Pennies from Heaven

By Shafrir, Doree | Newsweek, November 29, 2010 | Go to article overview

Pennies from Heaven


Shafrir, Doree, Newsweek


Byline: Doree Shafrir

With cash for tech startups in shorter supply, angel investors are going where VCs fear to tread.

Chris Dixon is sitting in his lofty office in New York's Silicon Alley, trying to persuade an 18-year-old to take his money. The young man is in town from California, and the word on the street is he's poised to become one of Silicon Valley's hottest entrepreneurs. His name is Dan Gross, and he's developed a method for allowing people to easily search all the data they store in the "cloud"--music, bank statements, Twitter feeds, Facebook wall posts. All he needs now is the cash to get his fledgling company, Greplin, aloft. And Dixon, a 38-year-old millionaire who runs an investment firm called Founder Collective, is ready with his checkbook.

With his thick-rimmed square glasses, jeans, studded belt, and, of course, sneakers, Dixon is in many ways what Gross aspires to be: one of the successful few in the crapshoot world of Internet startups. Dixon--who sold his Internet-security firm, SiteAdvisor, for $75 million to antivirus software company McAfee, Inc. in 2005--is what's known as an "angel investor," descending from on high to bestow his largesse on comers like Gross. Unlike the big venture-capital funds such as Kleiner Perkins and Union Square Ventures, angel investors are mostly individual entrepreneurs who've hit it big and are looking to gamble their own money on the next generation of talent. And with VC funding harder to come by since the beginning of the Great Recession, angel investors have stepped in to fill the gap: the number of these funds has exploded in just the last year, from seven in 2009 to 26 in 2010, according to the Web site EarlyStager, which tracks startups.

Of course, the "angel" honorific is a bit of an exaggeration. These heavenly moneymen are as opportunistic as their venture-capital brethren, hoping to get in on the ground floor of the next Google. Instead of offering budding entrepreneurs millions of dollars in exchange for big equity stakes, as the venture-capital funds do, Founder Collective offers an average of less than $200,000. In exchange, it takes less equity. But it provides more in the way of personal support to the entrepreneurs than a VC would. The potential payoffs to angel and entrepreneur? In addition to the obvious, the young entrepreneurs get access to some of the top minds and most successful founders in the tech world. And the angels stand to win bragging rights if they pick the right horse. After all, who in the Valley doesn't know it was Sun Microsystems cofounder Andy Bechtolsheim who handed Larry Page and Sergey Brin a check for $100,000 in August 1998, before they'd even incorporated? Or that Peter Thiel was the first outside investor in a Harvard startup called Facebook?

The reason any of this is possible is because in the last 10 years the price of starting a technology company has fallen dramatically. No longer do startups have to pay $60,000 for an Oracle database or shell out tens of thousands of dollars for a content-management system: free open-source software has taken care of that. Bandwidth and hardware are also substantially cheaper. Plus, a company that might have needed dozens of programmers in the past can now get away with one or two. Add to that the fact that most people working for startups eschew large salaries in exchange for equity stakes, and the cost of getting a new tech company off the ground goes from several million dollars to a few hundred thousand. That has allowed smaller funds like Founder Collective to get into the game in a big way.

Dixon came up with the idea for Founder Collective in 2008. At the time, he was launching a new startup with Flickr founder Caterina Fake called Hunch.com, which offers users product and lifestyle recommendations based on their purchases and those of their friends. Fake had made millions selling her Flickr photo-sharing site to Yahoo in 2005 and was now dabbling in angel investing, pouring seed money into companies like Etsy, the hugely successful online crafts site. …

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