July 17 (Bloomberg) -- New Enterprise Associates, the venture capital firm that backed Juniper Networks Inc., made a 26-fold return on its stake in Data Domain Inc., the biggest payout for a venture firm this year, partner Scott Sandell said.

The firm received $372.4 million after a $14.7 million investment, Sandell said in an interview. EMC Corp., the largest maker of storage computers, agreed to buy Data Domain for $2.1 billion this month, with stockholders set to tender their Data Domain shares by midnight tonight.

NEA’s return shows that big venture firms can still deliver a payoff by finding promising companies at the earliest stages, Sandell said. NEA’s Data Domain investment was made by a $2.3 billion fund, the sixth-biggest in the venture-capital industry’s history. NEA is bucking a trend toward raising smaller funds focused on startups that need less money to grow.

“What you get is diversification and consistency,” Sandell said. There are 40 to 50 companies that are still in the fund, he said. For them, “the final chapter is still being written.”

Venture firms such as NEA, which was founded in 1978, make investments through limited-partnership funds they raise every few years. NEA’s 10th fund, known as NEA 10, invested in Data Domain.

Smaller Funds

“Critics will say there’s no way NEA can do seed-stage deals, and this is the perfect opportunity for them to say we absolutely can,” said Jonathan Roth, president of New York- based Abbott Capital Management LLC, which invests in NEA funds. “For every person who says they can’t, two words: Data Domain.”

Most recent venture funds have gotten much smaller, as the firms struggle to post returns on big funds raised during the Internet boom. The average size of venture-capital funds raised in the first half of 2009 was $85.3 million, compared with $143.7 million in 2007, according to the National Venture Capital Association in Arlington, Virginia.

Paul Kedrosky, a senior fellow at the Ewing Marion Kauffman Foundation, said last month that the venture capital industry needs to shrink by half in terms of dollars raised, because there is too much money chasing too few deals.

“This is nice for NEA, but it proves the trouble with large funds,” Kedrosky said in an e-mail this week. “NEA would have required 6 1/2 Data Domain-like exits -- true outliers -- just to return the capital committed.”

NEA’s Performance

The Kauffman Foundation, based in Kansas City, Missouri, created the Kauffman Fellows program at the Center for Venture Education in Palo Alto, California, to train young venture capitalists.

The fund that invested in Data Domain has backed 124 companies, said Suzanne King, a partner at the firm. Fifteen have held initial public offerings and 33 have been acquired. Five have returned six to eleven times their initial investment, she said.

NEA 10 has performed better than about three-quarters of venture funds raised in 2000, according to data from the California State Teachers Retirement System and researcher Cambridge Associates. Through Sept. 30, NEA 10 had an annual return of 3.2 percent, according to CalStrs. The average venture fund started in 2000 lost 1.7 percent a year, Cambridge said.

Data Domain, based in Santa Clara, California, was founded in NEA’s offices with an initial investment of $250,000 by Princeton University professor Kai Li. The idea was to replace computer tapes used to store data with hard disks, which had been considered less reliable. Hopkinton, Massachusetts-based EMC announced the purchase on July 8, ending a two-month bidding war with NetApp Inc.

To contact the reporter on this story: Tim Mullaney in New York at tmullaney1@bloomberg.net

Last Updated: July 17, 2009 14:58 EDT