DFJ gets $55M for startups
West Coast venture firm DFJ Frontier has secured $55.4 million to invest in young companies, and Frank Foster of the firm’s Santa Barbara office will oversee it.
The fund, which closed April 27, is significant because it arrives at a time when seed-stage companies are struggling amid the harshest capital-raising environment in years. The cash also signals a win for DFJ Frontier because it came from big institutional investors at a time when pension funds and big banks have clamped down on venture funding.
The new fund will focus on investments in West Coast companies outside Silicon Valley in sectors such as the media, information technology and life sciences. At the fund’s closing, the DFJ Frontier said it had made four initial investments from the fund, though none yet in the Tri-Counties.
Previously in the Tri-Counties, DFJ Frontier has funded high-definition video firm Iconix Video and CrystalVoice, a voice-via-Internet company sold in early 2007.
“Our theory is that the greatest opportunity lies where there’s the biggest capital imbalance,” Foster said. “There are great entrepreneurs all over California. But most of the capital is in the Silicon Valley and then a smaller amount in the Los Angeles area.”
DFJ Frontier’s new fund came from institutions such as CalPERS, Credit Suisse and the Oregon Growth Account. The firm has also opened offices in Los Angeles and Portland to complement its existing locations in Santa Barbara and Sacramento.
Others in the tri-county venture capital community said they’re glad to see more money with a local presence, especially in a tough funding environment.
“Closing any fund in this environment is quite a feat,” said Jim Andelman, general partner of Santa Barbara-based Rincon Venture Partners, which teamed with DFJ Frontier to invest in Iconix. “$55 million is a great result.”
Southern California venture capital investments have rebounded slightly in the first quarter to $462 million, up 10 percent from the fourth quarter of 2008, according to data from Dow Jones VentureSource. But the last two quarters still represent the worst showing since the first quarter of 2003, when Southern California companies raised only $362 million.
Moreover, many venture capital investors are putting money into late-stage firms to shepherd them through the downturn.
Nationwide in the first quarter, seed- and early-stage investments dropped 45 percent in dollars and 40 percent in deals with $852 million invested into 204 deals, compared to $1.6 billion in 338 deals in the previous quarter, according to PricewaterhouseCoopers and the National Venture Capital Association. Also, many angel investors are pulling back as their personal wealth takes a hit along with the markets.
That opens an opportunity for DFJ Frontier to pick up quality entrepreneurs and ideas on favorable terms. It’s a buyer’s market, said Tom Hopkins, an attorney in the Santa Barbara office of Sheppard Mullin Richter & Hampton and is one of the Tri-Counties’ most active technology deal facilitators.
“Certainly there’s still lots of entrepreneurs and companies out there who are in need of funding,” Hopkins said. “[DFJ Frontier] is going to have lots of things to look at in deploying new capital in a market that needs it.”
Foster said DFJ Frontier’s investments range from $250,000 to a few million. The firm gets in early and rolls up its sleeves.
“An entrepreneur – especially in these times – is really hero,” Foster said. “It’s our job to work with him or her to really figure out what is the business model of this company and really validate that with customers.”
Though the new money has yet to fund any tri-county firms, Foster said he sees opportunities in the materials and biotechnology coming from the University of California, Santa Barbara, and lingering talent from Thousand Oaks-based Amgen, which laid off hundreds in 2007.
“Because of the downturn, there are some great people available,” Foster said. “I’m pretty excited now that we’ll be able to marry people with the great technology that’s coming out.”
Rincon Venture Partners’ Andelman said it’s no longer a hindrance that funds like his and DFJ Frontier can’t plunk down large chunks of cash.
“For small funds, there’s a very new concept that’s risen form this financial crisis – capital efficiency,” Andelman said. “In the past, raising $1 million to $2 million may have been a company’s Plan B, or even an admission of failure. Now we’re seeing every company say, ‘This is how we’re going to get to profitability to with a million or two.’”
DFJ Frontier’s Foster said medical diagnostics technologies may hold promise for the new fund, especially technologies that provide low-cost options for existing markets, such as serving an aging population.
Foster said that the dearth of opportunities for investors to exit – there have only been three U.S. initial public offerings so far this year – isn’t a huge concern for the new fund.
“My experience to date is that you need six to eight years to build a world-class company that’s delivering north of $50 million a year in revenue,” Foster said. “When we go into a company, it’s going to be a long-term partnership.”