Too Much Money Is Chasing Too Few Good Funds –

Dixon Doll confesses that he was a little apprehensive before he set out to raise the fourth fund for DCM-Doll Capital Management. “I remember reading all the doom and gloom in Venture Capital Journal a year ago and how tough it was going to be,” he says. As it turned out, DCM needed just four months to reach its target of $375 million. Brand name LPs like Flag Funds, Harbourvest Partners and Horsley Bridge Partners returned from DCM’s previous fund (see Fund Profile, page 10). We sat down with Doll to find out why the process was, in his words, so “shockingly easy.”

Q. What accounts for the relatively easy time you had raising your latest fund?

A. It’s a testament to DCM and the fund that we’ve built here. Part of our success in closing the new fund so quickly was having a track record of three prior funds. The second two are still [in process] but the first fund returned a 100% IRR.

The the quick closing is also a testament to the team that we’ve built here, our 12 investment professionals, people like Carl Amdahl.

And, we put together a terrific PPM [private placement memorandum] for the fund that spoke volumes about what we were going to do.

Q. How important was the PPM to your fast success?

A. It was important and it wasn’t. It was a physical symbol of our commitment to excellence and uniqueness and to building an outstanding team. The document itself was just another document, but numerous people we talked with said it was the most innovative and interesting PPM that they had ever seen in the venture industry. It’s quite something-four color, tab format, professionally designed. Really its like no other PPM I’ve ever seen.

Q. What is the most important issue in raising a new fund today?

A. Here is a quote from one of our LPs: “There is something like a trillion-with a t’-dollars trying to come into venture capital, and depending upon how you calculate, there is somewhere between $80 billion to $100 billion of available capacity.” You have a 10x imbalance.

Q. But some LPs say there is only $20 billion that can be invested effectively each year.

A. They come up with that number because they say that if you can’t come into the best venture funds don’t go into the asset class. There is $80 billion to $100 billion across all of the industry, but by definition the top quartile is $20 billion of funds.

Q. And the result is?

A. The result is that there is a permanent imbalance in the amount of capital that wants to come into our industry. That’s is a big issue, because capital finds a way. LPs don’t learn, and given the imbalance [there are going to be problems]. Every LP thinks that they can get in the best funds or that the ones they pick will come out in the top quartile. They use that as a rationalization for committing to funds and jamming capital into our industry. The No. 1 reason for the [Internet] bubble was capital coming from around the world, trying to cram its way into Silicon Valley. During ’98 and ’99 we got calls from the corners of the globe from corporations who wanted to come here and start up funds for their companies. My peers in VC were out hyping and promoting, and our industry turned into a giant vacuum cleaner, sucking capital from around the globe, with an emphasis on technology.

Q. Are we returning to a bubble mentality today?

A. There is a significant risk that another bubble is being created centering on China right now. [DCM was one of several VCs that benefited from the China craze when Semiconductor Manufacturing International Corp., which does chip manufacturing in Shanghai, completed a $1.8 billion IPO in March.] One of my friends told me last night that half of the partners in their firm were in Beijing, and that on the way in and out of Beijing half of the first class seats were occupied by well known venture or wanna-be venture capitalists traipsing over there to find the next or whatever. Bad things that are going to happen [in China] as people start pouring more and more money into China, principally due to the lack of management talent for companies that are raising money from Silicon Valley but operating in China. There is a real shortage of management talent in China, but a real wealth of technical talent.

Q. I’ve also heard that as much as 60% of VC firms are trying to raise money this year.

A. I suspect that is not too far off. Most venture firms are always trying to raise money, although they’ll deny it. There is a lot of planning going on for firms trying to raise funds for next year instead. It’s a great time to go out and take advantage of the improving conditions in the market.

Q. What advice do you have for firms raising money?

A. If you want to start a firm and start a fund right now, it’s a good time to do that. Get a small but effective potent group of partners together, preferably people that have known or worked together for a number of years. They need to have a strategy that is different from the mainstream funds. I don’t think it would be effective to raise a fund for China for example. Find a strategy that can be differentiated.

Q. How much should a new firm raise?

A. I think that the magic number right now is about $50 million per partner. Three partners in early stage, then, is plus or minus $150 million, but that varies with sector and stage.

Q. Any other advice?

A. There are many ways to differentiate, but there are many new technology areas outside of the conventional information technology and communications that we specialize in [at DCM] that are potentially interesting for new funds as we go forward. Alternative energy, for example. But you have to watch out about getting into a fund that is so early stage, so far ahead of the emergence of a market, that there is no possibility of it getting liquid. A lot of people think of nanotechnology in that way today.

Another issue that arises is whether it’s better for a VC firm to be a smart generalist or to be subject-matter experts. I come down [on the latter] so I advise people starting a fund today to have some really brilliant technical people who understand a subject matter area better than, or at least as well as, the great thought leaders.

Operating experience is a big deal, too. One of the things that went wrong in the bubble was that young and aggressive MBAs went out and raised funds. They weren’t the battle-scarred veterans who could make the tough decisions to keep a company going. The new folks raising funds have to be open and honest with their LPs about their own strengths and weaknesses. That honesty and integrity will go a long way towards inspiring confidence.

Q. Any other issues that firms should be aware of?

A. Some of the LPs go to their investment advisory boards and commit to making rates of return that have a huge impact on the operating assumptions of the companies and the pension funds that are making the investments. If they can’t deliver on that performance, especially with commitments to alternative investments growing, the results are going to be terribly disappointing. It’s going to leave [major investors in venture capital] underfunded. And if they don’t fix this situation it threatens the viability of the corporation or the firm as a whole.

Dixon Doll

Co-Founder & Managing General Partner,DCM-Doll Capital Management

Age: 61

Education: BSEE from Kansas State University (cum laude), 1964; MSEE from University of Michigan at Ann Arbor, 1965; Ph.D. in Electrical Engineering from Michigan, 1969.

Work History: Systems Engineering Manager for VC-backed data communications company Datamax from 1969 to 1971. Formed and ran a global consulting company, The DMW Group, from 1971 to1989. (DMW’s clients included Bill McGowan during his founding of MCI.) Taught at IBM Systems Research Institute in New York City during the 1970s while authoring seminal engineering textbook, “Data Communications,” published by John Wiley & Sons. Shifted focus to Silicon Valley in early 80s where he consulted for firms like Fairchild and Intel, while serving as a board member for many VC-backed startups. In 1985 became the third general partner at Accel Partners while co-founding Accel Telecom, the venture industry’s first fund focused exclusively on telecom. Left firm in 1994 and founded DCM two years later with David Chao.

Fund Performance: DCM 1, a $50 million fund, returned $6 for every $1 invested. Hits include @Motion, sold to for $300 million; Foundry Networks, which went public; iPivot, sold to Intel for $500 million; and Recourse Technologies, sold to Symantec for $135 million.

Board Seats: Include Adspace Networks, Kiwi Networks, Network Equipment Technologies, Neutral Tandem, Secure Elements and Turin Networks.

Other Board Seats: Asian Art Museum of San Francisco, Stanford Institute for Economic Policy Research and University of San Francisco.

Personal: Married to Carol Pucci Doll for 39 years. Three children and seven grandchildren.

Plans for Later Years: Assist favorite philanthropies with innovative fund-raising and investment strategies. Spend more time learning about Chinese history and culture. Remain actively involved in venture business by coaching, mentoring and lecturing. Resume piano lessons.