between Venture Capitalists and Entrepreneurs. Editor-at-large Leigh Buchanan talked with Draper, 82, about the VC industry and what it takes to succeed as an entrepreneur—no matter where your money comes from.

What was it like launching a VC firm at a time when most people didn't even know what venture capital was?

Actually, people in the East did know about venture capital through the Whitney family in New York and American Research and Development in Boston. But no one out here had heard the term. In 1962, when my partner, [Franklin] "Pitch" Johnson, and I started our first company, Draper & Johnson, we got no action. We would sit around waiting for the phone to ring. It didn't, so we drove out into the fruit orchards—remember, it wasn't Silicon Valley back then. We'd look for companies with names that sounded like they might have something to do with technology or at least like they weren't warehouses for prunes. When we saw a promising sign, we'd knock on the door and ask the receptionist, "Is the president in?" A man would come out—usually our age, early 30s. And he'd ask, "What do you do?" We'd say, "We're in the venture capital business. We buy a minority interest in a private company and help it grow." Then we'd ask, "What do you do?" And he'd talk about his business—they loved to talk about their businesses. We had a lot of fun and wasted a lot of hours that way. But once in a while, we got someone interested in expansion who hit our hot button. Then, as the banking community in San Francisco learned about us, we became the go-to guys for small, growing companies that might one day have a public offering.

With which entrepreneurs have you had the best working relationships?

One of the most passionate and energetic entrepreneurs I know is Jonathan Bush, whom I met in New Hampshire when he was 18 years old and out campaigning for his uncle, George H.W. Bush. Jonathan was everywhere—knocking on doors, working phone banks, driving around on a truck with a megaphone. He really inspired people.

Later, he connected with me when he wanted to start Athenahealth, which offers billing, electronic records, and other services for medical providers. We supported him, and I also got the Rockefellers to invest, as well as my son's firm. Athenahealth became a fine, rapidly growing company and had a very successful IPO a few years ago, in which we got back 10 times our investment.

I also became close to Dave Bossen, founder of Measurex, which made computer controls for the paper industry. Dave is that rare entrepreneur who is equally competent starting a company from dead scratch as he is running it all the way up to the New York Stock Exchange and beyond. [Honeywell acquired Measurex in 1997.]

Draper & Johnson was the first firm you started. What did that experience teach you about entrepreneurship?

First, that you need other people. Starting with the money. I had $25,000 and a $20,000 mortgage on a $40,000 house. I needed $75,000 and a partner with another $75,000, because the SBIC [Small Business Investment Company—a private-public partnership] would leverage that money three to one. So I teamed up with Pitch. And luckily, I had a father and Pitch had a father-in-law who loaned us what we needed.

Second, you need to pick a good partner. It's like picking a great wife: If you get that right, everything else is easier. And if you cooperate well inside the house, you're more likely to cooperate well outside the house. Third, you need to find a niche. When we started, we were the only ones out there talking to companies in the orchards of Santa Clara and Sunnyvale. I remember a saying from a pass receiver in football: "Throw the ball where I ain't." Well, we went where others ain't and ended up doing very well. Finally, I learned that being friendly and open comes back to help you. The people that have the hardest time in business are often brilliant but rub others the wrong way. People really wanted to do business with Pitch and me because we were good guys.

You prefer to visit entrepreneurs in their workplaces before they come to your office. What are you looking for?

Mostly, it's a matter of trying to relax the entrepreneur and observe his relationships with his team and employees on their home turf. I've seen an entrepreneur get into an argument with one of his vice presidents right in front of me. It made my skin crawl. I also look for orderliness and allocation of space. At one company, where the founder was a scientist, I expected most of the premises would be a lab. But the founder's office took up about two-thirds of the square footage. The lab itself was very small. It made a bad impression. Then there's always the chance I'll run into a guy in the bathroom and we'll start chatting and he'll say, "Have you heard about the lawsuit?"

What are the most common mistakes made by entrepreneurs?

People make lots of mistakes. They overestimate market size and underestimate how long things will take. But what happens most often is that entrepreneurs underestimate the importance of what they don't know. They know their competition as it is today, and they know that their own product is going to be significantly better. But they don't know what's going on in the backroom of their competition. You can't discount the possibility that the other guy is getting ready to replace the Model T with the Model A.

When evaluating companies, do you pay more attention to the idea or the leader?

The leader. Even if the product is wrong, a great, visionary leader will come up with another idea. During a presentation, I keep my eye on the top person, looking at how he interacts with his team, if he understands his audience, if he is the least bit unsure, or if he lacks information he should have had.

Most of all, I am looking for judgment. Why did he make certain choices in life? For example, I'm not in favor of serial entrepreneurs. If they've changed jobs every two years, I'm suspicious, even if they did a good job running things. I also pay a lot of attention to where they went to college, because it shows whether they took their education seriously. If they went to a top college: good. If they were top of their class at a second-tier college: terrific. It means they worked really hard. I have not had very good luck with Ph.D.'s. But I have had excellent luck with Ph.D. candidates who left early because they wanted to start their companies without waiting the seven years for a degree. Maybe someone with the patience to wait that long is not going to be a very good entrepreneur.

Another thing I do, by the way, is call references and then ask the references, "Who else should I talk to?" Often the reference has been set up in advance and is a good friend of the entrepreneur. And sometimes he will know something negative about the entrepreneur that he doesn't want to personally disclose. So when I ask that reference for another reference, he can steer me to someone who will tell me what he thinks I ought to know, without worrying that he has betrayed the entrepreneur. It's a good strategy for hiring situations as well.

What emerging technologies strike you as most exciting?

Stem-cell research is one. Last week, I went over to the Gladstone Institutes, and they were talking about how you could take skin cells, put them into the heart, and get those cells to start beating. They showed us a small section of a heart where these cells were all beating together. It was amazing. Also, quantum computers, which will eventually outperform all other computers.

Since you started in the VC industry, what has changed?

What's gotten worse from the VC's standpoint is that the business is less profitable, and the process is a lot more formal. I miss the days before we had the term term sheet, when I would just write stuff down on a piece of paper and hand it to the entrepreneur. From the entrepreneur's perspective, working with a venture firm is more bureaucratic. In most cases, there isn't as much personal connection between the entrepreneur and the partner. On the other hand, the entrepreneur has many more options. If I say no, now he just goes down the street and talks to three or four others.

Your new book is called The Startup Game. Do you think start-ups are a game for the entrepreneur as well as for the VC?

Sure, it's a game. But ask entrepreneurs, and they'll tell you, they're having a lot more fun than the VCs.

So have you ever been tempted to chuck it all and go work for one of these companies full time?

No. Never.