funding innovation: Distributed investment pools.

I came across an innovative way to distribute investment knowledge back to the community.  Take a look below.  What I find clever about this one is that they turn over the screening and investment selection process over to enterpreneurs (the community), and ask them to pick future winners.  Who better to

I’m very pleased to announce a new startup investment program today called The TechFellow Awards in partnership with Founders Fund. The goal is to honor technology innovators and stoke new investment in great early stage ideas.  The TechFellow Awards program will grant at least twelve fellows $25,000 each to invest in an early stage startup of their choice. Founders Fund will invest an additional $25,000 alongside those investments and request an additional right to invest another $250,000 when the company raises its next round of financing. In all, Founders Fund expects to devote more around $3.6 million to the program.

The fellows will have few restrictions on the companies they invest in. The fellows will be selected from four categories of experts: engineering leadership, product design and marketing, general management and disruptive innovation.

Read more from TechCrunch: http://www.techfellow.com/  and   http://www.techcrunch.com/2009/04/16/announcing-the-techfellow-awards-with-founders-fund/

Funds

Y Combinator

is a new kind of venture firm specializing in funding early stage startups. We help startups through what is for many the hardest step, from idea to company. We invest mostly in software and web services. And because we are ourselves technology people, we prefer groups with a lot of technical depth. We care more about how smart you are than how old you are, and more about the quality of your ideas than whether you have a formal business plan. (2-21-07) Y Combinator Taking Apps: Have Idea, Will Travel - Got an idea? Willing to hustle for a summer to see it grow? Y Combinator just announced their summer application drive. Applications are due by April 2nd and by the 10th, a few will be selected to present in Mountain View on April 21-22nd. If selected, your team will relocate to work and learn in Cambridge, Massachusetts.

For those of you unfamiliar with Y Combinator, it’s the seed financing fund guided by Paul Graham’s philosophies that helps young startups launch through mentoring and investing a base $5,000 plus $5,000 per founder. In exchange they take a 1-10% stake in the company. The teams are usually composed of young college grads with some programming skill. It’s not not a program meant for industry veterans. Some have criticized the program for taking too much ownership for such a small investment. Some readers have also called shenanigans on the operation. Here are some of the companies we’ve covered before. Kiko, Reddit, and Loopt are some notable Y Combinator companies. Exits, so far, have been through acquisition. Kiko died, and was then acquired by Elliot Noss. Conde Nast bought Reddit.

Some other programs such as TechStars have adopted the model. TechStars is another well backed program based in Boulder, Colorado also offering experienced mentors and cash to aspiring startups. While not the same ground floor financing as Y Combinator or TechStars, the venerable VC firm Charles River Ventures also adopted a smaller financing program (up to $250K debt) called Quick Start.

135 Garden St., Cambridge, MA 02138 Land line: 617 576 0695

Bang Investments

Bang Ventures, a Cambridge, Mass., based firm, wants to be the American Idol of the tech world.

The year-old company (previous coverage ) is launching a contest that will take business concepts from 100 tech entrepreneurs, have a panel of judges–including Marissa Mayer from Google, Leah Culver from Pownce and Curt Schilling of the Boston Red Sox–filter the field to 20, and then open up for a popular vote. In the end, the three entrepreneurs with the most votes will win seed funding and a package that includes an experienced engineering team in Poland and professional services from law firms and consulting shops like Deloitte and Touche.

Unlike Paul Graham’s Y-Combinator, a seed-stage incubator that selects programming whizzes in their mid-twenties, hands them a few thousand dollars, weekly advice sessions, and 10-12 weeks to crank out an initial product, Bang Ventures hopes to find business-savvy entrepreneurs who understand the market but may not have the programming chops needed to make their visions a reality. Y-Combinator also tends to stay out of subsequent funding rounds, whereas Bang Ventures will continue to fund the companies that show early promise or gain traction.

Mark Modzelewski , who conceived of Bang Ventures’ approach, says that the hardest thing for anyone working in Web 2.0 is building a user base that validates products and provides the feedback necessary to refine them. By selecting the final set of winners through a popular vote, he says, Bang is involving users at the concept stage and setting up the companies’ initial audience right off the bat.

Asked to explain Curt Schilling’s presence on the panel of judges, Modzelewski explains that Schilling is known in Boston circles as “an outside-the-box kind of guy” who helped found video game company 38 Studios (named after Schilling’s jersey number). Schilling, he says, entertains dreams of becoming a tech CEO.

Bang Ventures is issuing an open call to wannabe entrepreneurs and will have them fill out applications instead of submitting business plans. The top 20 that the judges select will videotape themselves making an elevator pitch–a concise description of their concept–and these pitches will be distributed via Bang’s site.

Modzelewksi says that Bang’s goal is to take a really good concept and “pre-marshal a bag of experience” to help it succeed. This is an interesting approach to the problem of discovering worthwhile outlets for venture capital and fostering the investments, but we wonder if it makes sense. Deloitte and Touche, for example, is known more for helping established companies optimize their processes than for turning innovative concepts into fleshed-out companies. In fact, some might argue that entrepreneurs who need consultants are in the wrong line of work. Similarly, an outsourced development house in Poland, no matter how talented, might be an awkward substitute for a scrappy band of hackers who work well together.

But on the other hand, why not try?

Elevator Pitch

Elevator Pitches, our community video project that allows entrepreneurs to pitch their startups through 60 second YouTube videos. Since then we’ve received a number of pitches covering everything from a fandom portal to a site focusing on group based text messaging.

Founders Fund

Three years ago, Peter Thiel, who runs a small venture-capital concern called Founders Fund, plowed $500,000 into a little-known social-networking Web site called Facebook Inc. Later on, his company invested a bit more.

That was a good call. The paper value of Mr. Thiel's initial stake has increased more than 50 times. Facebook now ranks among the hottest online properties, with some 59 million users and investors such as Microsoft Corp. piling in

Mr. Thiel, the former CEO of online-payment company PayPal, is making waves in Silicon Valley with an investment strategy that differs significantly from the traditional approach. His company invests only modest amounts of money, sometimes just a few hundred thousand dollars, and focuses on entrepreneurs Mr. Thiel and his partners often know personally. He also takes an uncharacteristically hands-off approach to company management.

Already, the gambit has yielded several potential winners like Facebook.

The venture-capital world "definitely needs to be shaken up," says the 40-year-old Mr. Thiel, an avowed libertarian who helped bankroll the movie "Thank You for Smoking," a satire about improving the reputation of cigarettes.

His company also reflects how a new type of venture capitalist is emerging, as start-up costs for Internet companies decline sharply. Many start-ups now need a bankroll of no more than a few hundred thousand dollars to get rolling, compared with the millions of dollars required a few years ago.

Other companies capitalizing on this trend include First Round Capital in the Philadelphia suburb of West Conshohocken, Pa., run by former Internet entrepreneur Josh Kopelman, who started online-commerce site Half.com and later sold it to eBay Inc., and Silicon Valley concerns such as True Ventures and Baseline Ventures. Many of the companies now manage money for outside investors, unlike informal "angel" investors who typically make small, one-time investments with their own money.

Most traditional VC companies want to invest larger sums, several million dollars, say, for large stakes in start-ups and then exert control over the companies' operations. Some demand "liquidation preferences," or guaranteed returns if companies are sold.

'Cushy Jobs' of VCs

Venture capitalists often can be too quick to fire start-up founders and replace them with professional managers, Mr. Thiel says. He blames a cultural divide: Many VCs "have these very cushy jobs, they get paid a lot," and often can't relate to founders, he says.

With so much money chasing deals in Silicon Valley these days, start-ups can afford to be choosy in picking their financial backers. They are increasingly turning to companies like his that offer less of a "command and control" model, he says.

Mr. Thiel and his fund's other partners, including two other PayPal co-founders, Ken Howery and Luke Nosek, also claim an advantage because of their front-line experience starting companies themselves. Mr. Thiel also runs a hedge fund, Clarium Capital.

The Facebook coup was one of several Founders investments that have generated "a healthy amount of envy" from other venture capitalists, says Max Levchin of Slide Inc., a start-up maker of software called widgets, or mini-applications used to decorate Web pages. In 2004, Mr. Levchin invited Mr. Thiel to be one of Slide's first investors, meaning bigger venture companies such as Mayfield Fund and Khosla Ventures could only invest later, for more money.

Heart in San Francisco

Mr. Thiel, who based Founders Fund in San Francisco rather than the traditional VC hotspot of Sand Hill Road in suburban Menlo Park, Calif., is structuring deals differently from how traditional venture capitalists do. Significantly, the fund often buys only a 5% or 10% stake in a company and sets up a special class of stock that start-up founders can sell while they are building their companies -- and before venture-capital investors see profits. That way, the thinking goes, the company founders can reap some financial reward and stay motivated to build the company before an IPO or company sale, which can take years.

Some traditional investors don't think founders should make money before backers do, since early paydays might distract them from the task at hand.

All of this is causing traditional VC firms to re-examine the way they invest in tiny tech start-ups. VC concerns including Trinity Ventures, for example, are now letting a few of their entrepreneurs "take money off the table" early on by selling stock.

Many big venture firms have also started looking at much smaller deals. Accel did six deals less than $1 million this year, although the company says that was in response to increasing valuations for larger-sized investments.

About a year ago, Charles River Ventures announced a program to offer $250,000 loans to fledgling Internet start-ups, far smaller than its usual investment size. Charles River is now also making equity investments in companies through its QuickStart program.

Partner George Zachary said his company launched the program because it was encountering many companies that didn't need a traditional, multimillion-dollar VC investment and the attendant hand-holding.

Just how successful Mr. Thiel's investing tactics are remains to be seen; Founders Fund hasn't yet seen any payout from the Facebook stake. However, it recently collected a big return when one of its investments, computer-security and antispam concern IronPort Systems Inc., was sold to Cisco Systems Inc. for $830 million.

Some Backlash

Mr. Thiel acknowledges his company faced resistance from blue-chip investors when it set out to raise money for its latest, $220 million venture-capital fund. One large institutional investor, who declined to be named, said he was put off by Founders Fund's anti-establishment pitch. Others wonder whether Founders Fund could soon tap out its close-knit network of entrepreneurs and run out of companies to fund.

"The early-stage venture game has always been about getting in early and getting in cheap," says Founders Fund partner Sean Parker, who helped start companies including online-music service Napster and online address-book company Plaxo Inc. "Some of those deals are now going to funds like ours."

source: WSJ