Seed stage, venture capital fund DFJ Frontier (www.dfjfrontier.com) announced this morning that it has raised its second fund, worth $55M. We sat down with Managing Director Scott Lenet last week, ahead of the announcement, to chat about the new fund and what the firm is investing in now.
Congrats on the new fund. What kind of investments are you targeting with this new fund?
Scott Lenet: We're really excited about the new fund. It's $55 million, which is two times the size of the first fund. We've increased our focus on Southern California, which is good for you guys. We've opened an office in Los Angeles, and continue to maintain one in Santa Barbara. We continue to be open to all kinds of sectors in the new fund, but we're increasing our efforts in media. The reason we are, is we noticed that as we were going through fund one, and made our first few investments in fund two, there were some really interesting media deals. For example, one of our investments was Boom Studios, the company that publishes comic books and turns those into films.
For those who aren't familiar with your investments, can you talk about your investment style?
Scott Lenet: We're seed stage, and early stage. There's that old joke about a guy, a plan, and a dog. You don't even have to have the dog, you could be as early as--I have this idea, or I need to finish my prototype, or need to commercialize or get my first couple of customers. That's the stage where we get involved. In contrast to the later stage funds--who want to see that you have lots of customers and references, want to know everything about how your business works, and that your business model is proven--we're looking for firms at the stage where it hasn't been proven yet, and where we can help you prove out the idea. We're looking for extraordinary entrepreneurs, who are willing to take the risk--even in this environment--and try to change the technology world.
Talk a bit about your connection with DFJ and how the relationship works?
Scott Lenet: It's a great partnership. DFJ has done something very innovative in creating their network. It consists of funds all over the world, in 33 different cities. We share information with over 150 of our partners. We each run our own fund--DFJ Frontier is different from DFJ in Menlo Park, and Different from DFJ Gotham in New York, or DFJ Mercury in Texas. We each have our own funds, and set of partners with different expertise--but we share our knowledge. One of the things that is really helpful about the network, is before we do a deal, we check it with partners all over the world, to see if they've seen similar companies. It's really important to be local for entrepreneurs, when you're at the very beginning of a company's life. When an entrepreneur call sup, and is interviewing a new candidate for Vice President of Marketing--and asks you to come over on Thursday to interview them to see if you like them too--it's helpful to not have to go get on a plane. You can just drop by and help with those things.
The risk of being local is you have on blinders--you only see what is happening in your own little community. That's the benefit of the DFJ network, you can be local for the entrepreneur, but get the benefit of the global insight of everything that is happening in the entrepreneurial ecosystem. That helps us in a couple of different ways, and to do the right deal. If you see a company, and have seen one or two similar firms, it may turn out that over the world each of our funds is seeing one or two similar companies--which means there are 25 of these things. We can tell whether they'll have a competitive advantage before we fund then. When we do fund the company, the network is really helpful as there are partners all over the world, with relationships with every major company and nearly every entrepreneurial company. If someone needs an introduction to a company--say one of our CEOs needs an introduction to Google--there's someone in the network who can make that intro. It's really great.
How are you approaching new investments in this current environment--it seems like not all venture funds are making investments...
Scott Lenet: We are making investments. There's really an opportunity in the current environment. Obviously, we want to be careful--there's a lot of uncertainty, and a lot of chaos right now. But, historically, downturns have provided some of the best opportunities for company creation. If you go back in history and look at the major downturns, there are many companies that have stood the test of time--companies like HP, Microsoft, etc. One of the things that are nice, if you're an entrepreneur, is with less fresh funds, there are fewer competitors than if you were in a different environment, when everything is go-go. In a go-go environment, you might see ten of a particular business plan funded. Now, there might only be one, two, or three. If you're that entrepreneur that is funded, that's an advantage. The other thing I saw as an investor, is a lot of people get into entrepreneurship for the wrong reasons. In boom times, folks think they'll just make a fast buck. Real entrepreneurs know that its takes hard work, and takes lots of time. In period like this, the fake entrepreneurs run for the hills and go back to their other jobs. Only people who are really passionate about the companies they want to create, are sticking with it during this phase. That's better for us, because the entrepreneurs who are really serious are the people we want to back.
With this new fund, it looks like you're adding lots of venture partners and offices?
Scott Lenet: We've really expanded our team, which began with just me and David. It was fun in 2002, 2003, and 2004 hopping into David's Mini Cooper and driving around California to go from portfolio company to portfolio company. We still do that, but we have greatly expanded the team. Frank Foster, who was a Venture Partner in our first fund, is now a General Partner. He's in Santa Barbara. One great thing about Frank, is someone we got to work with for four or five years before he became a partner. We say it's organic growth. It's similar for all of our venture partners--Bob and Eric in Portland, Jim in Sacramento, and Brian in the Bay Area, and Tony Perkins have all worked with us before. We get along with each other, and our working styles are compatible. With the new fund, we have more resources for entrepreneurs, to give them more money over the life of a deal, but didn't raise so much we had to change what we do. At $55M, we can still do seed stage deals. In the space between $100K and between $1M and $2M, there's a big hole in the marketplace, and it's really hard to get funded as an entrepreneur. For us, raising a fund of this size and new offices really increases the ability to service entrepreneurs, without changing what you do.