Fund News – L.A. Venture Community Lures DLJ Bankers

Donaldson, Lufkin & Jenrette appears to be the latest casualty of an affliction that has swept through investment banking groups across Wall Street: the itch to become a principal.

Last week, the firm lost two of its investment bankers to the burgeoning venture capital community in Los Angeles as Joe Reece and Steven DesJardins decided to hang up their own shingle.

Reece, a senior VP, and DesJardins, an associate, left DLJ’s West Coast office to jumpstart their own venture fund to chase early-stage equity investments in the media and technology sectors. The fledgling firm – dubbed Encore Capital Partners LLC – opened its Santa Monica offices by launching a $50 million fund, Encore Venture Partners LP. It will seek investments of anywhere from $500,000 to $5 million in size.

Looking to capitalize on the rapid convergence of media and technology, the principals will focus on infrastructure plays on both the Internet and telecommunications front; information technology services; education; and business-to-business services with an eye toward Internet services. The two are betting that the collective client relationships, legal background and financial expertise they have built will help them achieve those goals.

Reece, who began his professional career as an attorney at the Securities and Exchange Commission in Washington DC, practiced law at Skadden Arps Slate Meagher & Flom in L.A. for four years. He joined DLJ about three years ago as part of the firm’s push to create a dedicated mergers and acquisitions practice on the West Coast. During his stint at the investment bank, Reece provided mergers advice to several software infrastructure companies and other technology concerns, including Broderbund (now a unit of a unit of Mattel Inc.’s The Learning Co. division), Veritas Software Corp. and 7th Street.com, formerly known as 7th Level Inc.

Regarding the new venture, Reece explains, “We want to stick to our knitting and take advantage of the wave of convergence between media, telecom and technology.”

Deals in my backyard

Indeed, rather than running to Silicon Valley, these bankers-turned-venture capitalists believe that there are plenty of potential deals in their own backyard to keep them busy. “There is a revolution going on in information technology and media, and the opportunity for smart money to help grow these L.A-based companies is unparalleled,” adds DesJardins, a generalist investment banker of six years who has worked closely with several media companies in recent months.

The City of Angels has recently been the breeding ground for several venture startups that have secured instant fame in high-tech circles. Among them: Santa Monica-based Internet retailer eToys Inc.; Stamps.com Inc., the Santa Monica online stamps distributor; and the Pasadena search engine, GoTo.com Inc.

Venture capitalists and private equity firms seem to be warming up to the growing trend. According to a recent survey conducted by PricewaterhouseCoopers, a total of $217 million was invested in Los Angeles-area businesses during the first quarter, which is more than double the $96.3 million invested during the same period in 1998. Of that sum, more than $200 million of those investments were poured into Net firms or other tech-related concerns, the study found.

To date, however, there are only a handful of venture capital shops that troll for such deals in L.A. Among them: Avalon Investments Inc.; Forrest, Binkley & Brown; Zone Ventures LLC; idealab Capital Partners, and Los Angeles-based Brentwood Venture Capital.

And, in the venture capital world, a little bit of money goes a long way, DesJardins notes. Unlike most big leveraged buyout funds, which frequently are under pressure to make sizable investments – sometimes on the order of $500 million – in any given deal, the average investment size for a typical VC fund is less than $5 million. In the case of Forrest, Binkley & Brown, one of L.A.’s prominent venture firms, for example, it invested only $30 million in deals last year, according to the Los Angeles Business Journal.