Well-known tech investor aims higher

First Round Capital, one of the tech world's most successful angel investing firms, is looking to raise its first venture capital fund, reports Fortune's Michael V. Copeland.

By Michael V. Copeland, Fortune

SAN FRANCISCO (Fortune) -- First Round Capital, one of the most successful angel investing firms focused on early-stage Internet startups is moving up the food chain. The company is looking to raise its first venture capital fund backed by $75 million to $100 million in institutional money.

According to First Round Partner Howard Morgan, it is "very likely" that he and Managing Partner Josh Kopelman will be on the fundraising trail soon.

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You can bet that trip won't last long. Even though First Round is based in suburban Philadelphia, Kopelman has a reputation among Silicon Valley VCs as one of the guys you get in line behind to see the latest ideas from Internet entrepreneurs.

His firm, and its investing pros - including Morgan, a former Wharton Professor; Palm (Charts) veteran Rob Hayes and eBay refugee Chris Fralic - have been the early money in companies like tagging-pioneer del.icio.us (bought by Yahoo (Charts, Fortune 500)), business networking site LinkedIn, and online recommendation engine StumbleUpon (bought by eBay (Charts, Fortune 500)).

More recent investments include social network widget factory RockYou and a Web-based competitor to Quicken, Mint Software.

First Round has done well for itself with a simple strategy that other venture capital firms have begun to copy: Invest relatively small amounts, between $250,000 and $500,000 apiece, in a relatively large number of companies. On that money, prove or disprove the hypothesis on which the company was founded. Invest more in the startups that are working. Kill those that aren't.

The approach is especially well suited to today's Internet startups that don't require truckloads of cash to launch, and show signs of success or failure quickly.

Since the firm's founding three years ago, First Round has funded more than 40 companies with a total investment in the neighborhood of $15 million. Other VC firms, including heavyweights like Sequoia, Kleiner Perkins Caufield & Byers and Greylock have put an additional $300 million in follow-on money into First Round-backed startups.

Because of the small amounts of money it invests, First Round can still generate tidy returns for investors even on low-dollar buyouts or other relatively small-scale exit deals (Kopelman and Morgan both have their own money in the fund).

When StumbleUpon, for example, was bought by eBay this year for $75 million, "We returned half the fund on our share alone," Morgan says. That compares to an average venture fund, managing $200 million or more, where that type of exit would barely register.

Still, First Round's current approach of raising funds of $3 million to $5 million a year from individual tech investors, and then scraping up follow-on money for the most promising startups, have also kept it on occasion from investing as much money in a company as the firm would like (and getting a larger share). A $100 million fund would allow for those follow-on investments.

That doesn't mean First Round will be changing its investment style. It will still be looking to invest $250,000 to $500,000 initially in about 15 to 25 Internet companies a year. "That puts a certain discipline on the process that we don't want to lose," Morgan says. "We don't want to become a traditional fund."  Top of page