Venture Fund Strategy

From Business Week:

“Draper Fisher Jurvetson manages a little more than $4 billion, but it’s spread across 19 funds and run out of 33 offices from Boston to Beijing. Regional managers can often spot opportunities more quickly than those in charge of “monolithic funds” based on Sand Hill Road, says Ravi Belani, an associate at DFJ.

Three of Draper’s four home runs of the past two years—Baidu.com (BIDU), eBay’s(EBAY) Skype unit, and Focus Media Holding (FMCN)—have come from outside the U.S. The fourth, Divx (DIVX), is based in San Diego. “Most of the amazing innovations we’re seeing actually aren’t in Silicon Valley,” says Belani.

Oak Investment Partners scored last June when Gmarket (GMKT), an online marketplace in Korea it had funded, went public. Gmarket is worth more than $1 billion on the Nasdaq now; Oak sold a 10% stake in the company to Yahoo! (YHOO) a week before the IPO.”

I still hear often in the Silicon Valley VC circles: “We want to invest locally.” To me, this strategy is flawed, especially coming from firms outside the top tier. Unless they go outside and do some heavy-lifting, they would NEVER have access to the best deals.

Similarly, if they stick to the philosophy of only investing in deals that come on a platter, with a great market, an A-team, a defensible technology, they would have nothing to invest in, because those entrepreneurs would only work with one of the top 3-5 VCs.

In my view, all this is utterly utopic and impractical. In reality, deals come with handicaps, worts, freckles. Some have great markets, bad teams. Some have great teams, bad markets. My own bias is towards markets. I prefer a good market, around which an A team can be built. An A technology can be built. However, it requires taking risks on entrepreneurs / CEOs who perhaps need to be coached, maneuvered, even replaced.

Silicon Valley’s DNA, however, has traditionally been the exact opposite: geeks invent solutions looking for problems. They come up with intensely complex technologies which solve problems that have miniscule markets. With that, who cares if they have an A team?

But if a good market opportunity can be spotted, all the rest, in my opinion, is manageable. This has been the secret of Sequoia’s philosophy, but unfortunately, few VCs outside of Sequoia have been able to learn the tricks of this game.