VENTURESCOPE(3)

Inside Draper Fisher Jurvetson's conference room on the famed Sand Hill Road, extra-large dry-erase boards lie waiting for the next Hotmail to be hatched. But the venture firm's Menlo Park headquarters is by no means the only location from which it connects entrepreneurs and investors: DFJ has 120 affiliate partners managing more than $5 billion in 30-plus cities throughout the US, Asia, Europe and South America. It has dozens of funds focused on specific regions, sectors and stages, and there's even more on the way – Turkey, Russia, Israel and South Africa are among the venture veteran's next possible targets.

“Venture capital used to be a Silicon Valley phenomenon,” says Don Wood, the DFJ managing director who oversees the affiliate network's expansion. “People would invest as far as they could drive in an hour, and that was great during the 80s and even part of the 90s. But thanks to the internet and “instantaneous communication”, in part enabled by products and services from former DFJ-backed companies like Hotmail and Skype, “people are able to communicate constantly and instantly, so business ideas are flowing all around the world”, he says.

DFJ co-founder Tim Draper's original vision was to create a network of DFJ-branded funds sharing economics, deals, information and limited partners, but that are locally based and independent. Wood describes it as a mesh network, in which members interact with each other, not just with DFJ in Menlo Park.

“Our whole network, the affiliate model, has to do with being close to the companies,” Wood says. “But it is hard to be in Silicon Valley and invest on the East Coast, and even harder to invest in Vietnam or China, Europe or Russia.” In addition to venture capitalists providing funds to entrepreneurs, part of their job is to administer advice, which is best done locally, Wood adds.

In 1990, DFJ gained its first US affiliate fund, Polaris, in Anchorage, Alaska. By 2000, it had added six more US affiliates and had launched its first international fund, DFJ ePlanet.

That fund had three major hits: VoIP service provider Skype, Chinese advertising firm Focus Media and Chinese search engine Baidu: “Three companies that are worth today $3 billion to $5 billion, and all came out of one international fund,” Wood says. “It really opened our eyes that it's no longer a Silicon Valley game.”

DFJ decided to expand its international network to incorporate region-specific affiliates (the next globally focused ePlanet fund, currently being raised, will not be DFJ-affiliated), as well as investment strategies divergent from its traditional focus on early-stage technology companies.

“We are willing to have different investment strategies that are appropriate for the [given] region,” Wood says. “We're more open to later-stage and infrastructure and lower tech, but there's still a technology and early-stage DNA in what we do and the groups we try to find.”

Having global affiliates not only allows DFJ greater access to deal flow and business intelligence, but better enables it to invest internationally and perform due diligence, he says. It also satisfies LPs, some of whom have requested the development of a fund that would facilitate exposure to every investment from every affiliate in the network, he adds.

Speaking of the attractions of the affiliate model, Wood says: “It makes a local firm global. It gives it a stronger brand. Entrepreneurs like getting money from a firm that is known and has had success before. And limited partners like investing in funds that have had success before and are branded. We also help them share ideas, share deals, and then they also swap carry with each other – they each take one point of their carry and exchange it. So if you're in Europe and the fund in Japan has a success, you feel it.”

Sharing economics, Wood says, “glues everybody together and gives them a reason to want to help each other. By everybody helping each other it strengthens the brand. Everybody gets stronger when any fund in the network does well.”

While in the past ten years DFJ has focused on building funds opportunistically around teams and ideas, it is increasingly targeting specific regions. To do so it considers reams of statistics and variables including demographics, economics, and education data developed by Stanford MBA students, as well as geopolitical risk and venture capital concentration. DFJ also relies on more intuitive, softer indicators such as the perceptions gleaned from visiting regions and spending time with potential affiliates.

For DFJ to select and then begin working with an affiliate can take anywhere from six months to more than a year, depending on whether the firm is already up and running or a new team being established, Wood says. Once part of the network, the affiliate team is primarily responsible for fundraising, though DFJ will provide access to its limited partner list and make introductions, he adds.

If we got to the point where we couldn't track what was going on or performance was suffering or it was dysfunctional in some way, we would definitely hit the brakes. But the beauty of a mesh network is it can scale infinitely if it's designed right

Don Wood

DFJ's most recently added affiliates, FIR Capital in Brazil and Esprit Capital Partners in London, were chosen from numerous potential partners because they fit best with the Silicon Valley firm's mission and strategy, Wood notes.

“Their DNA is very similar to ours in terms of deals, and how to approach the business of venture capital,” agrees Marcus Regueira, founding partner of FIR and president of Brazil's private equity and venture capital association, ABVCAP. The decision to join forces was a combination of DFJ's “strategy being directed worldwide at a time we were looking for a partner in Brazil,” he says. Both DFJ and FIR met with many potential partners.

“Given the fact that we are not only entering a partnership with DFJ [on] a new fund but with existing funds of ours, it was also something extremely attractive in terms of managing companies,” Regueira says. “It will align interests with LPs as well, both our existing LPs and potential LPs for our third fund.”

It also provides FIR with a seasoned partner, whose expertise can be leveraged as venture capital develops in the region, he adds.

“We all really believe that this association will simply increase tremendously our growth in Brazil and our ability to do business both locally and internationally,” Regueira says.

The sentiment seems to be shared by most affiliate members, though former East Coast affiliates Draper Atlantic and DFJ New England last year merged to become New Atlantic Ventures, no longer affiliated with DFJ.

A decision to leave the network might be initiated by DFJ, the affiliate, or by the market's appetite, and would typically happen at the point where a new fund is planned, Wood says. He says DFJ does not rule out the prospect of affiliates that leave the network some day returning.

“We recognize and [affiliates] recognize that there has to be a balance of benefits that flow in order to keep the relationships together, so we are working hard to make sure that that balance is in their favour, that there's a strong reason why they want to be part of the network and that as part of the network, everybody does better,” Wood says.

At what point would DFJ consider its network to have reached its capacity? “If we got to the point where we couldn't track what was going on or performance was suffering or it was dysfunctional in some way, we would definitely hit the brakes,” Wood admits. “But the beauty of a mesh network is it can scale infinitely if it's designed right.”

He continues: “Really what we're building here is an information network, because investing is about people and knowledge and deal flow, and the more the better. So as long as we can harness that, and not have [partners and funds] all being islands, then this can grow forever.”

A vital question in coming years, Wood says, is: “Do funds, when they're bound together, outperform funds that are independent?” Though the data won't be official for some time to come, DFJ's experiences so far provide it with confidence in the collective.