Back in 1990, then relatively young venture firm Draper Fisher Jurvetson started thinking about how to expand the firm’s presence outside of Silicon Valley and share ideas and diligence with other VCs in the industry. DFJ created a partner network of independent VC firms across the globe that adopted DFJ branding. It was the closest thing to VC franchising at the time.
The first firm who joined was DFJ Polaris, who was based in Alaska. This network was an early version of the agency model that many VCs have adopted in the past few years as the affiliate VCs and DFJ combined created an extended network of resources (both in the U.S. and globally) for portfolio startups. Now DFJ is announcing that the firm is restructuring the network to clarify branding and create a governing board around the body.
To date, there have been 16 outside funds who have joined the network, 11 of which are outside the U.S. These include DFJ Mercury, DFJ Athena Korea, DFJ Frontier, DFJ Esprit, among others. As mentioned above, these firms are independent when it came to fundraising, LPs, and decision-making on when to fund startups. In turn for the branding and access, DFJ would have some carry in the funds that joined DFJ’s network (and there was also income paid to DFJ in the form of dues).
As part of the restructuring, DFJ will be creating a governing board, who will oversee the entire network, which includes DFJ’s own funds, DFJ, and DFJ Growth. The board is composed of a DFJ partner and includes representation from other network partners. Along with the board, the partner networks will be dropping the DFJ-branding from their names. For example, DFJ Mercury is now Mercury Fund.
So why the change? As the firm explains, the partner funds have matured, and are self-sustaining, meaning the DFJ branding is no longer necessary for these funds to create deal flow and more. DFJ Partner Don Wood, who also holds a seat on the governing board of the DFJ network, says the “restructuring wasn’t necessary per say, but instead it was an evolution and improvement of network.” He adds, “The benefits of the network remains the same, it’s just that the governance of the network has changed and actually gives a strong and equal voice to all the members of the DFJ family.”
In terms of the branding decision, Wood explains that the DFJ name attached to these independent funds caused confusion, especially amongst LPs and entrepreneurs.
As for the board, the benefit is two-fold, he says. First, it clarifies any confusion on how the network works. And second, it makes the network more of a democracy. For example, if a new firm wanted to join the network, the board will make the decision. This was previously made by DFJ in the past.
The board itself will help coordinate benefits, such as discounts to office services, to all startups in the network’s portfolio. Another interesting change–DFJ itself will no longer have any direct economic benefit to firms joining the network. Member firms still pay their dues (though now to the board), and DFJ will not get any carry in network firms. Dues from the partner networks will go towards creating services and making hires that can manage the relationships and networks between firms.
The question many may ask how the network firms have responded to this change. According to DFJ, they have embraced these changes and also found the existing structure to be confusing to both LPs and startups.
DFJ JAIC, which is going to be known as Draper Nexus, launches a cross border VC firm with around $50 million to invest in Japanese and US startups. The firm joined the network in 2011, and saw DFJ as an opportunity to give startups a global network of access points. “Our four person fund has limited brainpower and we wanted to tap into a larger knowledge base, and take a more global view to managing and helping our startups,” says Quaaed Motiwala, Managing Director of the firm.
Wood says that since the decision was made (which was unilateral across the network), no firm has dropped out of the DFJ partner program. In fact, many of the partners from DFJ network firms decided on the new infrastructure themselves.
DFJ, who last closed its tenth, $327 million fund back in 2010, says that this was the natural evolution of the partner program. You also have to wonder if the firm is raising a new fund, and decided to take some of this feedback from LPs into account. It should also be interesting to see whether any other VC firms follow suit in creating a similar structure.