DAG Ventures Raising $600M Fund

Updated You can make a killing being friends with Kleiner Perkins Caufield & Byers. So suggests the stunning rise of San Francisco-based DAG Ventures, which peHUB has learned is raising up to $800 million for its fourth fund $600 million, according to several sources, one of whom says the firm initially targeted $700 million. (The $700 million figure is consistent with a recent report in the weekly newsletter Private Equity Insider.)

It’s an almost preposterous amount of capital for a firm whose first venture capital fund closed just four years ago with $60.3 million. Then again, it’s in keeping with DAG’s aggressive trajectory thus far. DAG’s second fund closed with $325 million fund in 2006; in 2007, it raised a third, $500 million fund.

The team of DAG — originally known as Duff Ackerman & Goodrich –doesn’t have conventional venture capital roots; they didn’t come from another venture firm or stumble into VC from a management role at a technology company. DAG cofounder John Duff, a Yale-trained lawyer, was chief counsel at defense contractor Bechtel before becoming managing principal at its private equity subsidiary, Bechtel Investments. His eventual cofounder, Tom Goodrich, was a principal at Bechtel Investments focusing on buyouts of mid-size companies. (Indeed, until 2004, DAG focused on buyout opportunities.)

So how is DAG Ventures managing to raise so much money at a time when many other firms are scrambling? The answer, it seems, is investing behind the VCs whose funds LPs are dying to access: brands like Khosla Ventures, Benchmark Capital, Accel Partners, Sequoia Capital, and Kleiner Perkins Caufield & Byers, which DAG has joined more often in later-stage deals than any other venture firm. Among many other KP deals that DAG has joined are social network Friendster, biofuels maker Amyris Biotechnologies, and Mevio, formerly Podshow and today a video aggregation site that promises advertisers “brand safe” content.

In light of the many institutional LPs who say if they can’t back the glitziest firms in Silicon Valley, they’re not bothering with VC, it’s tempting to call DAG’s strategy brilliant. The truth is that I don’t fully understand it. While jumping into the follow-on rounds of some of the Valley’s “top tier” firms is providing DAG with a wide array of stakes — some of which will presumably provide returns — marking up the deals of KP and its ilk has to be mighty expensive, especially given the furious pace at which DAG is investing. Last year alone, it participated in the funding rounds of 23 companies, including many it led, like Amyris’s $70 million Series B round last September. What kind of upside does that leave the firm, and its investors?

The firm’s managing directors did not respond to a recent interview request about its strategy or its new fund, but DAG appears to have enjoyed a number of exits so far. In 2005, SanDisk acquired 3D integrated circuit maker Matrix Semiconductor in a deal valued at $250 million; Matrix had raised $175 million from eight firms, including DAG and Benchmark Capital. DAG also made out well when online video-sharing site Grouper sold to Sony Corp. for $65 million in 2006. Grouper had raised $3.75 million from DAG and another firm after raising $1.5 million in angel funding. And earlier in 2006, Verisign paid $30 million net of cash to purchase CallVision, an Internet billing and customer relationship management company that had raised $5.8 million from DAG along with three other investment firms. Other portfolio companies to be acquired, include Oakley Networks, bought by Raytheon for undisclosed terms; Trapeze Networks, which raised $102.4 million from 10 firms and sold to Revolution Partners for $133 million; Plaxo, which raised $23.4 million, was acquired by Comcast for an undisclosed amount rumored to be around $175; and Zimbra, which raised $30.5 million and sold to Yahoo last fall for $350 million.

According to the CalPERS website, DAG had called down approximately 25% of its third fund as of year-end 2007.

[UPDATE: VentureBeat is reporting that our story is wrong, having spoken with someone at DAG who said the firm may eventually raise a fourth fund, and that it will be much smaller than $800 million. Two quick notes: (1) The VentureBeat item says DAG is not yet fundraising, but says the partner cannot be named so as not to violate SEC marketing restrictions only in place while fundraising. Moreover, Private Equity Insider recently deported that DAG was coming back to market with a $700 million target. We will update when we have more info.]