Financiers hit jackpot with eToys.

How do you parlay a $3 million investment into $90 million in 18 months?

Invest in the Internet, of course.

At least that's what happened to Torrance-based venture capital firm DynaFund Ventures. Between December 1997 and June 1998, the little-known firm invested $3 million in an 8.23 percent stake in eToys Inc., the online toy shop that plans to hold an initial public offering in the next few weeks.

If all goes according to plan, eToys' shares will be sold to the public at between $10 and $12 apiece. If so, DynaFund's stake will be worth up to $90 million - a 30-fold return on its initial investment.

And of course, if eToys follows the pattern set by other recent e-commerce IPOs, the stock could go much higher. Either way, the young VC firm will have won both a lot of money and a sterling reputation.

"It definitely puts them on the map in terms of being associated with a big deal," said Jonathan Funk, general partner at venture capital firm Media Technology Ventures. "Before this, nobody had heard about them."

To understand how important the eToys deal is to DynaFund, consider that after the IPO, the value of the fund's stake in eToys should be greater than all the money it currently has under management - around $63 million.

"This is a big success for them," said Jon Goodman, director of the EC2 incubator project at USC. "This is their home run."

Founded in August 1997, DynaFund is almost as new as eToys itself.

Its investors are a mix of local technology-industry insiders such as Bill Gross, president of Pasadena-based Internet start-up incubator Idealab!, John McDonald, former CEO of McDonnell Douglas, and a number of Asian corporate and private investors.

While the fund is currently invested in around 20 companies, all technology-related, the eToys IPO will be DynaFund's first "liquidity event" - meaning investors can convert the profits from their investment into cash.

Even as DynaFund's investors prepare to celebrate the IPO, many other venture capitalists in town may be regretting what they missed. In their early days, eToys' principals shopped their company around the local venture capital community with little success.

Brentwood Venture Capital, arguably the most successful venture capital firm in the city, turned them down twice.

"In hindsight, it was a big mistake," said Brentwood General partner Brad Jones. "We were not convinced at the time that toys would sell over the Internet as well as books do."

Media Technology Ventures was another local VC firm that turned away eToys.

"We fell very much on the wrong side of the fence," said Funk. "At the time we were not sure that the toy industry was ready for this business model. And we felt that Toby Lenk (founder of eToys) was unproven as a manager."

As is so often the case, the deal between DynaFund and eToys was partially based on personal relationships.

Tony Hung, a vice president at DynaFund, knew Lenk from the time they worked together doing strategic planning at Walt Disney Co. So when eToys came looking for money, Hung could vouch for Lenk's ability.

Today, Hung not only handles DynaFund's investment in eToys, he is a director of the Internet company.

Alexander Cheung, portfolio manager for the Internet fund Monument Funds Group in Bethesda, Md., says the ability to judge the personal qualities of an Internet company's top management is often more important than analyzing earnings and market growth.

"The numbers are easy," he said. "Doing due diligence on the entrepreneur is extremely difficult."

VC firms sometimes go so far as to check the high school records of Internet company executives, many of whom are still in their 20s.

"The people are critical," Cheung said. "They are going into an extremely competitive environment. You have to see if they have the willpower to take the company to the next level."

By traditional venture capital standards, DynaFund sees its eToys investment mature well ahead of schedule.

Typically, venture capitalists expect to wait three to five years before their investments show a return, either through an IPO or a sale of the company. But with Internet companies, whose market is growing so rapidly, the gestation is being reduced to as little as one year, or 18 months in the case of eToys.

But while eToys is set to become DynaFund's first big success, the fund will have to generate such "home runs" on a regular basis if it wants to be a long-term contender.

"EToys will create the returns that keep investors coming back," said Jones. "But they will have to have more than one big winner."

The rule of thumb in venture capita/is that out of every 10 investments, three will collapse, taking the firm's money with them. Another three will become the "walking dead," companies that stay in business but do not grow to the point where the firm can get its money out. Another three will be moderate successes, meaning that investors may get a 20 percent to 30 percent return. Such limited returns, however, will be cancelled out by the losses suffered in other investments.

As a result, if a venture fund wants to generate the kind of overall returns that will attract investors, at least one out of every 10 deals must see the huge returns that are expected in the eToys IPO.

Having enjoyed a strong Christmas shopping season and fueled by strong demand for Internet commerce-related stocks, eToys' stock is expected to do well. And the expectation among local VC companies is that the offering will be only the first in a string of successful IPOs by local Internet-related companies.

Regularly mentioned as strong IPO contenders are Stamps.com, which allows users to download postal stamps over the Internet, Trading Edge Inc., a service for trading high-yield bonds online, and Sandpiper Networks Inc., which creates software that speeds Internet communications.

The hope is that the fortunes made through these IPOs and others like them will create a new breed of young, super-wealthy entrepreneurs, who will turn around and create new L.A.-based technology companies.