Venture Capital's Growing Aspirations

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Even funds that target early-stage tech companies are looking far beyond the Valley for home runs. 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.

Squeezing the Middle

The hunt for more capital-intensive, later-stage investments and promising startups in the booming markets of India and China is causing fund managers to make tough choices. Venture funds between $400 million and $700 million are often too polyglot to compete with smaller, sector-focused funds, but not quite big enough to cover the plane-hopping and branch offices required to forage for opportunities in Asia. So the pension funds and university endowments that put up the money during fund-raising are looking at the ends of the spectrum, not the middle. "A limited partner looking at this might say, 'I already have an international fund, a life-science fund, and a mega-fund. What do you bring to the table to differentiate?,'" says Mark Heesen, president of the National Venture Capital Assn. "That fund that's trying to be all things to all people—it might be hard for them to respond to that."

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.

To be sure, investment in U.S. startups is still rising. Venture capital investments in U.S. companies rose 8%, to $25.75 billion in 2006, according to Ernst & Young and VentureOne. Among the year's bigger Web deals, cell-phone service provider Amp'd Mobile raised $150 million in April from investors that included Intel (INTC) and Qualcomm (QCOM). Spot Runner, an online ad agency that creates and places ads for small businesses and has former AOL executive Robert Pittman on its board, announced $40 million in funding on Oct. 30 from CBS (CBS), Interpublic Group (IPG), and others.

Keith Rabois, vice-president for corporate and business development at social-networking site LinkedIn, which Jan. 29 closed a $12.8 million round of funding, sees a winnowing on the horizon (see BusinessWeek.com, 1/29/07, "LinkedIn Reaches Out"). "In 2005 and 2006, even with mediocre A-round results, you could get a B round," he says. This year, "people are going to be very critical."

Ricadela is a writer for BusinessWeek.com in Silicon Valley.