Despite being venture capital's spiritual home, Silicon Valley is turning towards wealthy private investors, reports Richard Watersin San Francisco

OUTSIDE CAPITAL always comes with strings attached. But raising money does not have to feel like doing a deal with the devil – particularly given recent developments both in the funding needs of young companies and the sources of money available.

There are plenty of horror stories to learn from. Take the experience of Charles Entrekin, a serial entrepreneur based in California whose technology services company took outside money to help expand into the software business. “When the big boys come to play, they come with an agenda,” he complains. “They want to get rid of you.”

Like many company founders, Entrekin and his partners accepted an outside chief executive as a condition of taking venture capital money. Then, when heavy spending in pursuit of rapid growth left the company in need of more cash, they were forced to accept another round of capital-raising that diluted their interests.

Many founders fear that heavy-handed venture capitalists, chasing high returns, will ride roughshod over their concerns. But it doesn’t need to be that way.

For a start, the days when start-ups felt the first thing they had to do was rush out and raise a large amount of money are over. That partly reflects a more mature attitude among entrepreneurs, says Frederik Fleck, a German entrepreneur who now works in Silicon Valley, where winning an early venture capital round was once something to brag about.

He also points to the declining capital needs of start-ups, now that they can rent access to IT resources over the internet rather than having to set up their own technology systems from scratch. “It’s a lot easier today to start a company with a lot less money,” adds Maynard Webb, a former president of eBay.

Webb is part of a growing band of angel investors – wealthy individuals, often entrepreneurs themselves, who put their own money on the line. Though they have been around for a while, angels are becoming a bigger force in early-stage investment.

Angels used to write cheques for $25,000 (€19,530) to $100,000, but many are now happy to put up $250,000 or even $500,000. Given the relatively small amounts they put to work, they claim not to need the big successes that venture capitalists seek, enabling them to be more patient.

“We don’t have a preconception about what an exit should be and don’t put a lot of onerous conditions on founders,” says Aydin Senkut, a former Google executive who has just raised $40 million from a group of other angels to back start-ups.

Such claims, clearly, contain a large amount of self-promotion. But, operating on a smaller scale than venture capitalists, angel investors can consider investments with more moderate long-term prospects.

Like all outside investors, it pays to know who you’re dealing with. Angels tend to rely on extensive networks of personal contacts, and can use these to support the entrepreneurs they back.

For instance, when setting up his latest venture, an online service called TVMoment, Fleck says he found backers with personal connections in the TV business to make up for his own lack of experience in the field.

Having the right backers also opens other doors. Matt MacInnis, founder of Inkling, whose technology is used to enhance textbooks for Apple’s iPad, says that finding well-connected investors has eased his company’s growth in its first year.

In his case, early backers included Senkut and Ram Shriram, one of the first investors in Google. These investors may not have provided a lot of direct help or advice in running the business, but their networks were invaluable when it came to bringing in bigger investors as the company has grown, says MacInnis.

Picking wealthy individual backers can also backfire. Some want to get too closely involved.

“There are some angels who no longer work and who want to come and spend too much time with you,” warns Webb.

Ultimately the same overriding consideration applies to picking angels as venture capitalists: to work out whether they share an entrepreneur’s goal for the business, and how impatient they are to get there. – (Copyright The Financial Times Limited 2010)