'Super Angels' Fly In to Aid Start-Ups

The Wall Street Journal

Aydin Senkut, in his office in Palo Alto, Calif., last week,

plans to announce a $40 million super-angel fund.

 

 

Much of the venture-capital industry is undergoing a shakeout. But a growing breed of start-up investors dubbed "super angels" is rapidly raising new money—and ratcheting up competition with established venture capitalists in the process.

Aydin Senkut, a former Google Inc. executive, plans to announce that he just closed a $40 million super-angel fund from institutional investors and wealthy individuals including hedge-fund manager Peter Thiel. His fund follows a $20 million super-angel fund by start-up investor Ron Conway in May and an $8.5 million fund from by former Google executive Chris Sacca in June.

Meanwhile, former PayPal Inc. executive Dave McClure is raising a $30 million super-angel fund, according to a regulatory filing. And super-angel investor Mike Maples, who raised a $33 million fund in 2008, is raising a new $73.5 million fund, according to a regulatory filing.

Many super angels started out just as mere angels, wealthy current and former Silicon Valley entrepreneurs and executives who invest their own money in technology start-ups.

What elevates super angels into an unofficial upper class generally is the magnetic effect their participation in a deal has on other investors—a main reason entrepreneurs like to do business with them.

And for super angels, investing has evolved into something more than a hobby. These players are now raising funds with outside money, investing full time and competing with VCs.

While their funds tend to be small, super angels have had an outsize impact on Silicon Valley. As many traditional venture capitalists retreated after the tech bust last decade, super angels filled the gap, investing small amounts of $25,000 to $1 million in dozens of new start-ups such as Facebook Inc., Mint.com and Zynga Game Network Inc. Super angels also work with established venture capitalists to bring them new deals.

As these micro-cap venture capitalists now raise their own funds—giving them more ammunition to participate in later financing rounds of a start-up—they are siphoning off more investment deals and fund-raising dollars from larger venture firms.

Judith Elsea, a managing director at Weathergage Capital, a $250 million fund-of-funds firm that invests in venture funds, says she recently invested in Mr. Senkut's new super-angel fund and has also put money into Mr. Maples's super-angel fund—at the expense of traditional venture funds.

"It's been pretty spotty" performance from regular venture funds, says Ms. Elsea. So "we have material exposure to several of these [super angel] managers."

Investing in super-angel funds can pose risks in that they typically invest in far-less-proven start-ups than venture capitalists do. And unlike venture capitalists, who have hundreds of millions to invest, super angels generally don't have enough money to fully fund a company to fruition.

Still, super angels are increasingly jockeying with established venture capitalists for stakes in start-ups. Geoff Yang, a venture capitalist at Redpoint Ventures, which closed a $400 million fund earlier this year, says his firm has been "squeezed" into a smaller ownership share in some investments because super angels wanted a bigger slice of the deal. While angels have brought many new start-ups to Redpoint's attention, "every [venture capitalist] is trying to figure out what their strategy is" with them, he says. "Are these guys friend or foe?"

Some start-up entrepreneurs say super angels have thrown them lifelines they couldn't secure from venture capitalists. Ryan Howard, chief executive of San Francisco online health-care start-up Practice Fusion Inc., says venture firms turned him down in 2008. They "want no risk," he says.

Super angels wrote Mr. Howard checks for $25,000 to $100,000, so that he was able to raise $1 million by early 2009. "Their network is mind-blowing," says Mr. Howard, whose firm raised a venture round from Morgenthaler Ventures late last year.

The super-angel activity contrasts with the rest of the venture industry, which is winnowing out after a decade of poor returns amid a lackluster initial-public-offering market for start-ups. The number of active venture firms is nearly one-third less than the 1,326 in 2000, according to research firm VentureSource.

Super-angel Mr. McClure says he tends to make dozens of small start-up bets and can comfortably make money if just a few of the start-ups are bought by larger acquirers for less than $100 million.

In contrast, big venture funds—often sized at several hundred million dollars and up—need bigger paydays to turn a profit on their huge funds.

"We have a whole different set of exit criteria," says Mr. McClure, whose biggest exit to date is Mint.com, the financial website that Intuit Inc. bought late last year for $170 million.

Mr. Senkut, who has invested in more than 60 start-ups as an angel investor since 2005, says he raised a super-angel fund because he wants to shift from being a minority investor in start-ups to taking majority stakes more often. With the new fund, the 40-year-old is growing from a one-man shop to a larger operation by hiring two staffers.

Having seen 10 acquisitions of start-ups in his portfolio over the past year—including Mint.com to Intuit and social search service Aardvark to Google Inc. for $50 million in February—Mr. Senkut says he is exiting from his start-ups three months to three years after the initial investment. By contrast, most venture-backed companies now either go public or get sold after a median time of 9.4 years, according to VentureSource.

VC Funding Gaining Steam in California

LA Times

Investment reached almost $4 billon in the state during the second quarter, a 51% gain from a year earlier and the most since the third quarter of 2008.

Venture capitalists are quietly reasserting themselves in what is one of the few bright spots for the California economy.

Venture capital investment reached almost $4 billon in California during the second quarter of this year, a 51% gain from the same period last year and the most since the third quarter of 2008. The number of companies they are funding also rose — up more than 8% to 296 compared with a year earlier, according to Dow Jones VentureSource, which collected the data.

Eventually this will mean jobs for California.

"The venture industry creates a lot of jobs because they are funding companies that are starting up almost from scratch," said Jessica Canning, global research director for Dow Jones VentureSource in San Francisco.

Venture capital investment is approaching its pre-recession levels, she said.

"This is good news," said Stephen Levy, chief economist and director of the Center for the Continuing Study of the California Economy in Palo Alto. "The investment will turn into jobs as some of these companies become successful."

Levy cautioned that the venture capital investment numbers represent a leading indicator for job growth and that the effects of the funding would take many months if not years to play out, "but as a first step it is very positive and probably along with the revival of business at the ports is the best economic signal going on for California."

Any upward eddy in jobs is of crucial importance to California, which some economists fear could fall into a double-dip recession.

On Friday, the California Employment Development Department said the state's jobs climate stagnated in June as part-time federal census workers lost their jobs and about 400,000 out-of-work people lost their unemployment benefits.

Although the monthly, seasonally adjusted unemployment rate crept down a tenth of a percentage point to 12.3%, the economy lost 27,600 jobs, the state said. California's unemployment rate was 11.6% in June 2009. Nationally, it hit 9.5% last month. Los Angeles' seasonally adjusted rate was unchanged from May at 12.2%.

The money venture capitalists poured into California in the second quarter accounted for slightly more than 51% of the $7.7 billion in venture capital put to work in 744 deals for U.S.-based companies in the period. The California money went into 296 deals.

The national funding was the highest quarterly total for capital invested since $8.4 billion was put into 699 deals during the third quarter of 2008.

Canning said signs of a resurgent venture capital industry also bode well for the national economy.

The investments demonstrated growing confidence in the financial markets — stock offerings is one of the methods venture capitalist use to capture profits from their investments. The investment also reflects a healthy corporate environment, she said.

"While initial public stock offering are the all-stars of the business, mergers and acquisition are the lifeblood for venture capitalists," Canning said. "Venture capital is impressed with the current round of corporate profits and believes that will give big companies the ammunition to make acquisitions."

Historically, venture capital investment has leaned toward technology and healthcare companies, -- which could help offset higher California health insurance quotes -- but the data for the latest quarter demonstrates that the funding is increasingly going to the energy sector — especially companies that supply the budding electric vehicle business and its infrastructure and renewable energy businesses, Canning said.

In California, renewable energy accounted for just 21 of the deals — not even 10% of the total — but represented $1 billion, or about a quarter, of the money invested, Canning said.

The San Francisco Bay Area, which dominated venture capital business in the state and the nation, had seven renewable energy deals, raising about $800 million. The biggest was a $350-million investment by VantagePoint Venture Partners, Morgan Stanley and other firms in Better Place, a Palo Alto provider of electric vehicle support infrastructure, Canning said.

California's renewable energy industry could be one of the biggest job providers, she said.

"This is a very young industry, essentially what the Internet was in 1998. The potential for that industry to grow is significant. We are just starting to scratch the surface," Canning said.

The second quarter was the first time that renewable and alternative energy venture capital investment in Northern California topped that for either healthcare or technology in total dollars, Canning said.

Venture capital investment in the Los Angeles metropolitan area represented a much smaller slice of the pie compared with the funds that get placed in the Bay Area, she said. The Los Angeles area accounted for $278 million in investment in 31 companies during the quarter, up from $111 million placed with 25 businesses a year earlier.

The Southern California deals also tend to be consumer-oriented businesses, such as the $31 million Insight Venture Partners put into HauteLook, an online private shopping club based in Los Angeles, Canning said.

Regardless of the industry, Levy said that the improved outlook for venture capital investment "debunks the idea that no body wants to do business in California. We continue to get half of a rising tide. This will take awhile but some success at these companies will lead to steady job growth."

Larry And Sergey Help Fund Tesla's Model S
As Posted to eWeek

Google co-founders Larry Page and Sergey Brin are major investors in Tesla Motors, which on March 26 revealed the prototype of its all-electric, zero-emission sedan, the Model S.

The vehicle, which can accelerate from 0-60 mph in under 6 seconds and hit a top speed of 130 miles per hour, will feature a 17-inch touch-screen with 3G connectivity, allowing drivers to check Google Maps or other data. The car’s electrical charge could also theoretically be monitored via an iPhone or a laptop, according to the company.

Tesla hopes that the Model S will eventually lead to a mass-produced electric vehicle, but production hinges on whether the Department of Energy will provide a $350 million loan to help kick-start production.

"This is just the first of many mainstream cars we’re developing," Elon Musk, CEO of Tesla, said in a statement. Musk was a co-founder of PayPal and founder of SpaceX.

Musk went on to cite the ownership cost of the Model S, should it enter production, as "similar to a gasoline car with a sticker price of about $35,000" once the lower cost of electricity versus the likely future price of gasoline was taken into account.

The company anticipates that the base price of the Model S will stand at $49,900, once federal tax credits totaling roughly $7,500 are factored in; it will come with a choice of batteries with either a 160-, 230- or 300-miles-per-charge range.

Deliveries of the vehicle will begin in 2012; those interested can visit this site to put their name on what will presumably be a long waiting list, if sales of the Roadster, Tesla's first electric car, are any indication.

The Roadster, currently in production with a price of just over $109,000, can go from 0-60 mph in 3.9 seconds and travel 244 miles per charge. There is a substantial waitlist for the vehicle, which was unveiled in 2006, three years after the founding of Tesla Motors.

Starting this spring and continuing through 2009, Tesla will open stores in Chicago, London, New York, Miami, Seattle, Washington and Munich.

Both Page and Brin, who’ve made no secret of their green IT leanings, were early investors in the company.

Should the Model S enter production, it may very well have a variety of technologies already in place to help meet drivers’ commuting IT needs. Intel rolled out four new Atom processors on March 2 designed to fit into a wider variety of devices, including those embedded in car dashboards; those processors will be paired with the Microsoft Auto software platform, designed to provide features such as mobile device integration and speech recognition.

The Model S’s promised 3G connectivity will allow drivers to connect with Google Maps, Internet radio and other tools.

Sergey and Larry Become Venture Capitalists
As Originally Posted to Channel Insider

Google has created a new venture fund designed to provide funding for Internet, software and other technology startups. Should Google acquire any of the companies it backs financially, it would drag any partners those companies have into its channel.

While Google’s foray into the channel with Google Docs and its search appliance has gotten a lackluster response, solution providers in the near future may find themselves involuntarily partnering with Google through acquisitions and the extended Google investment network.

Google created a venture capital fund to back startup companies developing innovative products in Internet services, software, hardware, green IT, clean energy technologies, biotechnologies and health care.

"We think we can find young companies with truly awesome potential and encourage their development into successful businesses," wrote Bill Maris and Rich Miner, the two executives charged with leading the venture fund, in a post on Google's blog.

Large, established vendors invest in smaller companies, betting their innovations will create new business opportunities, features for their existing products or simply a positive ROI should they go public or get acquired.

"Acquisitions by Google of portfolio companies are possible, but this is not the goal or focus of our investment activities. Our focus is building great companies and generating long term financial return," the Google fund's Web site said.

While Google’s acquisition of DoubleClick and its interest in technologies tangential to its core search business overshadow its other investments, Google has made several strategic investments and acquisitions over the years.

Two of the more interesting Google acquisitions were Green Borders and Postini in 2007. Green Borders was an innovative browser security startup that provided a quasi-sandbox that protected Web surfers from malicious Websites. Postini was an e-mail security service, which guarded digital communications from malware and spam.

Postini was a channel-centric venture with several hundred partners. Once Google acquired the company, Postini partners fell under the auspices of Google’s sales organization.

Separate from the investment fund, Google founders Larry Page and Sergey Brin are two of the major investors backing Tesla Motors, the startup manufacturer of high-performance electric sports cars. Tesla recently unveiled its new Model S, which features integrated 3G connectivity and a 17-inch touch-screen monitor for checking the Internet.

Venture Funding Falls 30%

As posted by: Wall Street Journal

Venture-capital investment dropped 30% in the fourth quarter to its lowest level since 2005, as the financial crisis threatened to cut off more funding for start-up companies.

In total, $5.5 billion was invested in private companies in the U.S. during the fourth quarter, down from $7.9 billion a year earlier and the lowest quarterly tally since 2005's first quarter, according to new data from research firm VentureSource. (VentureSource is owned by News Corp., which also owns Dow Jones & Co., publisher of The Wall Street Journal.) Just 554 venture deals were completed in the quarter, down from 718 a year earlier.

Venture capitalists typically put money into start-ups in sectors such as technology and health care, aiming to profit when the firms go public or are sold.

But venture-capital firms are pulling back now as the economy struggles to get back on track. "Very few new deals are getting done, and a lot of people are trying to make sure their portfolios are protected," says Faysal Sohail, a venture capitalist at CMEA Ventures in San Francisco, who says his firm has slowed its investment pace.

The venture business has been hit hard because the sector's routes to returns -- initial public offerings of shares and mergers-and-acquisitions activity -- have been all but shut down by the market's gyrations. In addition, some institutional investors have become gun-shy about investing in venture capital amid the downturn.

In particular, technology start-ups had their worst investment quarter since 1998, with just $2.2 billion invested in 266 tech-venture deals in the fourth quarter, off 39% from the $3.6 billion invested in the year-earlier period, according to VentureSource. Within the tech sector, investment in software start-ups fell to the lowest level since the first quarter of 1997.

Venture investment in health-care start-ups dropped to the lowest level in three years in the fourth quarter, with about $1.5 billion invested in 137 deals.

For all of 2008, there were 2,550 venture deals totaling $28.8 billion in investments, down from 2,823 deals totaling $31.4 billion in investments in 2007, says VentureSource.