Large investment managers are pouring money into venture firms, but they are increasingly selective.
The latest firms to raise money are DAG Ventures, here in Silicon Valley, and Accel Partners and IDG, for their operations in China.
Large institutions that funnel money to venture firms are focused on earmarking funds for the trendy buyout industry. Buyout funds often raise billions of dollars. So large pension funds like CalPERS or General Motors find it more efficient to write a check for $100 million to one of these, when compared to writing a $5 million check to a VC fund — especially when it takes the same amount of work to research beforehand.
VC funds are also out of favor because they raised a lot of capital in recent years, and have had trouble investing it wisely (the average VC fund fails to make money). One nascent firm, Ridgelift, led by former USVP partner Stu Phillips, was forced to shut down before even raising a fund.
DAG Ventures, however, has just finished raising $477 million for its third fund. We’ve nicknamed the SF-Palo Alto firm “Coattail Ventures” for its strategy of investing in companies already backed by the top-tier firms. These firms include Kleiner Perkins, Sequoia Capital, Benchmark, and lately, Accel. DAG makes few exceptions. By piggybacking on the work of those firms, DAG can cherry-pick from among the best deals, so that even if it invests later, and therefore pays a higher price to invest, it can avoid backing the less successful ones that never make it off the ground. It expects to cap the fund at a total of $500 million. DAG plans to add two more investment partners over the next year, partner John Cadeddu tells VentureBeat. The firm saw two of its companies, Matrix Semiconductors and Grouper, sold last year.
And Palo Alto, Calif.’s Accel Partners and IDG Technology Venture Investment, a firm based in China, have raised a joint $510 million China investment fund, according to the WSJ (subscription required). With China’s economy still expanding and entrepreneurship on the rise, investors are willing to open their wallets for investments there too. The fund is focused on Internet and mobile phone deals. It follows a smaller, $310 million joint fund two years ago. One investment from that fund, All Yes Investment Network, was bought by Focus Media for about $300 million.