Want a Fresh Venture Model? DFJ's Got One

By: Russell Garland

Nov. 21, 2007

Many venture firms speak of needing a new model, but Draper Fisher Jurvetson already has implemented one.

Over the years, Menlo Park, Calif.-based DFJ has built a global network of affiliates. After recently welcoming a host of new members, the firm's network now numbers 20, excluding three that appear likely to strike out on their own with new funds.

With many venture-capital firms mulling how to expand globally, DFJ says its model offers clear advantages. Its strategy seeks to balance the strengths of a traditional venture firm -- a closely knit group of investors with local expertise -- with those of a multinational company that has insight into developments around the world.

"All that work creates a deal flow and brand, and an intelligence-sharing," said Don Wood, the DFJ managing director who oversees the network. "A modest-size firm can now have the same power that an Intel has in terms of having a global perspective."

The network dates to 1994, when DFJ helped to launch Wasatch Venture Fund in Salt Lake City. In 1999 and 2000, DFJ sponsored a series of U.S.-based funds, along with an international venture firm, ePlanet Ventures. The success of ePlanet -- it backed Internet phone company Skype Technologies SA, now a unit of eBay Inc., and Chinese search engine Baidu.com Inc., both of which generated big returns -- convinced DFJ of the value of investing globally, Mr. Wood said.

To that end, the firm this year has expanded its network to include Esprit Capital Partners in London, FIR Capital Partners in Brazil, Tamir Fishman Ventures in Israel and Moscow-based bank VTB. The firm is still looking for partners in Central Europe, Japan and Turkey. It also expects to expand further in China and India.

The network encourages co-investments by its member firms and claims more than 100 joint deals among member firms to date. Sharing information also helps the firms evaluate potential deals and helps their portfolio companies, which nowadays often do business in more than one country.

The firms also share information about limited partners, although providing fund-raising assistance isn't the primary purpose of the network.

To promote connections among far-flung investors, DFJ hosts an annual meeting of all network partners every November in California's Half Moon Bay, south of San Francisco, and hosts a monthly conference call. It also provides back-office services for about half the firms in its network and offers buying discounts on services and equipment.

But belonging to the network also carries a cost. For its oversight role, as well as the use of its name, DFJ is a general partner in its member funds, sitting on investment committees and taking fees and a piece of the profits, amounting roughly to the cost of an additional partner, Mr. Wood said.

Network members also contribute a percentage point of carried interest to an equally shared pool, giving them a monetary incentive to cooperate with one another. "That's a material amount that really acts as glue," Mr. Wood said.

Despite that glue, a few of the earlier members of the network are breaking away, raising some questions about the long-term power of DFJ's model.

EPlanet Ventures, for one, is leaving the network as it raises a new fund because its global investment strategy isn't in line with the DFJ model.

Two U.S.-based partners, DFJ New England and Draper Atlantic, are also going their own way, joining forces to raise a fund as New Atlantic Ventures, which isn't part of the DFJ network. New Atlantic partners declined to discuss the fund during marketing. Mr. Wood said that the network's membership expense was one reason for the split.

DFJ is making concessions in light of the departures. Mr. Wood said that the firm has lowered the cost for established teams and that the door is open to New Atlantic joining.

"We're learning and adapting to make this network work," he said.