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AOL/HuffPo Deal A Victory for Angel Investor Lerer

AOL's purchase of the Huffington Post is a good deal for co-founder Arianna Huffington and angel investor Ken Lerer, who took a gamble on the Web start-up six years ago.

The year 2000 wasn’t great for liberals in America. That was the year, of course, that a bunch of uncounted hanging chads in Florida helped George W. Bush defeat Al Gore in the U.S. presidential election. Even worse was 2004. That year, Bush won again, prompting a wave of right-wing voices to ensconce themselves in the media. The political agenda was dominated by the likes of Rush Limbaugh on the radio, Bill O’Reilly on television and Matt Drudge on the Internet. Suddenly, liberals didn’t have a voice.

That’s when angel investor Kenneth Lerer decided to act. A prominent liberal activist and veteran communications professional, Lerer felt there needed to be a response to the conservative voices. Together with California columnist and commentator Arianna Huffington, in 2005 he launched the Huffington Post, a web portal that would aggregate political commentary and news from a liberal point of view. To finance it, Lerer initially put up $1 million of his own money and he and Huffington brought in several other seed investors, including former America Online COO Robert Pittman.

A venture of passion and politics, the Huffington Post didn’t have much of a road map at first. Indeed, many media critics mocked the Greek-born Huffington for getting involved in such a seemingly unplanned endeavor. But Lerer and Huffington were able to attract enough journalistic firepower to quickly make the Huffington Post the most influential liberal media platform in the U.S. In 2006, Lerer keyed a second round of financing, raising $5 million for the Huffington Post, bringing in venture capital firms SoftBank Capital and Greycroft Partners. (A year later the Huffington Post raised another $5 million from the same group of investors.)

Over the past two years, the Huffington Post has expanded its footprint to cover social and cultural issues. Coverage of media and entertainment has brought criticism — the news web site has been accused of straying from its roots — but also greater visibility and increased traffic. A section on divorce, for example, has generated a wave of new visitors. A third round of financing, in November 2008, this time a $25 million infusion from Westport, Connecticut–based Oak Investment Partners that valued the portal at $125 million, has given the Huffington Post financial staying power and the ability to call its own plays. Last year the Huffington Post significantly added to its New York operations and signed on new heavy-hitting contributors.

The Huffington Post, which became profitable last year, is a real business, with estimated revenue of more than $30 million in 2010 and $60 million projected for 2011. Today, the Huffington Post announced that it had agreed to be acquired by AOL for $315 million — $300 million in cash and the rest in stock — a windfall for its investors, including Lerer.

At a time when the venture capital industry is desperately seeking to right-size itself, established venture funds would have stayed away from the Huffington Post if not for Lerer, who has invested about $3 million of his own money for a stake that now is valued at more than $60 million. Venture capital veterans still remember ill-fated Friday Holdings, a specialized media venture fund bankrolled by Paramount Communications, QVC and Texas money manager Richard Rainwater and managed by Norman Pearlstine, a former Wall Street Journal managing editor who is now chief content officer at Bloomberg, and John Geddes, now a managing editor at the New York Times. Launched in 1993, Friday Holdings — named after Pearlstine’s then-wife Nancy Friday — made some high-powered hires and some flashy investments before suddenly closing shop in 1994. At the time, neither Pearlstine nor Geddes commented on what went wrong, but media experts said content-based businesses simply didn’t lend themselves to venture investing.

Lerer is more than just a media-savvy angel. He is part of a group of individual investors who have organized to invest together. These so-called superangels are putting together small pools of capital — typically $30 million to $35 million — from other entrepreneurs, wealthy individuals and small institutions. With this additional capital, superangels can now finance later rounds, in direct competition with venture capital funds.

Some of these superangels already have a reputation from previous entrepreneurial lives. Ron Conway, co-founder of Altos Computer Systems, is the best-known superangel. Keith Rabois, Reid Hoffman, Dave McClure and Peter Thiel are alumni of PayPal, the Internet payment company. Aydin Senkut and Chris Sacca are ex-Googlers. Founder Collective’s David Frankel and Eric Paley are successful digital media company founders. And then there are the expats — including Jean-Francois (Jeff) Clavier of SoftTech VC and Jon Callaghan of True Ventures — who are reinventing themselves as early-stage investors after careers at large industrial venture capital funds. Others, such as Lerer, Social Leverage’s Howard Lindzon and Y Combinator’s Paul Graham, are bringing their own life experiences to bear on building new entrepreneurial businesses and portfolios. The investing style is personal and the choices idiosyncratic, but these superangels are far more entrepreneurial and innovative than traditional venture capitalists.

Superangels are helping to reorganize early-stage investing with disciplined capital, uniform investing rules and a sense of community that venture capital hasn’t had for a long time. Lerer says the formation and financing of the Huffington Post is an example of the relationship between superangels and the traditional venture capital community. The superangels, with their own experiences and knowledge, are the ones who help test a concept and shape and finance it through the early stages. But it is left to deep-pocketed venture funds to finance the later stages. Superangel funds and venture funds provide complementary roles.

“It’s a relay race,” says Lerer, who runs New York–based Lerer Ventures with venture partner Jordan Cooper.

The first leg of the race increasingly belongs to superangels such as Lerer Ventures. “We are thinking somewhat differently from any early-stage venture fund that I know of,” says Lerer, whose son, Ben, is a partner in the firm. “We may write similar-sized checks or invest alongside some early-stage venture funds, but when we partner with a founder, we are not watching our investments from 10,000 feet, waiting to see what happens in 12 months. We are rolling up our sleeves and thinking on the day-to-day execution level that most newly seeded companies are living. What we are bringing to the party is operational expertise, since we have been operators ourselves. We are touching and feeling and using all of our founders’ products, thinking through distribution challenges, helping them solve the most immediate and seemingly minute challenges that emerge when you are turning a vision into reality.”

The rise of superangels has major implications for pension funds and other institutional investors, most of which are too large to invest with them. The bifurcation of the capital-raising process — with superangels (and angels) doing more of the early-stage investments in new areas of innovation and the venture capitalists doing the business development once a technology has been proven — reduces the risks for typical venture capital funds but also lessens their expected returns.

“Superangels are having a big impact on the venture capital business,” says William Sahlman, professor of entrepreneurial finance at Harvard Business School.

The immediate impact is bringing a level of specialist skill and experience to early-stage investing — a level that has been missing since the original days of venture capital — and a sense of true venture and exploration to a business that has become boring, predictable and top-heavy. But superangels also are having a longer-term impact, demonstrating that the real returns going forward are not in megafunds but in small funds — the smaller and earlier-stage, the better. Some more-enterprising venture capitalists, however, are not content to cede the potential riches from seeding start-ups. They are looking to reinvent themselves, bankrolling incubators, recruiting new, more entrepreneurial partners and downsizing to create smaller, more entrepreneur-friendly funds.

“The result is a great one for entrepreneurs,” David Rose of New York Angels and Rose Tech Ventures recently wrote on the ChubbyBrain web site. “There has been a rapid acceleration in the number of seed deals getting done around the country.”

In 2010 entrepreneurial companies received an estimated $18 billion from angels and superangels, according to the Angel Capital Association, a trade group in Overland Park, Kansas, that represents 150 angel groups and 6,500 registered angels across the nation. Although that is less than the $22 billion invested by venture capital for the 12 months ended September 30, 2010, the capital will reach ten times as many companies as the venture capital money, says Marianne Hudson, executive director of the group.

ANGELS ARE NOTHING NEW TO venture capital. As early as the 1930s, Laurance Rockefeller was investing his family money in ideas that he personally liked. One was an investment in a little-known St. Louis engineer named James McDonnell that would turn into aerospace and aircraft manufacturing giant McDonnell Douglas Corp. Even after World War II, Rockefeller continued to invest as an angel until the formation in 1960 of Venrock, the family venture fund.

Mitchell Kapor, who founded software maker Lotus Development Corp. and spent a brief sojourn as an institutional venture capitalist with Accel Partners, now is one of the most influential investors in the digital space. Some university professors also have turned out to be unusual angels: California Institute of Technology’s Carver Mead, one of the earliest employees at chip maker Intel Corp.; Massachusetts Institute of Technology’s Robert Langer Jr., a life sciences specialist; and Harvard’s Sahlman.

Perhaps the most ubiquitous of all angels is Ron Conway. The 59-year-old National Semiconductor Corp. alum and co-founder of PC maker Altos Computer (acquired by Taiwanese computer maker Acer in 1990) started investing on his own in the early ’90s. By 1994 he had decided to do it full-time. “I liked being around entrepreneurs who are inventing things,” Conway explains. “I like the feeling of accomplishment by giving advice.”

Since then he has been an investor in the early rounds of almost every major Internet company, including Facebook, Google, PayPal and Twitter. “I am now investing in the fourth generation of Internet entrepreneurs,” says Conway, who runs Silicon Valley–based angel fund SV Angel.

He likes to invest at a start-up’s inflection points — to help when it is needed most. Usually, that means investing in the seed round; helping companies build out their management teams and plan their expansion and development strategies; and introducing them to partners and customers.

Conway usually invests as much as $200,000 in a million-dollar round for about a 5 percent stake and stays involved for as long as 18 months, until venture capital funds step in to invest.

Still, most angels bring little to the table except capital. And many entrepreneurs say a lack of uniformity of practice and involvement has hurt them more than helped them. “When we really needed help, our angels disappeared,” says the founder of a digital start-up in New York. “We took the money because it gave us a quick start. But when we ran into problems, our investors were clueless.” The young Bangladeshi entrepreneur’s advice: Stay away from angels who don’t bring some skills or resources other than money.

For some angel investors, the game has been simply to provide enough money to start a company that they then can mark up for a subsequent round of financing. The fast-buck mentality has been harmful to the entrepreneur and the entrepreneurial process. More than half of the ventures seeded by angels have never been able to secure a subsequent round of financing, says the Angel Capital Association’s Hudson.

The superangels, through organization and organized capital, are bringing order to this world. More importantly, they have unleashed a level of creativity that traditional venture capitalists have been sorely missing. And in the process they’ve also helped revive America’s technology community.

Venture capital has long dominated the technology landscape, going back to 1946, when the transistor was patented and the first institutional venture fund was formed. Since that time, venture capital funds have been at the center of innovation, financing companies ranging from computer makers Hewlett-Packard Co. and Apple to biotechnology pioneers Genentech and Human Genome Sciences to Internet giants Amazon.com and Google.

Although venture capital funds continue to be the money behind the Internet’s most recent rising stars — Facebook, Twitter and Groupon — it’s the superangels who own what has come to be known as Web 2.0., the applications and technology that enable users to interact and collaborate over the Internet. Although mainstream venture capitalists can invest here, and do, what entrepreneurs need most is the wisdom of entrepreneur-investors who’ve cut their teeth in the web 2.0 world, as well as small amounts of capital to help test concepts, investor networks to help develop ideas and complementary technologies to build out businesses.

Not surprisingly, for many superangels the initial investments are never large and the expectations are modest: Get a company off the ground, and find an investor or buyer willing to pay a higher price. Palo Alto, California–based Clavier has been one of the more successful exponents of this strategy. Between 2004 and 2007 he invested in more than 20 companies, seven of which were acquired for a total of $350 million and 14 of which have raised north of $200 million in follow-on financing, Clavier notes on his web site. In 2007 he decided to create a formal early-stage fund, SoftTech, and raised $15 million. In a recent regulatory filing, SoftTech said it is planning to raise $35 million for a new early-stage fund. The additional capital would allow it to invest in more companies and take larger stakes.

The relationship between angels and venture capitalists has never been an easy one. “Funds that attempt to focus principally on early-stage investment rounds generally haven’t worked,” says Robert Raucci, who used to invest in venture funds for Alliance Capital Management Corp. and now is a general partner with Jericho, New York–based Newlight Management, a growth equity manager that invests in both private and public emerging growth stocks.

The lion’s share of the capital that a company needs tends to come from later rounds of financing, meaning that the follow-on capital is going to be largely provided by other investors. “To the extent that most early-stage funds have smaller pools of capital, they will not be in a major position of influence on the future rounds’ valuations,” explains Raucci. “So the early-stage fund is at the mercy of later-stage investors to offer valuations that are not very dilutive to its ownership. Basically, other investors get the benefit of the early-stage investor’s hard work.”

But superangels have learned from the failures of previous early-stage investors. They are concentrating on a smaller number of deals and working them more intensively. They have feeder relationships with larger funds that will pay a higher price given the superangel’s imprimatur. They are focusing on businesses where they can maximize their expertise and contacts. They are making investments that are not initially highly capital-intensive, and they strike better valuations than traditional venture capitalists because managements view them as early members of the management teams.

The first and second waves of technology entrepreneurs in the 1970s and ’80s mostly came out of universities, research labs and tech-intensive companies such as Intel and HP. The newest wave of entrepreneurs in digital media — even Facebook’s Mark Zuckerberg — has had neither the university experience nor the corporate background. So, many superangels have become the new universities and corporate training grounds, and the mentors, for young entrepreneurs. They are providing a level of preparedness and development to early-stage companies that is encouraging many venture capital funds to participate earlier in digital media’s life cycle.

Greycroft recently raised $130 million for a projected $200 million fund that 75-year-old founding partner Alan Patricof, one of the deans of venture capital, told institutional investors would co-invest with experienced early-stage investors. In May 2010, Menlo Park, California–based Sequoia Capital was the lead investor in Y Combinator’s $8.25 million superangel fund. And Kleiner Perkins Caufield & Byers, based just up the street from Sequoia on Sand Hill Road, is reportedly planning to launch a fund for start-ups building Facebook applications and integrating with the social network behemoth in other ways.

In many respects, superangels are taking venture capital back to its roots by demonstrating that early-stage investments can be successful and profitable, and by creating models to routinely invest in and nurture digital start-ups.

Still, most venture capitalists say they are not worried. When asked what impact the superangels have had on venture capital, Yatin Mundkur of Artiman Ventures in East Palo Alto, California, says: “To state the obvious, none — on nonweb sectors. Their focus has been solely in the web 2.0 arena.”

“The difference between superangels and classic VCs is pretty marginal in certain respects,” says C. Richard Kramlich, a longtime venture capitalist and a Menlo Park, California–based founding partner of New Enterprise Associates. “It comes down to whom you are working with and how much mind share you have and what resources are brought to bear in order to add value.”

ON FEBRUARY 25, 2009, HOWARD Lindzon, a stock trader and hedge fund manager, wrote on his blog: “I truly believe that the growth of the web will return soon and accelerate once again. Those with cash will not sit on it forever and I want to be a part of the next boom even if that means starting Social Leverage during the ‘depression’ of 2009.”

Lindzon has been a firm believer in the connectivity between social media and the financial markets. Yes, markets are all about high frequency trading and speed of execution, he says, but there’s also a viral quality to investing — a quality he contends can be harvested only through social networking. Hence his decision in 2008 to start an online community called StockTwits, “where market participants share their very best ideas in a continuous real time and open conversation,” according to its web site.

StockTwits aims to follow not stocks but the conversation around them. Day traders and electronic traders, even regular traders, seek to be part of the gossip and banter that exist on most trading floors and brokerage desks, Lindzon and StockTwits co-founder Soren Macbeth believe. But Lindzon, who is CEO of the Phoenix-based enterprise, also believes that physical networking complements the community that digital interaction creates. So in late October he paid a visit to Dewey’s Flatiron, a bar and restaurant in New York, mingling with Social Leverage shareholders, StockTwits contributors and Wall Street regulars.

The event was more of a mingle than an actual interaction. No one at Dewey’s had name tags, and many of the people were previously unknown to one another. But the conversation quickly turned to trading, and by the end of the evening, everyone was talking. The dialogue wasn’t just about publicly traded stocks but also about private companies like Facebook and social game developer Zynga, and it included discussions of contracts and outsourcing.

To avoid many of the pitfalls that traditional venture funds face, Lindzon has structured his superangel fund as an operating company, not as a fund. “Social Leverage will invest, help syndicate and also incubate and help businesses grow,” he explains. “We are focused on shareholder value and work off a budget. That said, only if we make good investments can we make returns.”

Key to Phoenix-based Social Leverage is having its own investors take ownership of the ideas in which it invests. “The real question is, how did the investment get sold to investors?” says Lindzon. It is important to let investors understand the huge risk they are taking. “If we communicate that to our partners and work as hard as we can toward our goals, then worrying about what others do is silly,” he says.

It would be easy to minimize the overall impact of the superangels by categorizing their investments as a slightly more organized form of angel activity. But some superangels are working at creating a more systematic form of funding, as well as ways to train and educate entrepreneurs and to reduce the risk in the venture business. The most visible of these groups is Y Combinator, a new model of start-up funding founded in 2005 by Paul Graham, Robert Morris, Trevor Blackwell and Jessica Livingston.

In the five years of its existence, Y Combinator has started and funded 208 companies. In its first batch, in the summer of 2005, there were eight companies. In the summer of 2010, there were 36. Y Combinator companies include Hipmunk, an airline-flight search engine; Loopt, a mobile social-mapping service that lets users see what their friends are doing; and Weebly, a web-site-building toolmaker. When this year began, 143 of the 208 companies were still operating and 16 had been acquired.

“We work with start-ups on their ideas,” says Graham, who helped come up with the idea for Y Combinator a few years after Yahoo acquired his software company, Viaweb, in 1998 for $49 million.

The partners at Y Combinator, all hackers at some point in their careers, say they’ve spent a lot of time figuring out how to make things people want. So they can usually see fairly quickly the direction in which a small idea should be expanded or the point at which to begin attacking a large but vague one. The questions at this stage range from apparently minor (what to call the company) to extremely ambitious (a long-term plan for world domination). “Over the course of three months, we usually manage to help founders come up with initial answers to all of them,” Graham says.

Y Combinator uses what one venture capitalist calls a “spray and pray” strategy. Twice a year the firm invests a small amount of capital ($18,000, on average) in a large number of start-ups and has them move to its offices in Mountain View, California, where for three months it works with them to refine their ideas. At the end of the period, Y Combinator holds a Demo Day during which the companies make their pitches to a large audience of start-up investors.

The firm’s visibility and success have led to similar endeavors elsewhere. In 2007 entrepreneurs David Cohen and Brad Feld created TechStars, a mentorship-driven seed accelerator based in Boulder, Colorado, that has expanded to Boston, New York and Seattle. In Providence, Rhode Island, Allan Tear, Owen Johnson and Jack Templin have launched Betaspring. Chicago has given birth to Excelerate Labs. BoomStartup has launched an incubator in Orem, Utah.

The value of a firm like Y Combinator isn’t simply in the companies it funds but also in its alumni, the companies that have graduated. It was important to Graham and the other founders to create a supportive community — one that shared knowledge, experience and capital. Not only are the alumni potential partners and technology sources, they are also important sounding boards and reality checks.

“The alumni community is becoming an increasingly large part of the value of Y Combinator — partly because it keeps growing as we fund more start-ups and partly because the members are becoming more successful as they continue working on their start-ups,” Graham says. “But I’d never want people to start applying to YC just to become part of the alumni community, so we’re in a race to increase the value of YC proper as fast as the value of being an alum is increasing.”

To be sure, capital and advice come with a price. Y Combinator often receives as much as 10 percent of a start-up. In return, founders typically feel empowered to seek higher valuations and raise capital using individual convertible notes instead of old-style fixed-size equity rounds — notes that enable them to raise the price to reflect demand. “Historically, the very best start-ups often have high valuations,” Graham says. “It’s not necessarily a winning strategy to look for bargains.”

Cohen’s approach in building TechStars was somewhat different. The founder and chief technology officer of software company Pinpoint Technologies, which ZOLL Medical Corp. acquired in 1998, Cohen had been investing on his own since the early 2000s. It gave him an opportunity to get to know other angels and form the rudiments of an angel network, but Cohen wasn’t fully satisfied.

“I liked the idea of angel investing,” he says. “I just didn’t like the execution.”

A longtime resident of Boulder, Cohen became aware that there were plenty of entrepreneurial opportunities in the city itself. But the entrepreneurs lacked capital to get organized and, more importantly, lacked mentorship. Cohen wanted to create a system of mentorship that didn’t simply help hatch a handful of companies but also built a lasting entrepreneurial community. To make sure that the launch was smooth, Cohen partnered with Feld, a successful entrepreneur and venture capitalist. (“Brad is one of the most recognizable names in the Rocky Mountain entrepreneurial community,” Cohen says.) Their combined network was enough to start TechStars.

The fund’s overall structure is similar to that of Y Combinator. “TechStars fills the start-up funding gap by providing just enough capital to get your idea off the ground. Your new company receives up to $18,000 in seed funding,” the fund tells visitors to its web site. Companies that are accepted receive extensive mentorship during the summer as well as a chance to present to angel investors, venture capitalists and top media at Investor and Demo Day. In return, TechStars receives 6 percent of their equity.

But getting equity and getting rich is not the primary motivation behind TechStars, Cohen says: “I am an investor. I live in Boulder. I want to create a start-up ecosystem that will get everyone here involved.” Certainly, the results have been encouraging. Of the 20 Boulder TechStar alumni, seven have been acquired.

For Cohen and TechStars, Boulder was just the beginning. “We are in four of the five most important start-up markets in the country,” Cohen says.

VENTURE CAPITALISTS HAVE long recognized the problem of institutionally funding start-ups (too small, too labor-intensive). Now they are working on solutions. Sequoia, for example, has invested $2 million in Y Combinator’s latest fund. Other venture capitalists are aligning themselves with superangels such as Ron Conway and Dave McClure for the right to co-invest in postseed rounds. But perhaps the most innovative solution comes from Polaris Venture Partners, which is funding its own incubator, Dogpatch Labs.

Jonathan Flint, a founding partner of Waltham, Massachusetts–based Polaris, says venture capital funds have to fundamentally change the way they do business. They’ve not paid much attention to the price at which they buy into a deal because there was always a higher-priced IPO or acquisition to bail them out. But now, with IPOs scarce and the M&A market much more selective, they have to pay attention to the prices at which they invest in a deal.

Says Flint, “The way out of the dilemma is to return to venture capital’s roots: source deals early at a natural valuation, a valuation that reflects worth, not market hype; work closely with a start-up in partnerships, not competition; and use the fund’s network of fellow investors, portfolio companies and entrepreneurs to help reach the start-ups’ goals.”

The idea is to lower the cost of an investment so that the exit — typically an initial public offering or an acquisition — can be profitable even at lower margins. “You have to change the arithmetic,” Flint says.

For Polaris, the change agent was Dogpatch Labs, where aspiring entrepreneurs get a desk, Internet connection, coffee and lunch. “Our locations are wide-open, fun spaces that we respectively share with local start-ups,” boasts the Dogpatch web site. “They are sorta like frat houses for geeks.”

In 2009, after successfully launching Dogpatches in San Francisco’s Embarcadero Center and in close proximity to MIT in Cambridge, Polaris decided to open one in New York. “We all recognized that there was a significant amount of early-stage activity in New York,” says Peter Flint, the Polaris general partner in charge of the New York Dogpatch, and Jonathan’s brother. “What we were not clear on was the scale of the activity and if this was a flash in the pan.”

After spending a few months in New York talking with entrepreneurs and other venture capitalists, Peter Flint realized that a new breed of entrepreneur existed and that New York clearly was experiencing organic growth. Although the city boasted many incubators and entrepreneurial work spaces, they were ill equipped to provide the environment that contemporary digital start-ups needed. “We then decided to open Dogpatch Labs, and I raised my hand,” says Flint, a former cable television network executive and professional recruiter.

Billy Chasen decided to use Dogpatch to develop Stickybits, an application provider that attaches digital content to physical objects, because by setting up shop there he established regular clear contact with Polaris, one of the lead investors in Stickybits, as well as with New York’s entrepreneurial community.

“Dogpatch is a great start-up-friendly space in New York City,” says Chasen. “There aren’t too many of those around.” Chasen, who as a founding member of digital incubator Betaworks himself helped launch a number of applications, enjoys the campuslike environment at Dogpatch.

“There’s a lot of help and interaction between companies,” he says. “Everyone wants to help everyone else out because we’re all in the same boat — trying to make something superuseful for people and starting from scratch.”

For many entrepreneurs, the community of peers is the real attraction of incubators like Y Combinator and Dogpatch. It’s a way to keep abreast of changes in technology, get feedback and even find new partners and collaborators. “What we are really benefiting from is being in an entrepreneurial community,” says New York Dogpatch resident Joe Essenfeld, co-founder and CEO of Jibe. “There’s a lot of exchange of ideas that wouldn’t happen if you were by yourself.”

Essenfeld, a Cornell University graduate and serial entrepreneur, has been involved in start-up projects since high school, each one progressively more ambitious and complex than the last. Jibe is a digital job board that integrates social networks such as Facebook and LinkedIn to enable employers and applicants to leverage the overlap of their social graphs. From previous co-workers to friends who work with a specific company, Jibe recognizes matches among different networks as they apply to job opportunities. In March 2010, Jibe raised $875,000 in seed funding from superangels including Lerer Ventures and established venture capitalists such as Polaris.

Currently, there are 14 start-ups at the New York Dogpatch. They range from Stickybits and Jibe to Food52, a cooking web site, and StellaService, which measures online customer service. Jibe, says Essenfeld, is ready to move to a larger space. A slew of other aspiring entrepreneurs are ready to take its place.

Success for Polaris is being at the start of the entrepreneurial food chain. “I would like Polaris to establish closer relationships with entrepreneurs and investors,” says Peter Flint. “I would like to find a few deals a year for seed investments and relationships with companies that graduate out of Dogpatch who would be interested in Polaris participating in their Series A financing. We would like Dogpatch to be considered one of the centers of early-stage activity in New York.”

Jared Hecht, 23, feels that New York already has become a center for early-stage entrepreneurial activity. In May 2009, following his graduation from Columbia University, Hecht began working as business development manager at Tumblr, a New York–based blogging site. One night during a business trip, he was frustrated that he was having a hard time keeping up with his friends, and he decided to do something about it.

Together with pal Steve Martocci, Hecht created a texting-based application and distributed the program to friends. That app turned into GroupMe, which currently has ten employees and says it now handles millions of text messages by allowing users to create messaging groups and set up conference calls. The response from potential investors was so positive that Hecht and Martocci left their jobs to launch GroupMe on July 1, 2010. For seed capital, Hecht persuaded his family to put up $20,000. By the end of August, GroupMe had raised $850,000 from superangels, with Lerer Ventures being the lead investor.

Ken Lerer, who also sits on GroupMe’s board, is the “consigliere, the man,” says Hecht. “He has been tireless in providing introductions, being the voice of reason and in helping the business along.”

The interest that GroupMe has generated (another Twitter?) created a bidding war for the company’s second round of funding, in December 2010. More than half a dozen venture capital groups made their interest known, including Khosla Ventures and General Catalyst Partners. Less than six months after its first round of financing, GroupMe has raised $10.6 million at a valuation of more than $35 million.

The presence of angels such as Lerer, along with their diverse community of businesspeople, media, ad people and techies, makes New York “a blossoming, breathing entrepreneurial community, a developing ecosystem,” says Hecht. Maybe it’s just the time for web 2.0, or simply the gathering of like-minded angels, entrepreneurs and appropriate technologies, but such ecosystems are changing venture capital and the face of innovation in America.

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