WSJ.com | February 21, 2012, 3:15 PM
By Zoran Basich
The growing prominence of the technology scene in New York has provided plenty of potential deal flow for venture firms based there. Danny Schultz, managing director of DFJ Gotham, thinks the region is reaching the sort of critical mass that, on a larger scale, makes Silicon Valley a technology mecca.
Schultz’s firm, which people familiar with the matter say closed its second fund at just under $100 million in recent months, invests in technology sectors including digital media, e-commerce, financial technology, mobile and network infrastructure. In the e-commerce space, one of DFJ Gotham’s portfolio companies, Totsy.com, is currently raising its Series B round, according to a person familiar with the effort.
Here’s an edited version of our conversation with Schultz:
There’s been a lot of buzz recently about New York’s tech scene. What makes it a good place to invest right now?
New York’s time is here. You’ve got a situation where you have first-time entrepreneurs who have worked for successful local tech companies and have had the benefit of “drafting” off of the experience and wisdom of successful CEOs and other senior entrepreneurs, learning the art of moving fast. You’re getting kind of a flywheel effect, or a snowball effect here. It’s also great that the city is led by (New York mayor) Mike Bloomberg, an entrepreneur himself. He loves talking about Bloomberg’s early years and New York’s entrepreneurs totally relate to his message.
You’re a backer of Totsy, a New York-based flash sales site. Why does that space interest you?
Totsy targets the moms-and-kids space, which is a rich vein to mine. Let’s face it, moms are a powerful commerce demographic. Additionally, Totsy is not merely focused on the high end luxury market. That’s simply too narrow a product set for the mom/kid demo. Another key differentiator from other flash sale sites is that there are fewer easily identifiable retail distribution outlets in the mom/kid space. They are for the most part all boutiques. From the vendors’ point of view, that’s a distribution challenge that makes flash sales a sorely needed additional outlet for product.
It’s been a difficult fund-raising environment for most venture capital firms. What do you think the current thinking is among limited partners when it comes to the VC asset class?
When the financial meltdown hit, in the midst of this global economic crisis, which sectors took off, demonstrating hyper growth? Smartphones, social media, online e-commerce. These are areas that sit squarely within the zone of what we and other VCs are looking for. And it’s a point not lost on the limited partner community. They see this innovation boom as well.
The larger, brand-name firms have been able to raise large funds over the past year or so, but it’s difficult for most others. What is the environment looking like for smaller firms?
It seems to be improving for smaller firms and here’s why. Pre-money valuations for our investments tend to be in the single digit to low double digit millions, say $4 million-$12 million for example. We can have many companies acquired for $25 million, $75 million, $200 million and be extremely successful for our LPs. The LPs are therefore realizing that small to medium-sized funds can do very well and that the best-positioned funds are a winning hand.
What are you seeing in terms of the exit market?
Liquidity options are different today compared to ten years ago. Historically in venture capital, 80% of exits were M&A. The fact that we’re back in that zone is a good thing, not a bad thing. Now there’s a third leg to the stool, the secondary markets. It’s growing in fits and starts, but I wouldn’t be surprised if the public markets adjust to what the (valuation) message is in the secondary markets. For a fourth leg of the stool, you have private equity funds and buyout funds showing deeper interest in acquiring previously venture-backed companies that are at a more mature phase of growth but not IPO-ready.