DCM Ventures, an early stage venture firm, with offices in Menlo Park, Ca.; China; and Japan, has just closed its eighth early-stage fund, DCM VIII, with $500 million.
The fund came together on the heels of two other funds that DCM has raised in the last 18 months, including a $170 million “Turbo Fund” that DCM is using to invest in growth-stage companies (that it mostly but not exclusively has previously funded), and a $100 million “A Fund,” which is a healthy-size seed-stage fund that DCM is using to fund mobile and emerging platforms.
Altogether, DCM is now managing more than $3 billion. That’s a lot of money, even for a firm that’s been around since 1996. But here’s what DCM can boast that most venture firms in recent years cannot: It has also returned a lot of money to its investors — $1.5 billion over the last three years, in fact.
Last week, we chatted with firm co-founder and general partner David Chao about how DCM pulled off this hat trick. Our chat has been edited for length.
TC: What’s the mandate of this new, $500 million fund?
DC: It hasn’t really changed. Trying to get 15 to 25 percent of Series A rounds in the U.S. and Asia has been our bread and butter for the last 20 years.
TC: And your A Fund, which closed last year — why is it necessary to run that separately?
DC: With the advent of angel rounds and seed rounds and convertible notes, we felt we could be more bold and experimental with the A Fund. For example, a lot of game companies aren’t the greatest profile for a typical venture fund. It’s a hit-or-miss business — almost like Hollywood movies. We also focus on new platforms. So when we did some of our first VR deals and drone deals, we did it out of our first A Fund [which closed in 2011], and we’ve done more VR and AI deals out of our second A Fund already. So it’s a higher risk fund.
TC: It’s also high reward, seemingly. That first fund invested in Kakao Talk, a cross-platform mobile messaging application that took off.
DC: Its first round was [valued at] $100 million [premoney], so it wasn’t a typical main fund bet. [Ed: Kakao went public in 2014, and its valuation continued to soar. Though competition from soon-to-be public LINE has dampened its growth, Kakao is still valued at $6.4 billion currently.)
TC: You’re also writing checks from a growth fund. Why, and how many late-stage deals have you done?
DC: Late-stage isn’t really our strength, nor do we have a history of doing a lot. We just want to cherry pick the rounds of companies we know well, and maybe another 20 percent of it goes to a brand-new, late-stage deal. So we kind of disciplined ourselves and thought, When you look at our pipeline, there are probably 10 deals every few years that we want to double down on.
Our first Turbo fund has already returned 4x.
TC: What were its breakout hits?
DC: We invested in [discount retailer] Vipshop in the pre-IPO round, and we were the anchor — or lead — investor at the actual IPO. We did the same with 58.com, which is the Craigslist of China, and Tuniu in China; it’s the second largest travel company there.
TC: Have you done any PIPE deals, or would you?
DC: We’ve due diligenced a couple of PIPE deals in the last 10 years, but in the end, we weren’t comfortable with them.
TC: Have you backed a late-stage company that you didn’t first fund when it was less mature?
DC: Only one company so far has been a late-stage company that wasn’t out of DCM, and that was out of our fifth fund and we backed [the interactive media company] RockYou. It’s profitable now, but it’s taken longer than we thought.
How how DCM returned $1.5 billion to investors in three years’ time, the play-by-play:
1.) Invest in companies that enjoy hugely successful IPOs (and double down as these companies are making their market debut), as with:
58.com (NYSE: WUBA)
Kakao Talk (KOSDAQ 035720)
Vipshop (NYSE: VIPS)
2.) Fund startups that bigger companies want to buy, like:
1 Mainstream (acquired by Cisco)
99 Bill (sold to Wanda Group)
Basis (acquired by Intel)
Happy Elements (sold to an investor consortium)
NxEdge (sold to Trive Capital)
Pharmaron (sold to an investor consortium)
SandForce (acquired by LSI)
Slice (sold to Rakuten).
Pictured above, DCM’s five general partners. From left to right, they are David Chao, Osuke Honda (based in Japan), Hurst Lin (based in China), Jason Krikorian (based in Menlo Park), and Ramon Zeng (also based in China).