VCs Aim to Out-Angel the Angels

Responding to the emergence of a new breed of wealthy investor, venture capitalists are boosting their early-stage investments in startups

by Aaron Ricadela

In October, as startup Jaxtr hit up venture capital firms for its first round of funding, it landed an unusual arrangement. Instead of taking a few million in cash from a firm that would hope to one day book a fat return, Jaxtr took a loan—just $1.5 million, from no less than four VC firms and three angel investors. None got the usual perk of a seat on Jaxtr's board. The result is plenty of independence for Jaxtr, a maker of software that routes calls from blogs and MySpace profiles to cell phones. "You're still basically on your own," says Jaxtr Chief Executive Konstantin Guericke, one of the co-founders of networking site LinkedIn.

Jaxtr's tale illustrates the new calculus governing high-tech venture capital. For years, angel investors and traditional venture firms existed in a sort of symbiosis. Wealthy tech-industry veterans willing to open their checkbooks for $100,000 or so—the angels, as they're known—could bootstrap promising young companies before serious money, to the tune of six or more figures, from venture firms arrived. Angling for a slice of Jaxtr, however, were both groups: Mayfield Fund, Draper Fisher Jurvetson, Draper Richards, and the Founders Fund on one hand; angel investors Ron Conway, Reid Hoffman, and Rajeev Motwani on the other. "The company was a bit in the driver's seat," one investor says.

Angels with Deeper Pockets

What put Jaxtr in the driver's seat is a turnabout in traditional roles for angel investors and venture capitalists. Venture capitalists are responding to the emergence in recent years of what have come to be known as super-angel investors, who sink multimillion-dollar investments into Web startups and other tech companies, often carrying them further into their life span before they knock on VCs' doors. Professional angels and boutique angel funds have been a driving force behind emerging Web companies including Kevin Rose's Digg and Revision3, Marc Andreessen's Ning, search engine Powerset, and online music site Last.fm, to name a few (see BusinessWeek.com, Slide Show: "Tech's Next Gen: The Best and Brightest").

"We have the flexibility to invest like an angel or a later-stage venture capital firm," says David Weiden, a general partner at Khosla Ventures, an angel-investment fund headed by Sun Microsystems (SUNW) co-founder Vinod Khosla. "Because we're investing our own money, we can scale down to whatever we want." Khosla investments range from $100,000 to $25 million, in areas including Internet technology and clean energy.

New Angels in Town

Other super-angels, including Silicon Valley veteran Conway, PayPal co-founder Peter Thiel's Founders Fund, Philadelphia-based Josh Kopelman, and LinkedIn chairman and founder Hoffman, possess similar range, able to keep plugging capital into adolescent companies while swooping in to nab hot startups with an agility big VCs have been hard-pressed to match. "We're not under pressure to put huge amounts of money into every deal," says Mike Maples Jr., who has invested in Digg and Revision3. "The venture guys can't really do that."

Or can they? VC firms on both coasts are responding to the rise of super-angels by seeding startups with more small investments and using loans instead of cash to test ideas from unproven entrepreneurs. In a sense they're aiming to out-angel the angels. The theory is that the investments take less legwork than nurturing companies through traditional rounds of funding, letting VCs get in on promising projects without much risk. "It's their answer to this dilemma," says Conway, an early investor in Google (GOOG) (see BusinessWeek.com, 2/20/06, "A Search Engine for Every Subject").