'THE SUPER ANGELS', THE NEW BREED OF ANGEL INVESTORS THAT PROVIDE MORE THAN JUST CAPITAL

When it came time last year for Twitter Inc. to sign its first major revenue deals – with Microsoft Corp. and Google Inc. – neither the start-up's executives nor its investors did the negotiating. The hot micro-blogging start-up instead turned to one of its advisors and early angel investors, Chris Sacca, a former head of special initiatives at Google Inc. who has invested in 35 start-ups.

"I went in and helped conceive of and negotiate the search deals with data and licensing with those providers," Sacca said. "I knew [Google and Microsoft] but also we didn't have biz dev guys yet." Sacca's work with Twitter is one example of the increasing influence and importance of an emerging group of angel investors who are using their expertise, and wealth, to help build new companies. Unlike many angel investors - traditionally affluent people who invest on the side and provide little more than their checkbooks - these so-called super angels act more like full-time venture capitalists. They're typically successful entrepreneurs, or like Sacca, former technology executives, who actively work with the companies they invest in and sometimes take board seats. These angels mostly focus on Internet and software-as-a-service start-ups since the costs to create these companies have fallen dramatically in recent years with open source software, open Web standards and cloud computing. This allows the angels to provide much of the early capital that larger venture capital firms used to provide. And, as companies like Facebook Inc. and Zynga Inc. have proven already, the potential to make fast money on the Internet is extraordinary. "It's built over the last year to a fever pitch," said Dave McClure, an early PayPal Inc. employee who invests as an angel for himself while also heading seed investing for venture firm Founders Fund. "All of a sudden it seems like seed investing is the 'It Girl' at the party. Everybody's trying to jump in." The Mini-VCs More and more, these investors are toeing the line between angels and venture capitalists. Some of them are creating small seed funds that can compete with venture firms in Series A deals by pooling together money from other influential angels or even institutional investors. Former entrepreneur Mike Maples, for instance, who has invested in notable Web start-ups such as Chegg Inc., Digg Inc. and Twitter Inc., runs a firm called Floodgate that manages a $35 million pool of angel money. Other prominent angels have even moved onto traditional venture capital. Reid Hoffman, the founder and chairman of LinkedIn Inc. and a prominent angel investor, joined venerable venture firm Greylock Partners as a partner last year. Another super angel, Netscape Communications Corp. founder Marc Andreessen, recently founded his own venture firm with longtime angel Ben Horowitz, following in the footsteps of Josh Kopelman, who helped create seed-stage firm First Round Capital. But many super angels define themselves as more closely aligned to the interests of entrepreneurs than venture capitalists, who some say are too focused on home run exits and don't provide enough hands-on guidance. "VCs generally depend on forcing companies to a binary outcome," said Sacca. "They say, 'Look we don't want you to sell until you go to $1 billion.' I appreciate that you paid to invest but if I go to zero, I [as an entrepreneur] get nothing." One angel that is getting more involved is serial entrepreneur Manu Kumar, who has just raised a $6.25 million fund for his firm, K9 Ventures, which he manages himself. In 1996, Kumar founded SneakerLabs Inc., which was acquired in 2000 by Octane Software Inc. for more than $100 million. He then co-founded Web conference company iMeet Inc., which merged with Netspoke in 2002 and sold in 2005 to Atlanta-based Premier Conferencing. Kumar, who has a Ph.D. in computer science from Stanford, started investing his own money in 2000, but in 2007 he noticed that there was a gap between $5 million Series A venture rounds and smaller angel bets. So he decided to raise a new fund from individuals and family offices, partly from investors in his past companies, to plow large sums of money into start-ups. "I realized I wanted to be making a much bigger commitment at the angel level while also being able to do everything I can to help the company," said Kumar, whose investments include online crowdsourcing company Dolores Labs Corp., doing business as Crowdflower, cloud voice-services provider Twilio Inc., online DNA sequencing company DNAnexus Inc. and Highlightcam, a Web cam service for video monitoring. Leading with a larger angel investment can give the right to a board seat, help draw in other investors to the company, quicken the closing of a deal because a smaller number of investors are needed, and allow one angel to do virtually an entire round if others are not interested. Also, having a fund provides more ability to invest in the Series A round pro rata and a cushion to prevent dilution. Several other prominent angel investors have also recently raised new funds. Ron Conway, arguably Silicon Valley's most well-known angel investor, recently closed a new $20 million fund for SV Angel, which he manages with five partners. David Cohen, director of Colorado-based incubator TechStars, confirmed he just closed a $4.5 million fund. And last year, several notable East Coast entrepreneurs with angel-investing experience pooled their money together to form Founder Collective with a $40 million fund. Also in the market raising funds are Sacca, McClure and Aydin Senkut, a former Google executive who now runs his own firm called Felicis Ventures, according to regulatory filings and published reports. They all declined to discuss the fund-raising, citing Securities and Exchange Commission rules. Flexible Fund Dynamics Driving all these new funds are the changing dynamics of the venture capital industry. In the past decade, venture funds have grown larger, and in many cases are too big to make small investments in start-ups that don't require that much money. Even what is now a relatively small $200 million fund, for instance, can only make so many bets before the portfolio becomes too unmanageable. Also, many venture firms can't make what they consider meaningful returns for their investors on seed investments. For example, even if a firm that manages a $200 million fund made a 20x return on a $500,000 investment, that $10 million return will not significantly "move the needle." McClure said many venture funds need five out of 30 companies to have exits the size of Skype Technologies SA, which was acquired for about $2.6 billion in 2005 by eBay Inc., to be successful. Angels, on the other hand, can shoot for 10 smaller exits out of 100 investments at the size of Mint Software Inc., which was acquired for about $170 million by Intuit last year. McClure was an advisor and investor at Mint, which also received angel backing from Ron Conway, First Round Capital, Felicis Ventures and others. Chris Dixon, one of the partners who runs Founder Collective and who made an early bet on Skype, pointed to Google's March acquisition of Docverse Inc., one company he invested in, in which the price was not disclosed but published reports pegged at about $25 million after raising less than $2 million from seed investors Baseline Ventures, Naval Ravikant and Michael Dearing. "If it was funded by VCs, that's not successful, but because it was angels it's a very good return," Dixon said. "The fact that you put smaller amounts in at a lower valuation gives more flexibility with the size of exits." Larger venture firms, such as Charles River Ventures, CMEA Capital, Index Ventures, Polaris Venture Partners, Redpoint Ventures and Sequoia Capital, have also moved more into seed investing, but some firms are doing this more to generate an inside track on larger Series A rounds than to generate returns from an investment, McClure said. This has led to some competition where some angels prefer to keep certain larger venture firms out of seed rounds, according to Dixon. More Than Checkbooks Super angels are usually chosen by entrepreneurs because they fit in at least one of three categories, according to Paul Graham, partner at Y Combinator. They either are highly networked individuals, such as Conway, who has made early bets in Internet companies like Google, PayPal and Twitter; tech geniuses, such as Paul Buchheit, one of the creators of Gmail, who later founded FriendFeed Inc., which was acquired by Facebook; or have deep business expertise in a certain field or sector, such as Max Levchin, who founded PayPal Inc. and now is chief executive of Slide Inc. One start-up, WePay Inc., an online group payment service, tapped Levchin because of his knowledge of online fraud, online payments and his relationships with banks from his experience at PayPal, said Bill Clerico, chief executive of WePay. "Max built the PayPal fraud system," Clerico said. "We knew that, so that's why we aggressively sought him out." WePay has raised $1.65 million total from August Capital and angels McClure, Levchin, Conway and Y Combinator. What they all have in common is that they're providing more than just a check, getting their hands dirty and helping guide entrepreneurs as they build their companies. "What I'm seeing, particularly with my approach, is almost every angel deal that gets done has one or two angels that get highly involved," said new angel Travis Kalanick, who sold his company Red Swoosh to Akamai Technologies for $19 million in 2007 after receiving $1.7 million in funding. "They're not just financial investors. One or two individuals will help them with marketing or company strategy or hiring." Kalanick, who left Akamai in 2008 and began investing in March 2009, has invested in Blipify Inc. doing businsess as Blippy, Expensify Inc. and Kareo Inc., among others. He helps entrepreneurs with hiring, introductions to partners, strategy or sales, and therefore only has time to invest in about 8 to 10 companies per year. Kalanick often invites his portfolio companies to come to his house in San Francisco for "jam sessions" where entrepreneurs get together and talk shop. The angels in Silicon Valley often invest together and know each other well. Despite having dozens of companies to manage, they often split up tasks for sales, partnerships or marketing among each other to make the work more efficient, Clavier said. Often, Clavier and one or two others who make up 50% to 60% of the investment in a round will discuss which angels would have the best knowledge, skills or connections for a particular company, and then they'll try to bring them in as investors, Clavier said. Clavier, who estimated he has invested in 20 companies with Senkut and 17 with Conway, calls this a "distributed partnership." "We all make independent investment decisions but we work together very efficiently," Clavier said. Ultimately these angels' biggest asset is knowledge from past start-ups that they can pass on to new entrepreneurs. "The big thing for me is having made many mistakes and now being able to help people figure what the right way is to do things," said Othman Laraki, an angel investor and executive at Twitter. "What are the things I learned to start a company that I didn't learn from a book? That's what I can share with people."

With costs to create tech companies falling, a new crop of angels is providing much of the early capital that large firms used to provide, and they are adding their expertise and influence as well. Many super angels say they are offering the kind of hands-on guidance VCs no longer provide.

COMMENTARY:  If you are looking for venture capital and need an angel investor, this is a must read. The angels are all around you.  All you have to do is look.  Thank you, Tomio Geron, The Wall Street Journal's VentureWire.

Courtesy of an article dated April 28, 2010 appearing in The Wall Street Journal's VentureWire