DCM: Taking A Seat Alongside Silicon Valley’s Giants –

PALO ALTO, Calif. – The ground-floor offices of DCM sit in the heart of Silicon Valley: Page Mill Road in Palo Alto. Inside a leafy conference room, the table is long and black, the space is jammed with electronic equipment, the walls lined with tombstones marking the public offerings and sales of About.com Inc., Foundry Networks Inc., InterNAP Network Services Corp., International Manufacturing Services Inc. And at the head, is founder Dixon Doll, unfazed.

“A great entrepreneur would walk in and not be intimidated by these kinds of companies,” he says. “Everyone wants to back winners, and great entrepreneurs want to work with venture firms with a strong history of success.”

Nearly 10 years after closing his first venture deal-a $24 million round of financing for LAN-system manufacturer Bridge Communications Inc.-the former Kansas State University football player left blue-chip Accel Partners to strike out on his own. Partnering up with David Chao, the duo formed DCM in 1996, and closed on $46 million worth of commitments for its first venture fund, Doll Technology Investment Fund, later that year.

Now, with four additional partners in place, Thomas Blaisdell, Eric Gonzales, Peter Moran and Robert Theis, the firm is investing its third major fund, the $465 million Doll Capital Management III.

A short history of rapid growth, however, has not altered the firm’s founding principles. It invests in early-stage technology companies that cross into the networking and communications space, the wireless arena, software, Web services and the Internet. The firm puts an average of $5 million to work in each deal and often takes a seat on a company’s board of directors. All six partners have technology backgrounds and operational experience. Two also have consulting experience; another is a former investment banker. All deals are agreed to by consensus. All partners work on all deals, and each portfolio company is assigned one primary partner and one secondary partner to oversee the investment. The partners meet with their portfolio companies every Monday morning, and then gather in the afternoon. And each quarter, the partners have an off-site retreat.

“The reason we have fun is because we like working together and we like our portfolio companies and we like focusing on the key issues that make the difference between success and failure,” Blaisdell says. “In any company, there’s 96 different things to do-from fund raising to taking the trash out at night. We like to focus on those two or three things that make the difference between success and failure, or a really big success versus just being a survivor.”

The firm, for its part, has had its share of both big successes and mere survivors. It rode the crest of the Internet wave as an early investor in content provider About.com Inc. The company, once public, was later acquired by New York publisher Primedia Inc. IPivot, a San Diego maker of Internet appliances that enhance transaction performance over the Internet was acquired by Intel Corp. in October 1999.

In the optical networking space, DCM is an investor in Luminous Networks, and it has also invested in eDreams of London, an e-commerce site for travelers scouting vacation packages, and Palo Alto-based Vendavo, a company whose life began as a Web portal for administrative assistants and has reinvented itself as a business-to-business provider of pricing and deal management software.

While technology is at the core of each investment, for DCM, management unlocks the key to its investment strategy.

“That’s an art form,” Doll says. “You get a feel for it by being in the business. It’s like pornography: it’s hard to define, but you know it when you see it. It’s a team that’s stellar, passionate, and willing to do whatever it takes to be successful.”

In Nasdaq-listed Foundry Networks, the management team has outperformed even the company’s switch and router technology.

“If they were out trying to raise money, I’d back Bobby [Johnson] in a heartbeat,” Doll says. “When a great entrepreneur like BJ comes in, you worry less about understanding the technology.”

And it’s the same with IPivot. “The management team [led by President and CEO Brett Helm] hadn’t built a company before and sold it out, but they had a tremendous amount of expertise and relevant operating experience. They were smart and technology-savvy,” he says.

In the 14 months since its final close, DCM III has completed 11 deals. The firm expects to finish another deal or two before year-end, and maintain a similar investment pace next year.

“It’s harder working on deals than finding deals,” Blaisdell says. “It hasn’t gotten harder to find good deals. The quality of deals has increased because only the really serious entrepreneurs and business models are even approaching this funding environment.”

Indeed, the firm, like many, is scrutinizing the priorities of its portfolio companies, watching burn rates and expenses. It is extending the runway for its portfolio, seeding them with enough capital to reach development and marketing milestones, but at a rate at which the spending ramp follows the revenue ramp. It is also looking to fund companies with a strong syndicate of venture firms behind them, or those with seasoned chief executives or an entrepreneur-in-residence at the helm.

The firm is looking hard at the enterprise software space, and at wireless infrastructure and services plays, as well as Web infrastructure and services. With a number of international deals already in its portfolio-online recruitment channel 51Net of Hong Kong and wireless reseller Japan Communications Inc. of Tokyo among them-DCM will continue to scout internationally, but only if it can identify a strong partner on the ground.

Now, even with the rumblings of an economic downturn and a prolonged international crisis, the firm is cautious, but optimistic. Though the IPO window may have shut indefinitely and a chill has weakened the technology sector DCM has put the priorities of its existing portfolio ahead of any new deals. Page Mill Road will not lose its place among Silicon Valley’s giants.

“It got over-hyped and over-promoted, but when a huge bubble lets out, it’s a lot of air and lets out a big bang,” Doll says. “Venture capital’s contribution to the economy is about new companies. It’s created jobs, provided a mechanism for the economy to reinvest itself and shift away from dying industries. In the networking space, we created infrastructure and multimedia that weren’t there.”

Following are some of DCM’s portfolio companies:

@Motion Inc. (Redwood, Calif.) creates products that allow voice-activated retrieval of text, voice and fax messages from various mobile devices. Openwave Systems acquired the company in 1999.

Co-investors include Dialogic Communications Corp., Intel Corp., Parker Price Venture Capital Inc., Sienna Ventures and T-Venture.

About.com Inc. (New York) is an online content provider that provides users with a network of 700 topic areas. The company was acquired by New York-based publisher Primedia Inc.

Co-investors include Crystal Internet Venture Fund LP, Walden International and Zero Stage Capital Co. Inc.

Coradiant Inc. (Boston) is a managed service provider offering remote operation of enterprise and Internet data centers.

Co-investors include Grandbanks Capital and Sandlot Capital LLC.

Employon Inc. (Cleveland, Ohio) is a Web-based recruiting services firm.

Co-investors include Crystal Internet Venture Fund LP and individual investors.

Foundry Networks Inc. (Sunnyvale, Calif.) develops workgroup and backbone switches – gigabit switching routers, multilayer switches, workgroup switches and backbone switches – for local area networks. The company went public in October 1999.

Co-investors include Accel Partners, Crosspoint Venture Partners, Institutional Venture Partners and VantagePoint Venture Partners.

Internap Network Services Corp. (Seattle) provides Internet connectivity routing to ensure optimal routing of customers to and from the major Internet backbones. The company went public in September 1999.

Co-investors include Chase H&Q, EastWest Venture Group, Fidelity Ventures, Granite Ventures LLC, Kirlan Venture Capital Inc., Morgan Stanley Private Equity, Oak Investment Partners, Siguler Guff & Co. LLC and Vulcan Ventures.

Japan Communications Inc. (Tokyo) is a mobile telecommunications service provider for Japan’s corporate market. The company also is a value-added reseller of wireless services.

Co-investors include Japan/America Ventures Inc. and PAMA Group Inc.

Luminous Networks Inc. (Cupertino, Calif.) has a line of optical switches that allows carriers to provide service aggregation and transport of circuit-based voice and IP-based services over metropolitan optical networks.

Co-investors include CE Unterberg Towbin, Crown Advisors International Ltd., DynaFund Ventures LLC, Easton Hunt Capital Partners, Morgan Stanley Private Equity, Pacific Venture Group, Pyramid Technology Ventures, RWI Group LP, Scientific-Atlanta, Sternhill Partners, Thomas Weisel Partners LLC and Tyco Capital.

Recourse Technologies Inc. (Palo Alto, Calif.) is the developer of covert security software designed to track and trap, contain and control hackers.

Co-investors include Canaan Partners, Intel Corp. and Menlo Ventures.

Vernier Networks Inc. (Mountain View, Calif.) provides hardware and software to enhance, manage and protect wireless networks.

Co-investors include Foundation Capital and an undisclosed corporate investor.

Doll Capital Management is located at 3180 Porter Drive, Palo Alto, Calif. 94304. Tel: (650) 233-1400. Fax: (650) 854-9159. The Firm’s web site is http://www.dcmvc.com.

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