Is DAG operating under a capital constraint?

Institutional LPs have been getting financially squeezed, and venture capitalists are suddenly feeling the pinch.

Since the beginning of the yearr, PEWeek has learned of three, unannounced fund “adjustments” at vintage 2007 and 2008 funds that closed but are now having to downsize. It has learned of one firm now running every new investment decision by its base of LPs. And this week, even news of some very well-capitalized funds “tightening up” is beginning to leak.

DAG Ventures, for example, a firm best known for investing in the mature deals of Kleiner Perkins Caufield & Byers, as well as for its fundraising prowess — it was raised a stunning $1.425 billion in commitments across three funds since 2006 — has historically invested at a rapid-fire pace. In 2007 alone,it participated in the funding rounds of 23 companies, including many it led, like the $70 million Series B round of Amyris Biotechnologies Inc., an Emeryville, Calif.-based startup that develops renewable hydrocarbon biofuels.

Yet according to one VC whose firm has co-invested with DAG in several companies, DAG, which “used to invest in deals sight unseen,” is “definitely acting now like they’re under capital constraints,” says the VC, who asked not to be named.

Indeed, since October, DAG has disclosed just three investments. Late last year, it participated in a $20 million round for Kosmix, a Mountain View, Calif.-based developer of vertical search engines. It also participated in a $10 million round for One True Media, a Redwood City, Calif., startup that develops online editing and sharing tools for videos and photos, and in an $11 million round for Gigya in Palo Alto, which sells tracking software to online widget makers.

Meanwhile, before the global slowdown, DAG had invested in four startups in August alone. The firm participated in a $25 million round for Jasper Wireless, a Sunnyvale, Calif., wireless startup focused on machine-to-machine data communication; in a $20 million round for Amyris; in a $14 million round for the personal transportation startup Segway, based in Bedford, N.H.; and a $20 million round for the San Francisco-based social networking company Friendster.

DAG did not respond to a request for comment from PeWEEK. A second source close to the company says that DAG has been making capital calls over the last couple of months without issue.

“It’s getting to be brutal,” says Robert Hofeditz, a partner in the San Francisco office of the placement agency Probitas Partners. “No one is immune.”

Hofeditz says that none of the LPs with which Probitas works has called the firm, looking for a way out of commitments. He adds, “That’s not to say it won’t happen, but it hasn’t yet.”

Yet there’s no question that even institutional investors that have long been held in the highest regard are no longer a safe bet. Not only have the endowments of leading institutions like Harvard, Yale, and the University of California been whipsawed by the downturn, but they now have more capital calls than they do incoming distributions. Worse, they’re still obligated to underwrite what typically amounts to between 20 percent and 30 percent of their schools’ operating budgets.

Says one VC, “Everybody is hesitant to make capital calls right now. You don’t want to know if your LPs are going to back out. It’s almost like the don’t-ask-don’t-know school of venture capital. If you don’t know, you can comfortably tell everyone that your LPs are fine. If you call and your LP can’t help you, what do you do? If you forgive them, you set a precedent that you really don’t want to set.” Enforcing agreements, however, can be an even worse option. “No one wants to sue. GPs just don’t go there.”

Adds the VC, who has worked in the industry for more than a decade: “I’ve heard of LPs failing to make capital calls by choice. I’ve never [before] heard of an LP failure to make a capital call because the money just isn’t there. Before late November, early December, it just wasn’t a risk that anyone thought about.”