tech moneyThese days, it seems like you can't put down a latte in Silicon Valley without running into another angel investment fund getting underway. The latest is $40 million Felicis Ventures, founded and bankrolled by former Googler Aydin Senkut.

This is an institutional angel fund -- that's sort of an oxymoron. Angels tend to be very early stage investors before the institutional guys pile in for the A, B and C funding rounds. But of late, the seed round or the angel round has replaced the later stages in prominence.

Why is that? There's lots of debate on the topic but, in a nutshell, Web-based companies are so darned cheap to build out and can fail so quickly that the actual upfront costs of launching a company can be quite minimal -- and far less than the days of yore when startups had to build huge gobs of technology just to get a product out.

Big Momentum Before Further Funding

How is this possible? For starters, programming languages for the Web have gotten much easier and, by extension, much faster. A guy in a garage can build the proverbial startup in a weekend whereas it used to require at least a few months. Second, these fast-growing startups can accrue huge momentum and traffic before even needing to go back to the well for cashola.

Witness Foursquare, the super startup du jour. Founder Dennis Crowley repeatedly told VCs he didn't need money, and when he finally took it, the company was valued quite highly due to its already impressive prominence.

This is unfortunate news for very large venture capital funds that raised big rounds based on expectations that startups would need considerable funding injections just to go live and build a scalable product. Au contraire. The VCs now face a situation where they have way too much money for the seed game. But much of the real money is made at that stage. The funds could possibly compensate by investing smaller amounts in more startups -- rather than pumping $2 million in one startup, backing four different ones with $500,000 each.

Constrained VCs

Still, there are only so many boards that a VC can effectively participate in, and many funds simply cannot add extra personnel in mid-stream without serious soul searching. (It's notable, however, that traditional VC patterns are actually even more strongly enforced now in sectors like clean tech and transportation that require heavy capital upfront to even get to a product stage.)

All of which explains why angel or seed-stage funds are in ascendance in Internet investing. They are, for most intents and purposes, venture capital funds adjusted to the new reality of shoestring garage startups and rapid-fire investments on the Internet.

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