DAG Ventures back to market seeking $600M

You can make a killing being friends with Kleiner Perkins Caufield & Byers. So suggests the rise of San Francisco-based DAG Ventures, which is raising $600 million for its fourth fund, according to several sources familiar with the fund-raising effort. One source says the firm initially targeted $700 million.

No matter how much capital the partners are seeking, the fund size is notable for a firm whose first venture fund closed just four years ago with $60.3 million. The pace at which the firm is fund-raising, though, and the amount that it is raising, is in keeping with DAG’s aggressive trajectory thus far. DAG, which previously focused on buyout opportunities, raised $325 million for its second fund, which closed in 2006. Just last year, it raised $500 million for fund III.

The firm did not immediately respond to requests for comment.

The team of DAG—f.k.a. Duff Ackerman & Goodrich—doesn’t have conventional venture capital roots. DAG co-founder John Duff, a Yale-educated lawyer, was chief counsel at Bechtel before becoming managing principal of the defense contractor’s private equity subsidiary, Bechtel Investments. DAG co-founder Tom Goodrich was a principal at Bechtel Investments and focused on buyouts of mid-size companies.

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 by co-investing with VCs whose funds many LPs are clamoring to access.

Among the well-known firms that DAG has joined in later stage deals are Kleiner Perkins, Khosla Ventures, Benchmark Capital, Accel Partners and Sequoia Capital. And among the many Kleiner Perkins deals that DAG has joined are social networking site Friendster, biofuels maker Amyris Biotechnologies and Mevio (f.k.a. Podshow), which operates a video aggregation site that promises advertisers “brand safe” content.

DAG appears to have enjoyed a number of exits so far, too.

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, according to Thomson Reuters (publisher of PE Week).

Another liquidity event that went well for DAG was when online video-sharing site Grouper Networks was bought by Sony Corp. for $65 million in 2006. Grouper had raised $3.75 million from DAG and T-Venture Holding GmbH after raising $1.5 million in angel funding.

Earlier in 2006, Verisign paid $30 million to purchase CallVision, an Internet billing and customer relationship management company that had raised $5.8 million from DAG and three other investment firms.

Other DAG portfolio companies to be acquired include Oakley Networks, a monitoring software startup bought by Raytheon for undisclosed terms last year; Trapeze Networks, which raised $102.4 million from 10 firms and sold its wireless Local Area Network technology to Revolution Partners for $133 million in June; contact management software concern Plaxo, which raised $23.4 million and was acquired by Comcast for an undisclosed amount reported to be about $175; and enterprise messaging company Zimbra, which raised more than $30 million in funding from Accel and Benchmark, among others, before Yahoo bought it last fall for $350 million.

Not all LPs understand DAG’s strategy. While jumping into the follow-on rounds of some of the toniest VC firms is providing DAG with a wide array of stakes, marking up the deals of Kleiner Perkins and its ilk can be expensive, says one endowment manager, who questions the furious pace at which DAG in investing.

“I’m not sure why LPs are going so crazy. I think DAG’s strategy makes a bit more sense at a smaller fund size where they can be a bit more selective,” says the LP source, who has invested in many of the funds DAG co-invests with.

Last year alone, DAG participated in the funding rounds of 23 companies, including many it led, such as Amyris’ $70 million Series B round in September. As of the end of last year, DAG had called down about 25% of its third fund, according to the California Public Employees’ Retirement System.