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In the traditional Silicon Valley funding model that worked for many decades, entrepreneurs came up with new ideas, pitched them to Venture Capitalists, and prayed that their idea was unique and that the VC’s found credibility in the management team in order to get funding to build the enterprise.

In the post dot-bomb era, VC’s became increasingly risk adverse, and wanted to fund only those ventures with proven entrepreneurs and only ventures that had already been fleshed out to remove much of the technology risk, leaving only a market risk to conquer.

Now, since the Great Recession, VC’s have gotten even further risk adverse, although they claim otherwise. Today, most VC’s are concerned about their Limited Partners interest in the start-up space, because their own liquidity has been diminished, but probably more importantly, they have had negative returns on the VC sector of investing for over ten years! So the VC’s are looking to invest in deals that might have a reasonably short exit in order to increase their returns. Also, by looking at shorter time frames for exits, they are almost sure to invest in later stage ventures which by their nature have taken some, if not all, of the techno logy risk out of the equation.

The rise of the angel

So what does that leave for early stage entrepreneurs? In the late 1980’s and early 1990’s wealthy individuals became a source of capital for early stage deals. These individuals became known as angel investors. In the late 1990’s, and especially in this decade, these individual angel investors organized themselves into groups. By acting in a group, many angels believe they get the collective intelligence of the members of the group, which broadens their own market for possible investments. They also get to spread their investment risk out, by investing smaller amounts individually into more deals collectively. This formula is beginning to replace the traditional venture capital model.

Angel investors have more tolerance for the time it takes to build a successful business, because they don’t have to answer to limited partners, they only have to look in the mirror and satisfy the reflection looking back at them. Angel investors are prepared to invest in early stage companies, and when structured properly, they are able to see a positive return when an exit does – hopefully – occur. Be aware however, that angels are more intelligent now than they used to be. Today, they also look to how much capital the enterprise will require beyond the angel round. If this amount is large, they might want to have some later stage venture capitalists actually look at the deal to judge their future interest in the team and the space.

So, if we look at the funding order available for entrepreneurs today, the first place they should look after their own family and friends, should be to the organized angel investment groups. They still have to deal with more individual investors who make their own decisions, but they are typically dealing with intelligent, qualified investors. So, we can say that these angel groups have now taken the place of the traditional venture capital early stage funding.

When the entrepreneur has fleshed out the technology, and maybe even the market, traditional sources of venture capital may be available to increment the angels’ investment.

Time will tell whether this change in the funding ecosystem is permanent or temporary. But for now, entrepreneurs need to work with angel groups.

Rich Brenner is Founder and CEO of The Brenner Group, one of Silicon Valley’s premier professional services firms. Rich is a veteran executive, entrepreneur, investor, board member, and philanthropist.

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