When the U.S. Army wants to equip soldiers with solar panels instead of battery packs, or the Central Intelligence Agency wants to combine maps, databases, and satellite imagery—or the National Aeronautics and Space Administration wants to find better ways to recycle water in space, whom do they call?

Time’s up, people—they call venture capital.

Or, to be more precise, they set up their own venture capital arms to help finance the cutting-edge technologies most likely to help them do their jobs. That way, they can ferret out and partner with the kind of innovative startups that might never make it through the bureaucratic government-contracting maze.

The latest entrant to the government innovation sweepstakes is NASA, which this month issued a “Request for Information” from organizations interested in partnering with the agency to set up an independent venture capital fund.

To be launched later this year, “Red Planet Capital” will be modeled on In-Q-Tel, an independent nonprofit firm set up by the Central Intelligence Agency in 1999.

“NASA’s looking at going to the moon and returning to Mars and at ambitious plans for human space flight,” says agency spokeswoman Melissa Mathews. “We’re building on existing technology, but obviously there’s technology we need to foster, so this is one way of doing that.”

With $63 million from the CIA, In-Q-Tel partners with other venture firms to fund companies developing new ways to sort, handle, and secure data. So far, it has invested in more than 90 companies and reviewed more than 5,400 business plans, leveraging more than eight dollars in private capital for each dollar it puts in.

The Army followed the same model a few years later, when it set up OnPoint Technologies to invest in a $25-million venture fund. Both firms are independently run as nonprofits, a model NASA expects to follow.

The space agency plans to invest $11 million in fiscal 2006 and eventually increase that figure to about $20 million a year, focusing on technologies that involve water reuse and recycling, improvements to spacesuits and other machinery used in exploration, environmental monitoring and control, and data systems and biomedical support for exploration missions.

In December 1998, as Silicon Valley was teeming with engineers who had quit their day jobs to chase the dot-com dream of IPO riches, a group of four tech-industry veterans made what at the time seemed like a wrong-way bet: that going private would be the next big thing for technology companies.

With Internet startups from Pets.com to Webvan to BBQ.com littering the landscape, tech seemed more lucrative, and more risky, than ever. But David Roux, Jim Davidson, Glenn Hutchins, and Roger McNamee didn’t see it that way. The four banded together and risked $112 million of their own money, plus about $400 million from tech executive acquaintances, on the premise that tech businesses were mature enough to generate steady, predictable returns.

“Our big insight was that the new economy was just like the old economy,” says Mr. Roux. While private equity investors had steered clear of technology because they worried that earnings and cash flow were too volatile, the average tech company in the 1990s was boosting revenues by 15 to 20 percent a year, he says—six times as fast as the overall U.S. economy. Even larger, more established tech businesses were growing 10 percent a year.

Instead of trading equity for cash, it was time for technology companies to fuel growth by increasing debt loads, the four thought. After a day of mogul-hopping on the ski slopes outside Salt Lake City, the partners shook hands and borrowed the name of a nearby fishing hole to launch Silver Lake Partners, the first buyout firm focused exclusively on tech.

Leveraging Experience

The four figured they collectively had enough experience and understanding of the technology industry to make better calls than just about anyone else in the private equity business.

The firm has helped bring leveraged buyouts—once the province of old-economy industries such as food and tobacco—to the high-tech world. Just as IPOs have been the lifeblood of new technology companies for the last couple of decades, SilverLake’s efforts are now helping LBOs breathe new life into older technology. And along the way, such deals are making boatloads of cash for the investors who bankroll them and the financiers who engineer them.

Mr. Roux, who had served in executive positions at Lotus Development and Oracle after earning a master’s degree in economics from CambridgeUniversity and an M.B.A. from HarvardUniversity, had the operational experience.

Mr. Davidson came from Hambrecht & Quist, where he headed the investment bank’s technology banking business, and Mr. Hutchins had spent years in the private equity business, first at Thomas H. Lee Partners and later at the Blackstone Group. Mr. McNamee, a private equity veteran who co-founded Integral Capital Partners and served as a technology fund manager at T. Rowe Price, has since stepped back from SilverLake to focus on Elevation Partners, a media and entertainment-focused private equity firm he co-founded in 2004.

Seven years after placing their audacious bet, the partners pulled off the largest technology buyout—and the third-largest leveraged buyout—in history, with their $11.6-billion deal to take data-management software maker SunGard Data Systems private.

Undervalued Companies

SunGard had everything SilverLake looks for. It was a market leader with healthy cash flow, a large customer base, a tested management team, a strong brand, and a division or two with spin-off potential. Even better, from the buyout shop’s point of view, the company was undervalued by the public markets—and it had a low debt-to-equity ratio, so it could be loaded up with long-term debt to finance a buyout.

“It’s clear to anyone in the business that there are good businesses out there that the public markets might be undervaluing,” says Ben Bisconti, a managing director at Accel-KKR, a buyout firm that specializes in purchasing closely held, often family-run technology companies.

The leveraged buyout burdened SunGard with $7.7 billion in long-term debt, up from the $509 million showing on the company’s balance sheet at the end of 2004. But the company has plenty of cash flow to cover the debt-service costs, and the deal gave it the flexibility to make further acquisitions without worrying about short-term Wall Street analysts’ expectations.

“Finally, we have shareholders with the same kind of long-term view and long-term horizon as our employees and clients,” says SunGard CEO Cristóbal Conde. “We can do a lot of things we could not do as a public company.”

That’s a refrain often repeated by companies going private, and to a certain extent it rings true for SilverLake’s deals. The firm’s portfolio companies have a track record of being able to pump up spending on research and development, capital investments, and customer support—in stark contrast to the typical LBO playbook, which has often called for slashing expenditures on new product development, as well as cutting jobs and dumping pension plans to slice costs.

“There is more of an emphasis on the process of growing or at least sustaining the company on a technology basis in these buyouts than would have been the case in a traditional old-economy company,” says Josh Lerner, a professor of investment banking at HarvardBusinessSchool. “SilverLake has executed brilliantly with this.”

More than applauding the firm’s ability to make money, Mr. Lerner suggests buyouts can be good for the industry. “When you look at both the operating success as well as the financial returns, it’s hard not to argue that they’ve been fairly attractive to date,” he says of SilverLake’s deals.

And with companies heavy on cash, the time is ripe for firms to take on more debt, says Mirko Mikelic, a senior portfolio manager at Fifth Third Asset Management in Grand Rapids, Michigan. “In the last 50 years, this is the most cash companies have had on their balance sheets,” says Mr. Mikelic, who oversees $14 billion in bond investments. “Firms have been reluctant to lever up, but now is probably time.”

In It for the Long Haul

To show SilverLake’s commitment to long-term growth, Mr. Davidson cites the example of Seagate Technology. “The first two quarters they were private, they missed their numbers,” he says. The typical response of a leveraged buyout sponsor “is to slash costs and get the profitability back,” he says.

And crush capital spending, interjects Mr. Roux.

Instead, the firm gave Seagate’s managers the green light to ramp up R&D spending and speed up the consolidation of its plants into three main manufacturing centers. The result? Seagate could eventually make any of its seven disk drives on any factory line, slicing costs and allowing it to adjust its product mix on a dime whenever markets changed.

“We could do a 160-gigabyte drive for the same cost, maybe even cheaper, than somebody else could do a 120-gigabyte drive,” says Mr. Davidson. “That’s actually kind of an amazing value proposition for customers.”

Adds Mr. Roux: “It required an act of financial courage to make an investment that would not pay off in the next quarter or the next year.”

R&D spending at Seagate jumped from under $600 million in 1998 to almost $800 million in the year after the buyout, allowing it to pump cash into developing technologies that can store 500 times more information on a single disk, and 12 times more on a micro-drive.

Those investment decisions weren’t made without a struggle, concedes Seagate CEO William Watkins. “I look at the world and say, ‘we can’t save our way into prosperity,’ and Dave Roux goes, ‘yeah, but you can spend your way into disaster,’” he says.

Although SilverLake closely scrutinized Seagate’s spending plans—and Mr. Watkins’ proposal to build what he called “the factory of the future”—the new owners nearly always backed management’s strategies in the end, according to Mr. Watkins.

“They’re really good at that one big decision: ‘We either have confidence in management or we don’t,’” he says. “If they don’t, they replace them.”

Seagate was a winner, returning $1.9 billion so far on SilverLake’s equity investment of $324 million—not counting another $800 million worth of stock the firm still holds.

Not every SilverLake bet pays so handsomely, though.

The firm’s biggest flop was a $180-million investment in SubmitOrder.com, which handled inventory management and order fulfillment for e-commerce companies. Not long after SilverLake decided to back it, the market for technology stocks crashed. And then K-Mart, its biggest customer, went bankrupt and SubmitOrder eventually folded.

Not that SilverLake skimps on research. Every Monday morning, partners in the firm’s Menlo Park, California, office file into a room walled with straw-colored rice paper, and seat themselves around a polished eucalyptus-wood table to review portfolio performance and talk about deal prospects.

Via videoconference, partners in London and New York City virtually join the California group in what Mr. Roux calls “our little Zen temple of capitalism.” Managing directors with ideas circulate a “green sheet,” a brief analysis of a possible deal. Files on prospects getting an initial nod are moved on to a team that takes a deeper look at financial, management, technology, and other details to get a clear picture of their key strategic issues.

Out of 100 or so deals that make it this far, 25 or 30 move on to due-diligence full-court press, a process that consumes thousands of man-hours and can involve more than 100 people, including outside lawyers, accountants, and tax advisers.

The Payback

At the end of that process, “it’s typical for us to be spending a million dollars a week evaluating and analyzing the opportunity,” says Mr. Roux.

In a busy year, the firm might do three, maybe four, deals out of the more than two dozen that come up for serious consideration.

SilverLake has earned a gross internal rate of return of 32 percent on its $2.3-billion first fund, allowing its founders to indulge their passion for basketball by buying stakes in their favorite teams. Mr. Roux and Mr. Hutchins each own a share in the Boston Celtics, Mr. Davidson a stake in the Golden State Warriors.

The firm collects management fees of between 1 and 1.5 percent on the committed capital in its portfolios, though it pays those fees back after the portfolio becomes profitable. Once that happens, SilverLake pays its investors a profit, and then takes 20 percent of the profits for itself.

Once SilverLake fully sells off its stakes in all the portfolio companies of its first fund, it should come close to tripling investors’ money. Assuming it realizes such returns, the firm would rake in a profit of about $920 million on the fund. Distributed evenly, that kind of cash would make every one of SilverLake’s 63 employees—even the secretaries—a millionaire more than 14 times over.

Do the pension funds and university endowments that invest in private equity funds balk at such arrangements? They wouldn’t if they used venture capital firms as a comparison. U.S. buyout funds raised $86.2 billion last year, and posted one-year returns of 32.5 percent in the third quarter, far outpacing the 19.7 percent returns for VC funds during that period.

SilverLake is likely to capture some of that flood of investor cash this year. Sources familiar with the firm say that with its SLP II fund already half invested, the firm is likely to raise a new fund later this year even larger than SLP II.

Global Ambitions

Making no secret of its global ambitions, SilverLake sent managing director Egon Durban to London to open an office last fall. The partners had gotten their feet wet in Europe two years earlier, selling business intelligence software maker Crystal Decisions to Paris-based Business Objects for $840 million.

Mr. Durban, who joined the partnership in 1999 from Morgan Stanley’s investment banking group, sees European tech companies as less mature than their U.S. counterparts and therefore less likely candidates for pure buyouts. He also thinks that Europe’s pro-labor environment can get in the way of deals. “In the U.S. there’s always a mantra that they’re doing the right thing if they’re creating shareholder value,” says Mr. Durban.

Thus, he sees a different kind of opportunity for the partners, what he calls value arbitrage. For example, he says, a mid-cap Norwegian tech company might be listed only in Norway. “French investors don’t touch you. German investors don’t touch you,” he says. And therein lies the opportunity: making it more broadly accessible to raise its value.

SilverLake had a rocky start in Europe. It lost out on two big deals last year—one involving Spanish mobile telephone operator Amena (which France Telecom took for $12 billion). They dropped out of the bidding for TDC, a Danish telephone operator; that deal has not been settled.

SilverLake also has designs on Asia, being a major investor in Seagate (which has a massive Asian presence). Last summer, the company signed former IBM CFO John Joyce as an investment partner. Mr. Joyce previously ran IBM’s Global Services business and spent seven years in Tokyo. He also engineered the sale of IBM’s PC business to China’s Lenovo.

He says SilverLake will soon be recruiting “advisors” in Japan and China to help identify opportunities in Asia. SilverLake measures its profile by how many of the major tech deals it participates in, says Mr. Joyce. “We want to build up that same kind of brand in Asia.”

He thinks the partners’ long-term approach should play well in Asia. Mr. Joyce says he first approached Lenovo chairman Liu Chuanzi about selling IBM’s PC business in 1999—and five years passed before that deal was done. “That’s the type of pace you have to be willing to adhere to when you’re trying to do something [in Asia].”

Being patient isn’t to be confused with being slow. Because SilverLake’s investments crisscross so many segments, the firm is brilliantly positioned to spot trends and act accordingly. Little known to most people is the fact that it is Singapore’s largest private employer—thanks to its interests in Seagate, Avago, a carve-out of Agilent’s semiconductor unit, and contract manufacturer Flextronics. “We’re very much exposed to Asia,” says Mr. Hutchins.

“One of the great advantages that we have is in the portfolio of companies we’re investing in,” he adds. “[They’re] at the forefront of technology.” A look at the Flextronics order book, for example, gives a very good idea of cell phone pickup and how many base stations are being installed.

“The only way you can get to scale with technology companies is to be global, and so your business has to, by design, be global,” says Mr. Hutchins. “We get, oftentimes if we do our jobs right, venture-like opportunities embedded in the company as a result of some new product or application or geography. We call it ‘two ways to win.’”

Talk about having their cake and eating it, too. “The genius of the private equity and technology industry is that we get the downside protection that comes from private equity, and the upside opportunity that comes from venture,” says Mr. Hutchins.

The company says its digital amplifiers, which are smaller than traditional analog amplifiers, can match their sound performance while generating less heat, delivering greater efficiency, and selling at a lower price.

Those are crucial advantages for the Austin, Texas-based company, which reports that sales of the type of digital amplifier chips it sells totaled $125 million in 2004. That market is expected to expand by 60 percent a year to more than $800 million by 2008, according to Tempe, Arizona-based market research firm Forward Concepts, which specializes in research on markets for digital signal processing technology.

“The consumer electronics market is rapidly transitioning to digital audio amplification,” said Eric Rothfus, managing director of Austin-based TL Ventures, which co-led the financing round with Origin Partners. “This is especially true for flat-panel TV, where the increased efficiency is a requirement.”

JAM, which holds 20 patents and has another 20 pending, in December introduced its first two amplifier chips, both aimed at the digital TV market. The company’s chief technology officer has said mobile phones are likely to be JAM’s next product frontier.

“Mobile phone manufacturers are building more and more audio features into cell phones, and these phones have very stringent power and heat requirements,” CTO Larry Kirn said in a backgrounder on the company’s web site. “JAM has the right technology and product line to capitalize on this opportunity.”

Capital from the latest financing round, which brings JAM’s fundraising total to $12.5 million, will be used to expand the company’s product line and ramp up production, said Rick Beale, vice president of marketing.

“With this funding, the company is really transitioning from a technology orientation to more of a product orientation,” he said. JAM plans to hire another 40 to 50 employees by the end of the year, on top its current staff of between 10 and 15, he said.

Other participants in the financing round were IntelCapital; EDBV Management, a fund management company controlled by the Singapore Economic Development Board; and two angel groups from Boston: Launchpad Ventures and Hub Angels.

“Their participation will help make the JAM True Fidelity digital amplifiers the solution of choice for consumer electronics,” said Mike Holt, JAM’s CEO.

Also on Tuesday, the company said it opened a new office in Singapore, where JAM said it will focus its sales and operations efforts, given the concentration of original equipment manufacturers in Asia. It will continue to develop new products and plan strategy and marketing efforts from its Austin offices.

The National Aeronautics and Space Administration introduced the effort quietly this month with no formal announcement, just a “Request for Information” from organizations interested in partnering with the agency to set up an independent venture capital fund.

The fund, to be called Red Planet Capital, will be modeled on In-Q-Tel, an independent nonprofit firm set up by the Central Intelligence Agency in 1999.

The CIA’s idea was that an independent investment firm could much more easily identify, partner with, and invest in startups developing technology that might be crucial to the agency’s mission than could a bureaucracy-bound government agency. Making such investments was also seen as a way to accelerate crucial research and development efforts.

“NASA’s looking at going to the moon and returning to Mars and at ambitious plans for human space flight,” said agency spokesperson Melissa Matthews. “We’re building on existing technology, but obviously there’s technology we need to foster, so this is one way of doing that.”

Tapping Startup Savvy

NASA hopes the effort will help it tap into the savvy of startups that might not be traditional government contractors, she said. The agency expects to invest $11 million in fiscal 2006 and eventually grow to about $20 million a year.

Since its origin, In-Q-Tel has invested in more than 90 companies and reviewed more than 5,400 business plans. It often partners with other private equity investors, with the result that each dollar In-Q-Tel invests leverages more than $8 in private capital.

“We would envision a similar kind of situation,” said Ms. Matthews.

The idea of setting up a NASA venture capital arm “has been circulating for at least a couple of years,” she said. “It predates our current administrator.”

In-Q-Tel Connection

NASA Administrator Michael Griffin, who joined the agency in April 2005, was formerly chief operating officer of In-Q-Tel.

The initial technologies NASA wants its venture program to focus on are those that involve water reuse and recycling, improvements to space suits and other machinery used in exploration, environmental monitoring and control, and data systems and biomedical support for exploration missions.

NASA is also looking for technologies that can help astronauts fix equipment malfunctions with whatever items they have on hand.

“That’s a really important thing if you’re going to set up moon bases or take a six-month journey to Mars,” said Ms. Matthews. “They’re having to do some of that in the space station—some astronauts call it MacGyvering.”

MacGyver was a popular 1980s television character who used common items such as light bulbs, pine tar, and cleaning fluid to devise inventions that would help him get out of tough situations.

That’s why the Bellevue, Washington-based company developed software that can teach mobile phone users how to use all the nifty features that come with their phones.

The idea is that once users have the know-how, they’ll spend more money using premium mobile phone features that allow them to do things such as download games and ringtones, send photos and text messages, and access data over the wireless Internet.

Plus, the software is expected to save providers of mobile services much of the money they now spend on customer support, helping users to use their phone’s services.

“The complexity of the phones that are being offered today is significantly greater than in the past,” said CEO Bob Lewis. “We’re taking advantage of all the memory and capacity that’s in phones today to provide services that have never been able to be provided at the handset.”

The additional $13 million, gathered in a third round of financing, brought its fundraising total to $18 million. The company, founded in 2003, plans to use the cash to nearly double its staff to about 60 and roll out products to mobile operators worldwide through technical trials and pilot programs.

The company has already tested the products with three European wireless carriers, and expects one of them to do a full rollout of the system in the first half of this year.

SNAPin is also in talks with U.S. carriers, and by the end of this year or early next year expects to be booking substantial revenues, though executives wouldn’t say when the company is likely to begin turning a profit. They did say they expect this venture funding round to be the company’s last.

Fundamental Change

“Just as the cash machine fundamentally changed retail banking by giving consumers a faster and easier way to manage their accounts, SNAPin’s category-defining products are providing a similar sea change for mobile networks,” said David Walrod, a general partner at Oak Investment Partners, which led the financing round.

In addition to the software designed to teach owners how to use their mobile phones, SNAPin offers three other products in its suite of software for cell phone operators.

One is a customer support module that intercepts calls to mobile operators’ customer service lines to offer users a menu of frequently asked questions and their answers.

Between 40 and 60 percent of mobile customers call in to their carriers’ help centers every month, and these calls can cost providers as much as $50 each, according to SNAPin executives.

“There really aren’t economies of scale when you talk about call centers,” said Mr. Lewis. By answering many customer questions with the software built into their handsets, SNAPin’s technology can save carriers on call-center staffing and infrastructure costs, he said.

Remote Diagnostics

The company also offers maintenance software that allows service providers to run diagnostics remotely on their customers’ cell phones and determine whether problems result from user or network errors. This software can be set up with monitoring routines that can find and fix problems before phone users even know they exist, said Mr. Lewis.

And SNAPin’s Metrics software gives providers the ability to use the cell phones in their networks to test network performance and coverage. Providers can also see detailed usage data on any phone in the network with the software, allowing them, for example, to monitor how many contacts a user has stored in her phone, how much time she’s spent charging the battery, what the phone’s default language is set to, and how much of its memory she’s used.

In addition to Oak Investment Partners, other participants in the funding round were Frazier Technology Ventures and Hunt Ventures.

Silicon Valley is full of people like Drew Lanza. A Stanford University graduate, engineer, serial entrepreneur, and now venture capitalist, the 49-year-old Atherton, California, native seems to know everybody in the hollow of land between the eastern foothills of the Santa Cruz mountains and the San Francisco Bay.

He helped hook up Bandel Carano, a venture capitalist with Oak Investment Partners, with Rick Aversano, a seasoned startup executive. The former funded the latter’s business idea, which became Qtera, an optical-networking company bought by Nortel Networks scarcely two years later for $3.25 billion.

Similar stories abound in Silicon Valley, which still soaks up more than a third of all venture capital in the United States and incubates more startups than any other region. The narrow stretch of land between San Francisco and San Jose has given birth to some of the biggest names in technology, from Hewlett-Packard to Intel to Oracle to Apple Computer to Sun Microsystems, many of which spawned startups of their own.

Intertwined with Technology

The area is not only full of young technology companies, it’s also replete with people who, like Mr. Lanza, act as catalysts, connecting those who need money, employees, managers, accountants, lawyers, and business partners with the people and companies most likely to fit the bill.

As old hands know, their connections, coupled with the rapid-fire job-hopping and furious pace of information exchange that characterizes the valley, are key to the region’s economic success and its dominance in creating innovative technology companies. And that’s on top of a culture that lionizes entrepreneurs.

It’s not just a matter of knowing venture capitalists knowing other venture capitalists, it’s knowing the whole cross-section of players—engineers, lawyers, accountants, researchers, and CEOs of often dozens of companies.

“It’s one of the hidden secrets of the success of Silicon Valley,” says Heidi Roizen, a managing director at Mobius Venture Capital in Palo Alto.

“The fabric of our whole community is so intertwined with technology and entrepreneurship and innovation,” she says. “The valley is so steeply concentrated in technology jobs that you get to know people from competing companies because you go to the same church or your kids play on the same soccer team or you live next door to each other.”

Mr. Lanza, for instance, grew up down the street from Bill Edwards, one of the Valley’s earliest venture capitalists, and Tim Draper, who became a third-generation VC in 1985 when he started his own firm 27 years after his grandfather founded the first VC firm on the West Coast.

“I always lived within three miles of Stanford,” says Mr. Lanza, a partner at Menlo Park-based Morgenthaler Ventures. “I can specifically relate a couple of times when deals have been a combination of someone from the technology arena and someone I knew in high school.”

The Alumni Advantage

Some of the most economically relevant ties in the region are those forged by technophiles who worked together at the same company.

Example: PayPal co-founder Max Levchin, who left the online-payments company after it went public and then was sold to eBay in 2002, formed his own business incubator, MRL Ventures, which has already sparked at least three startups. He runs one, an online photo-sharing service called Slide, and another, online networking and reviews site Yelp, is run by former PayPal engineering vice president Jeremy Stoppelman (See Q&A: Jeremy Stoppelman).

“It’s become quite a strong alumni network,” says Mr. Stoppelman, who notes that Mr. Levchin himself provided the company’s initial financing as well as introductions to venture capitalists before Wellesley, Massachusetts-based Bessemer Venture Partners invested $5 million in November.

Mr. Stoppelman got help hiring engineers and preparing his venture-funding proposal from Keith Rabois, another former PayPal employee who is now an executive at social-networking site LinkedIn. He also used his connections from PayPal days with LinkedIn CEO Reid Hoffman and newly minted venture capitalist Peter Thiel to cement relationships with venture capitalists.

“The better connected you are in the valley’s social network the easier it is to get things done,” says Mr. Stoppelman.

That’s one reason so many startups accept venture funding. CafePress, a Foster City, California-based online marketplace for customized products such as T-shirts and coffee mugs, was already profitable in early 2005 when Sequoia Capital made an investment, according to vice president of product development Mehdi Maghsoodnia.

But more important than the money was having partner Doug Leone on the firm’s board, he says. “When we want to approach a potential business partner, the first thing we do is ask our board members,” says Mr. Maghsoodnia, explaining how introductions are arranged.

As CafePress grew, executives needed advice on designing a data processing system for larger volumes of orders. Another Sequoia partner provided just the introduction they needed. That was to online shoe retailer Zappos.com, which willingly shared its expertise, according to Mr. Maghsoodnia.

Fostering Entrepreneurial Experimentation

Venture capital firms often become crucial nodes between companies, since many of their partners have worked at technology companies, and have not only the technical and operating expertise to grasp what pioneering startups are doing and where they fit in the marketplace, but also the relationships with other engineers and programmers and executives who can be useful to their portfolio companies, according to academic researchers.

“The advantage of the kinds of networks [Silicon Valley] has and the overlay between industrial and legal and venture capital and university networks, where all those networks feed into one another—that’s fairly unique,” says Mark Granovetter, a Stanford sociologist spearheading a research project aimed at tracking and mapping the relationships between key players in Silicon Valley. “Regions that don’t have all this reciprocity back and forth find it difficult to stay at the cutting edge.”

Many other regions—including the Boston area, Silicon Valley’s biggest U.S. competitor—are dominated by “insular, secretive, inward-looking firms, universities, banks, and research institutions that hinder the social networking and open information exchange that support multiple entrepreneurial experiments in Silicon Valley,” says AnnaLee Saxenian, a professor at the University of California, Berkeley, and author of Regional Advantage, an examination of the differences between Boston and Silicon Valley.

Ms. Saxenian quotes one Silicon Valley entrepreneur saying he “got commitments for $2.5 million in 20 minutes from three people over lunch who saw me write the business plan on the back of a napkin. They believed in me. In Boston, you can’t do that. It’s much more formal.”

Not everyone agrees that such speedy decisions are restricted to Silicon Valley, though. “That’s silly hogwash,” says David Skok, a general partner at Matrix Partners in Waltham, Massachusetts, the heart of Boston’s technology corridor. “We fund people here very, very quickly.”

In the fall of 2004, he says, Matrix pumped $5.2 million into Veveo.tv, a company aiming to deliver television to consumers over broadband connections, and $4.25 million into Aylus Networks, a developer of technology that would enable the delivery of video over wireless communications equipment.

“They were situations where we had a person we knew and respected highly, and they came in and explained they wanted to start a new business in a general area, and we liked the general area enough to say, ‘We’ll back you,’” says Mr. Skok.

The VC Honor Code

Still, dense networks accelerate decision-making in Silicon Valley, where venture capitalists say they can vet entrepreneurs, check whether there’s a market for their business ideas, and even find potential customers with a series of phone calls to the right people.

“People do all these favors for one another and provide all this information for one another in ways that are priceless,” says Mr. Granovetter. “If you tried to buy that information, you couldn’t.”

The process allows venture capitalists to move quickly, backing a company right when the market calls for it—a huge advantage in a world of constant change.

Trust is the other component. “There’s a code of honor among venture capitalists,” says Ms. Roizen. “If you know something bad about somebody you don’t let a friend put a bunch of money into that person.”

The connections forged in a small community reinforce that network of trust. “There’s no substitute for personal contact,” she adds. “The strength of knowing someone because your kids are on the same soccer team is different than what you get through business relationships.”

The investment will help the Salem, Oregon-based Saber Consulting improve its products, broaden its customer base, and expand into new markets, said Ben Bisconti, a managing director with Accel-KKR. The amount of the investment was not disclosed.

Founded in 1997 by brothers Nitin and Karan Khanna, Saber sells software systems that help state and local governments manage internal systems and processes such as the evaluation of construction bids. The systems also allow them to offer online services from filing tax forms to applying for driver's licenses.

Saber’s systems encompass government functions such as voter registration, election management, and forms processing, as well as data collection and analysis for utilities, healthcare, and educational organizations.

“Their existing portfolio products have applications in all 50 states,” Mr. Bisconti said, noting the company currently sells to local governments in just 13 states. “We’ve worked with them on developing a growth plan.”

Fragmented Market

While bigger companies like Accenture offer some competition for Saber, the market for public-sector software systems is very fragmented, said Mr. Bisconti.

“There are a lot of smaller companies that provide the type of software and solutions Saber does,” he said. “From our perspective, they’re getting to the scale where they can deliver very large and very complex IT solutions to the state.”

Accel-KKR’s experience investing in technology companies that focus on public sector customers makes the relationship a good fit for the two companies, said Saber CEO Nitin Khanna, a former senior manager at Oracle.

“We have found in Accel-KKR a number of key attributes that we felt were essential in a financial partner—experience in the public-sector IT space, a proven track record of partnering closely with family-owned businesses, and an unparalleled network of business relationships.”

General Catalyst Partners, which was founded in 2000, focuses on investing in early-stage technology companies, mainly in the software and applied-technology sectors.

The Cambridge, Massachusetts-based firm’s latest fundraising effort brought in $100 million more than its previous $300-million fund, which closed in 2003. The fourth fund also increases General Catalyst’s capital under management to $1 billion.

The firm’s entrepreneur-heavy management team is what gives General Catalyst its competitive edge in the venture capital arena, according to executives at portfolio companies.

“Because of their own legacy as entrepreneurs, General Catalyst was able to provide the support, enthusiasm, and resources for me to build my business and my team,” said Jeremy Allaire, the founder and CEO of Brightcove, an Internet television company that helps web producers syndicate and profit from their content.

Mr. Allaire, a former executive with web-development software maker Macromedia, founded Brightcove during a stint at General Catalyst. “They gave us the momentum we needed to get Brightcove launched in the marketplace,” he said.

General Catalyst’s portfolio companies include Taleo, a maker of workforce-management software that raised $94 million in an initial public offering last year; ProfitLogic, a manufacturer of profit-optimization software that was acquired by Oracle in 2005; and Venetica, a developer of content-management software that was acquired by IBM in 2004.

General Catalyst aims to back companies that have a clear roadmap to achieving profitability and “whose competitive advantages can be sustained through alliances with top distribution partners, innovative development efforts, and/or patents and intellectual property protection,” the firm said in a statement.

Companies in the region grabbed an increasing share of venture capital investment, generated a rising percentage of U.S. patents, and experienced productivity gains that outpaced the rest of the nation, according to the latest yearly report card from Joint Venture Silicon Valley, a public-private partnership that tracks trends and promotes growth in the region. The study is scheduled to be released Friday.

“The Valley has experienced a turbulent five-year period of economic restructuring and occupational change, producing both unprecedented job losses and substantial wage gains,” said the report.

The 1,500-square-mile region, centered around Santa ClaraCounty, gained 2,000 jobs in 2005 and its unemployment rate fell to the lowest since June 2001, the study found. The job gains were driven by hiring at software companies and firms specializing in “creative and innovation services” such as legal work, graphic design, marketing, and advertising work.

Plus, the region generated 10 percent of the nation’s patents, double its share a decade ago. What’s more, the region sucked up 25 percent of all U.S. venture capital investment, up from 18 percent in 1995.

The message: creativity and innovation are driving the region’s economy and keeping it globally competitive. “Silicon Valley’s most important competitive edge may be its ‘creative edge,’” said the report.

Fewer CEOs

Still, not all the report’s economic news was rosy. Semiconductor manufacturers and designers, which for many years were the backbone of Silicon Valley’s economy, shed jobs in 2005.

And last year’s gains did little to reverse employment losses the region has suffered over the last five years. Since the second quarter of 2000, Silicon Valley has lost 212,150 jobs and the workforce declined by 118,600.

Even as employment shrank, though, wages grew. Over the last decade, per capita income in the region rose 9 percent faster than the national average, increasing to $56,633 in 2005.

“This striking juxtaposition of job loss against wage gain indicates a fundamental shift to higher-skilled occupations,” said the report.

The number of jobs in the region for top-level engineers, scientists, and managers has risen since 2000, while jobs in key support occupations such as computer programmers and electromechanical technicians have declined.

Curiously, the number of Silicon Valley CEOs fell by 780 over the period, while the ranks of management analysts swelled by 1,130.

Soaring Housing Costs

And although average wages increased, not everyone in the region has benefited. Silicon Valley’s median household income fell for the fourth consecutive year, and now hovers at $84,987—near its 1995 level.

While that’s close to double the national median of $44,389, it doesn’t stretch nearly as far as it would elsewhere, as soaring housing prices have pushed home ownership beyond the reach of most Silicon Valley residents. Even though housing affordability in the region increased last year, barely one in five households in the region could afford to buy a median-priced home, the study said.

What made the difference? The largest technology buyout in history.

Last March, Menlo Park, California-based Silver Lake Partners assembled some of the biggest names in buyouts to orchestrate an $11.6-billion takeover of data management company SunGard Data Systems—making it No. 1 on Red Herring’s Top 10 Deals List.

With its steady cash flow and reliable revenue, SunGard seemed to bear out SilverLake’s theory that technology is now a maturing industry and predictable enough to be attractive to buyout firms.

Wayne, Pennsylvania-based SunGard reported profits of $454 million on revenues of $3.56 billion in 2004, up 22 percent from a year earlier. Three years earlier it reported profits of $246 million on revenues of $1.16 billion.

Big Spenders

“Technology spending has reached over half of business capital expenditures,” says Alex Slusky, the founder and managing partner of Vector Capital, a San Francisco-based private equity firm specializing in spin-offs, buyouts, and recapitalizations of technology companies. “It’s such a large part of the economy that it can’t grow much faster than the economy as a whole. The perception that this has become a cyclical industry rather than a growth industry is now accurate.”

Traditional buyout firms certainly showed the time was ripe for technology transactions. Boston-based Bain Capital, Fort Worth, Texas-based Texas Pacific Group, and New York City-based Kohlberg Kravis Roberts, The Blackstone Group, and even Goldman Sachs all signed up to gulp down a piece of the SunGard pie.

One reason deals are drawing so many participants is simply that they are getting bigger. Seven of the top 10 buyouts this year were deals worth more than $1 billion each. And investors are fueling the buyout boom as they channel increasing amounts of cash to private equity firms.

At the end of the third quarter, buyout and mezzanine funds had raised more than $54 billion, surpassing their take for all of 2004, and putting them on pace to more than double the amount of capital they raised in 2003, according to data from Thomson Financial’s Venture Economics and the National Venture Capital Association.

Meanwhile, the average fund size has soared, from $330 million in 2003 to $443 million in the first three quarters of 2005. That trend is likely to continue as investors seek to put larger amounts of capital to work, and could well mean the number of syndicated deals will shrink as funds balloon.

Privatizing Pickup

And size mattered for technology executives last year, with the SunGard transaction shifting many of their views, according to Accel-KKR’s Mr. Barnds, whose Menlo Park-based firm buys privately held technology companies and boosts spending on areas like sales and marketing to accelerate growth and boost value. “There were companies that we had been calling on for six months or a year ahead of that transaction and trying to explain the merits of going private,” he says. After the deal went through, Mr. Barnds says the same CEOs started chasing him, “saying they wanted to really explore this and how they viewed it as their idea.”

With the SunGard deal, “2005 was the year tech buyouts went from the fringe to the mainstream,” says Mr. Barnds. CEOs went from viewing a buyout as a defeat to seeing it as a strategic initiative and a way to transform their business.

That’s certainly how Cristóbal Conde, the CEO of SunGard, saw his company’s leveraged buyout. “There was a disconnect between the long-term horizon of our employees and customers with that of our shareholders, which was far more short term,” he says. Now, SunGard can make more of the acquisitions that have fueled its growth without worrying about the damper a spending spree might put on its quarterly earnings and valuation by Wall Street analysts, he and the company’s new owners say.

Mr. Conde says the company’s plan to sell off its disaster recovery business, known as availability services, has been scuttled now that the company no longer has to persuade public-markets investors that keeping the cash cow fits the company’s strategy. But analysts are skeptical.

“We always felt the market didn’t value our cash-flow generation ability,” says Mr. Conde. “It’s a very, very predictable company. Our license sales are only 7 percent of total revenues.” In contrast, Oracle, the world’s third-largest software maker, garners more than one-third of its revenue from new license sales—a figure that rises to almost 80 percent when license upgrades and support are included.

Deciding When and What to Sell

Still, SunGard’s heavy debt load—$7.5 billion in bonds and loans were used to finance the buyout—could push it to put one of its other divisions on the auction block, says Stephen Velgot, an analyst with Cathay Financial, a New York City-based research firm and institutional broker-dealer.

The company’s higher-education and public-sector arm, which builds software for school administrations and municipalities, is “the fastest-growing and sexiest part of their business,” he says. Revenue in that division nearly doubled in 2004, pushing profit margins up three percentage points to 15.5 percent, while margins either shrank or grew less than one percentage point in each of SunGard’s other two divisions.

To Mr. Velgot, a unit that looks that sexy is ripe for a sale. “They could potentially get a high price for that business, so why not sell it off?”

Because SunGard generates enough cash flow to not only cover debt-service costs but also to fund more cash-generating acquisitions, answers Mr. Conde. In 2004, the company reported it earned $785 million in cash from operations, a 22 percent increase from the previous year’s $645 million. Except for a decline in 2003, the company’s cash flow has grown steadily for a decade.

And the game, according to SilverLake, calls for using equity efficiently to generate growth: Rather than leave cash on their balance sheets, it’s time for technology companies to use leverage as a cost-effective way to fuel expansion.

Helsinki-based Conor Venture Partners Oy plans to invest the capital in early-stage technology firms in Finland, Sweden, and the Baltic countries of Estonia, Latvia, and Lithuania. The fund is expected to close later this year.

Early-stage investments are a specialty of Finnish venture capitalists, according to data from the 114-member Finnish Venture Capital Association.

As a share of gross domestic product, Finland’s venture investments at the seed and startup stage—which represent a company’s earliest phase of growth—outpace all European countries aside from Sweden, FVCA statistics show. After adjusting for each country’s GDP, those investments rank Finland third among all countries, just behind the United States, according to the data.

Private-equity companies in Finland invested €369 million ($447.8 million) in 249 portfolio companies in 2004, the latest year for which statistics were available from the FVCA. That represented a 13 percent increase from the prior year. High-tech companies took in about a third of the total invested.

Finnish entrepreneurs had the third-best access to venture capital in the world that year, according to a survey by the Lausanne, Switzerland-based International Institute for Management Development.

Once it begins operations, the Conor Technology Fund I will make investments ranging from €500,000 to €1 million in companies in the information and communications technology, embedded systems, semiconductor technology, electronics, new materials, and optics industries.

It will be managed by four partners: Pekka Roine, a former senior adviser at Prime Technology Ventures who serves on the boards of several technology companies and spent 22 years as an executive at Digital Equipment Corporation; Juha Ruohonen and Manu Mäkelä of Holtron Ventures, an Espoo, Finland-based venture firm; and Sami Ahvenniemi, who served as CEO of wireless communications company Bluegiga Technologies and was formerly an executive at SSH Communications Security Corp. and a partner at Holtron Ventures.

Investors in the new fund include the government-owned investment company Finnish Industry Investment Ltd., industrial holding company Atine Group, and Etera Mutual Pension Insurance Company.

The reporton firm-by-firm investment returns offers an unusual glimpse into the performance of buyout and venture capital firms, which typically keep a close guard on such data and have fought some high-profile legal battles to keep other pension funds from publicly releasing such figures (see Ohio, VCs Wrangle Over Data).

Facing pressure from VCs, the bureau stopped short of releasing data that shows valuations of individual companies in which the bureau’s private equity partners are invested. The bureau has asked the courts whether it can release such information (see Ohio Portfolio Data Angers VCs).

But Friday’s move shed plenty of light. While a number of buyout funds in which the bureau had invested created double-digit returns on the pension fund’s investments, most venture funds in the portfolio registered negative returns.

Does that mean the bureau’s venture investments were bum deals? Not necessarily, said Emily Mendell, the National Venture Capital Association’s vice president of strategic affairs and public outreach.

Her response suggests that one reason venture firms have fiercely opposed the release of performance data is because they fear that negative returns in the early years of a fund may eclipse the gains investments make in later years, which is typically when venture funds harvest their big wins.

Dangerous Information

“When it gets out there, [some of this information] is dangerous because people don’t understand it,” said Ms. Mendell. “You need to give these funds time to make the returns they have historically made.”

It can take from five to seven years for venture fund returns to turn positive—well into the 10 years that represents the typical life of a venture fund, she added. “We typically don’t look at anything under five years as being meaningful.”

That’s just about the time frame covered in the Ohio data, which includes just two funds closed before 2000 among the 60 buyout, mezzanine, and venture capital funds listed. The bureau’s portfolio also includes eight funds-of-funds, which operate similarly to mutual funds, but in the private equity industry.

The bureau’s private equity portfolio had a market value of $330 million as of March 31, 2005, according to today’s report, which was based on a review of the valuations of the bureau’s private equity funds by Ennis Knupp & Associates, a Chicago consultant group.

The bureau had also received distributions of $97.7 million as of the report’s closing date, bringing its total capital value to $427.8 million. Those investments yielded annualized returns of 3.16 percent for the bureau.

Return Data

The bureau saw its biggest gain from investments in a fund run by Quad-C Partners, a Charlottesville, Virginia-based buyout firm to which the Bureau has made a $15-million capital commitment.

As of March 31, Quad-C had invested $8.2 million of that amount and paid back $1.9 million to the bureau, putting the total capital value of the investment at $15.6 million and giving the bureau a 90 percent return on investment. The firm also registered the highest annualized rate of return among the bureau’s portfolio funds, at 40 percent.

Among venture funds, Athens, Ohio-based Adena Ventures registered the highest annualized rate of return, at 13 percent on a 2002-vintage fund. The only other venture fund to show a positive rate of return for the report’s time period was Nashville- and Dallas-based Pharos Capital Partners, which registered a 2.7 percent annualized return on a 2000-vintage fund.

“Pharos is pleased to be a top-quartile performer in the asset class and to have created value for the Ohio retirement funds and its other institutional investors,” said Pharos spokesperson Owen Blicksilver.

Still, with the National Venture Capital Association claiming more than 400 members, the Ohio data shows only a small slice of the venture and private equity world.

Over the last ten years, the NVCA’s data shows venture firms outperforming private equity firms that do buyouts and mezzanine investing. Ten-year returns at venture firms were almost 26 percent compared with 9 percent for buyout firms, Ms. Mendell said (see VC Returns Plummet 147%).

The fund, the first the venture capital firm has raised since 2001, is more than double the size of NeoMed’s third fund, which pulled in $42 million from investors. That fund, NeoMed III, is now fully invested.

The new fund will back between 12 and 15 companies over the next four years, investing between €5 million and €8 million into each, said NeoMed founding partner Erik Amble in an email Wednesday. The firm will likely hold on to portfolio companies between three and five years each, and eventually expects about half to go public and half to be acquired.

NeoMed, based in the British island of Jersey but operating out of offices in Oslo and Geneva, has already made its first investment from the new fund.

In partnership with the London-based 3i Group, the firm in November put 10 million Swiss francs (US$7.84 million) into Endosense, a Switzerland-based medical instrument company that is developing pressure-guided catheters for treating atrial fibrillation, a form of heart arrhythmia.

“NeoMed is now well-positioned as a leading European-based venture capital firm specializing in the healthcare and life sciences industry,” said Mr. Amble. The firm’s fourth fund drew investors from the U.K., Sweden, Norway, Switzerland, and Saudi Arabia, and the limited partners included both institutional and private investors as well as funds-of-funds.

Establishing Syndicates Earlier

In the years since NeoMed raised its last fund, the life sciences industry has seen increased interest from established biotech companies and specialty and midsize pharmaceutical firms in partnering with venture capitalists, said Mr. Amble. Also, investors are increasingly “establishing syndicates earlier with the view to finance development all the way to clinical proof-of-concepts,” he said.

Formed in 1997, NeoMed targets its investments toward healthcare and life sciences companies,and mainly puts its cash into companies in continental Europe and Scandinavia, with occasional forays into the U.S. and U.K. markets.

NeoMed’s current portfolio companies include Hopkinton, Massachusetts-based Aderis Pharmaceuticals, a biopharmaceutical company that specializes in treating cardiovascular, renal, and neurological diseases; Kuros Biosurgery, a Swiss biomedical company working to develop biosurgery, repair, and regeneration products; and Volcano Therapeutics, based in Rancho Cordova, California, which develops products to detect and treat plaque in the coronary arteries and vascular system.

One fine evening in the rolling hills of western Pennsylvania, Catherine Mott was nursing a Glenlivet at the Sharon Country Club with a half-dozen executives. One of them, James C. Mason, CEO of a plastics injection-molding company, mentioned how a friend had just recommended investing in a startup that made smart cards.

Mr. Mason told the group the company had already snagged two governments, Maryland’s and Israel’s, as customers, thus proving its business concept worked, Ms. Mott recalls. “He said he was investing $35,000 and we should be thinking about it too.”

After a brief review of the company’s financials and an interview with its CEO, she and the other six execs—all men—put in between $25,000 and $50,000 each.

Ms. Mott had become an angel—but was still learning to fly, it turned out. “I lost my shirt on that one,” she laughs now. She eventually turned down the card company’s third request for cash, but not before making direct investments in two other startups.

Despite the false start, Ms. Mott was firmly hooked on angel investing, which still attracts few women. They account for only 7.5 percent of the roughly 225,000 angels in the United States, says Jeffrey Sohl, a professor at the University of New Hampshire’s Whittemore School of Business, and the author of three papers on women angels. In Europe, the numbers are even lower. Brigitte Baumann, a member of the European Business Angel Network’s executive committee, estimates that women account for 5 percent at most of angels in Europe.

There’s Money to Make

But some women are bucking that trend, forming their own groups of angels and fighting a mens’ club mentality in the venture capital world that often results in women being relegated to the sidelines. Though there are 9 million women entrepreneurs in the U.S., and nearly half of privately held firms are at least 50 percent women-owned, less than 9 percent of venture funding went to women-founded companies in 2004, according to Dow Jones research firm VentureOne. But that was double the share of venture dollars gained by women-founded companies just two years earlier.

In many cases, women angel investors—often excluded from male-dominated angel groups in the past—are motivated by a desire to rectify that imbalance. But mainly, they’re joining the ranks of angels because there’s money to be made.

And while many women venture capitalists downplay talk of male investors’ hostility toward women, the libertarian ethos of Silicon Valley—which boasts the highest concentration of venture cash and experience in the world—hasn’t provided the most nurturing environment for women wanting to be rainmakers. The irony is that women’s angel groups, which have formed in cities like Boston, New York, Seattle, and Washington, D.C., have yet to in Silicon Valley.

Angels are typically accredited investors with yearly incomes of at least $200,000, or net worth of at least $1 million, who back companies with their own cash. In Europe, a growing number of women are becoming “micro angels,” investing €50,000 or less per year, often as part of a group of all-women investors.

“There is a large untapped potential with 35- to 45-year-old women who are either active professionals, taking some time off, or looking to get back in business and have anywhere from €10,000 to €50,000 a year to spend,” says Ms. Baumann.

Need at the Seed Stage

Angels are a huge source of capital: In the U.S., they poured $22.5 billion into 48,000 startups last year, according to the University of New Hampshire’s Center for Venture Research, while VCs funneled $20.9 billion into just 2,876 companies, most of them later stage.

Recently, angels have shifted toward investing in later-stage companies, deepening a U.S. funding gap at the seed stage, the earliest phase in a company’s life when it may still be developing its products and have little to no revenue. Here, women are playing an important role, says Mr. Sohl.

Women angels tend to concentrate more on seed funding than the angel community as a whole, according to Mr. Sohl’s research. In 1998, 80 percent of angel investments were at the seed stage; that number has since dropped to around 50 percent, he says. But here’s the thing: 60 to 65 percent of seed investments are made by women, he says.

“General angel groups have decreased investments at the seed and startup stages in order to allocate dollars to later-stage investments,” says a Center for Venture Research study by Mr. Sohl and center researcher Laura Hill. “Women may be filling a critical gap in the development of new firms by choosing to invest at earlier stages,” their report argues.

Active female angel involvement at the seed stage encourages more women entrepreneurs to seek outside financing, argues Ms. Baumann. She says 30 percent of all French startups are founded by women but only 10 percent have traditionally sought outside financing. A new Paris-based, all-women angel networking group now gets 30 to 40 percent of its pitches from women, according to Ms. Baumann.

Even if they don’t invest, women angels can help female entrepreneurs find money elsewhere, she says. Since women entrepreneurs tend to undersell their projects, experienced women angels can both give advice and act as “decoders,” presenting companies in language and terms that will attract male investors, she says.

A Gender-Neutral Decision

In the U.S., women angels listen to three times more women’s pitches than do angels in general, says Mr. Sohl.

But data shows that even if women angels are more receptive to receiving pitches from women, they base investment decisions on the strength of a business’ case, says Mr. Sohl. The same is true in Europe, says Colin Mason, a professor at the HunterCenter for Entrepreneurship at Glasgow’s University of Strathclyde. “Gender does not play in the investment decision at all,” says Mr. Mason, who conducted a study on women angels in Europe.

Studies in both the U.S. and Europe have found that once women angels do make an investment, they tend to be more hands-on. “Women angels spend a bit more time and are a bit more supportive,” says Mr. Mason.  

Ms. Mott launched her women-only angel project in 2003—after selling her own startup, a consultancy that worked with smaller banks developing wealth-management businesses. She interviewed members of one women’s group, and came away thinking she was onto something. “Many of them felt this was an area they were very unfamiliar with and there was a comfort created by the fact that it was all women in the room, and they could learn from their peers and ask questions and not get looked at funny,” says Ms. Mott.

Having spent 17 years in banking before starting her own company, funny looks were no big deal to her, but that wasn’t the point: “I’ve always worked in a man’s arena, and I don’t really care—but most women are not that way.”

So what happened? Not much. After only three women joined the cause, she ended up opening her Pittsburgh-based BlueTree Allied Angels Network to men, who now make up 43 of the group’s 45 members.

Hard to Find

But where Ms. Mott failed, other women are succeeding. At least a half-dozen women angel groups have sprung up across the U.S. in the past couple of years, says Marianne Hudson, director of entrepreneurship at the Kansas City, Missouri-based Ewing Marion Kauffman Foundation.

There may be even more, but data on angels and the groups they form is hard to come by. There is no central organization tracking and compiling information about their activities—partly because the groups themselves differ widely in how they’re organized, how they invest, and how active they are. Some just join together to trade tips and hear entrepreneurs’ pitches, some cooperate on due diligence but invest as separate individuals, and some invest as groups, through limited liability corporations (LLCs) or other vehicles.

The Center for Venture Research is one of the few organizations that collects this hard-to-find data. The study by Mr. Sohl and Ms. Hill identified 19 women’s angel groups, although its definition was pretty loose—memberships with at least 25 percent women. Only five had exclusively women members, according to Mr. Sohl.

But more exclusive groups have sprung up in just the past few months—sometimes in unlikely places. Barbara Boxer, a lawyer and former entrepreneur in Milwaukee, Wisconsin, assembled an all-women’s group of 20 accredited investors this summer after attending a January conference exploring women’s lack of access to capital.

The group aims to fund exclusively women- and minority-led businesses. “We realize there’s a need and a niche,” says Ms. Boxer. Called Women Angels, the group—which held its first meeting only in August and is already performing due diligence on seven potential deals—includes bankers, business owners, real estate experts, and technology consultants. In an approach common to other female-led networks, Women Angels is looking beyond technology companies to manufacturers, retailers, and other types of businesses.

Feeling Comfortable

Women’s Investors Network, which is part of Oregon Entrepreneurs’ Foundation in Portland, was started in 2002 with much the same thinking in mind. “The current groups were pretty targeted to tech companies and women just weren’t interested in looking solely at tech companies,” says Sydney Joyner, a founding member and chair of the group.

Even though more than one-third of the 60 or so women who attended WIN’s inaugural meeting had investing experience, and had been entrepreneurs or angels, many felt intimidated by male-dominated angel groups, she says. “It’s not that they couldn’t join,” she says. “It just didn’t feel comfortable.”

Ms. Joyner runs an executive search firm and has done some angel investing on her own. “I spend most of my time in meetings with men only and I wanted to see more women involved in the process,” she says. “Women have good judgment.”

The group spent its first six months organizing and educating its members, she says, and by early 2003 had made its first investment—in Portland Monthly, a magazine founded by Nicole Vogel, who formerly worked in strategic planning at CNN and Turner Broadcasting. Three of the group’s four investments so far are in companies with women in leadership positions and it has made follow-on investments in two of the four to date.

It’s too early to know whether WIN’s members will make money from these investments, though, as none of the companies has been sold or gone public.

Seraph Capital Forum, the oldest U.S. women’s angel group, founded in 1999 in Seattle, has yet to make an exit, according to founder Susan Preston. “Part of the problem has been the burst of the bubble,” she says. “The bust has delayed us by probably a couple of years.”

The idea for Seraph grew out of Ms. Preston’s frustration with not having access to quality venture deals, and her suspicion that other women were experiencing the same roadblocks. “The two angel groups in town at the time were both 100 percent men,” she says. In fact, one of Seraph’s early members—a woman she declined to name worth “tens of millions of dollars”—had attempted to join both groups and been turned down, says Ms. Preston.

With Seraph, Ms. Preston found she had tapped a rich vein. “I sent 225 invitations to the first meeting and 175 women showed up; I had to keep calling back, saying I need a larger room,” she says. “It was obvious that there was a lot of pent-up energy and desire to be involved as investors.”

The group was so eager to invest that the first entrepreneur who made a presentation garnered seven investments. “It wasn’t even intended to be an investment meeting,” says Ms. Preston. “She presented her company as a favor to me.”

New Perspectives

In the six years since Seraph was founded, its members have made millions of dollars in investments and have funded more than two dozen companies, from software to telecommunications to retail and consumer products businesses, according to Ms. Preston. The network doesn’t limit itself to women-led companies, but “we do attract more women entrepreneurs,” she says.

There are more to attract these days. From 1997 to 2004, the number of women-owned companies grew 17 percent, or twice as fast as the number of businesses overall. They now employ 19.1 million and generate $2.5 trillion in sales, according to the Center for Women’s Business Research.

Despite the perception that women entrepreneurs may have less experience, expertise, and devotion to their companies, Ms. Preston hopes the growth in women’s angel networks can help them to achieve success. “It helps to have women on the investment side,” she says. “They bring an added aspect of perceptiveness and intelligence.”

“It’s not just about the technology or the profitability, it’s about the business model,” Robert Bauer, the vice president and chief technology officer at Xerox Global Services, told technology executives gathered at the Red Herring Fall conference in San Francisco.

As companies increasingly begin to treat software as a service, paying subscription fees for software delivered over the Internet as opposed to license fees for applications installed on desktop machines, steady revenue streams have become more important, he said. “With all small companies, if you can generate recurring revenue streams, the value is greater.”

And startups that provide a new technology are often a better buy for large companies than those focused on offering services, according to panelists.

“Growth for M&A in services is a real challenge,” said Donald Rippert, the chief technology officer at Accenture. “You won’t pay the same premium for a services-based business that you would for a technology-based company.”

That’s because employees are usually one of the most important assets in a services-based company, and they are often difficult to retain after a merger, he said. “If you’re buying a services company, you’re buying a brand, which is created through relationships, and if you lose the people you lose the relationships.”

Plus, the earlier in its lifecycle a company can buy a technology startup, the easier it will be to integrate it into the larger parent, he said. “The earlier stage is a much easier buy,” said Mr. Rippert. “It’s cheaper, and only a few software companies are able to keep a good, clean architecture over time.”

When R&D Is Better

Still, companies that don’t need to move quickly to enter new business areas may prefer to use internal research and development rather than acquisitions to generate the technology needed to enter new markets, panelists said.

Some companies like Apple Computer and Google that are focused on developing very distinct products and services that set them apart from the rest of the pack prefer to do internal R&D, said Mr. Bauer.

With internal R&D, “you build a culture and a capability” that operates very differently than companies that grow through acquisitions, said Mr. Bauer.

M&A can be highly disruptive to a company, even long after an acquisition has taken place, said Mr. Rippert, citing a Harvard Business Review study. In the survey of 473 companies, researchers found the attrition rate was 20 percent at firms that had been involved in M&A.

Meanwhile, companies that had no M&A activity had an attrition rate of only 10 percent, said Mr. Rippert. “If you are going to see a lot of leadership change, you are going to have trouble retaining personnel,” he added.

How to Decide

Deciding when to acquire a company hinges on three key factors, said Amy Shuen, a business professor who recently returned to the United States after a stint teaching at the ChinaEuropeInternationalBusinessSchool in Shanghai.

If the target has a technology that is core to a potential acquirer, then a purchase makes good sense, she said. “If it’s a core technology, you probably want it in-house,” she said.

If a company has a product or service that is competitive with the acquiring companies’ offerings, then the push for acquisition is less urgent, though the larger company might want to buy the outfit as a defensive move.

If the target company’s offering is merely complementary, then a purchase is probably less relevant. The rival might consider a partnership or some other deal that doesn’t necessarily involve a purchase.