Greg Sands spent years honing his investment skills at Sutter Hill Ventures, where he's known for sourcing deals on companies such as Merced Systems, a multi-year Inc. 500 nominee, and QuinStreet, an online marketing company founded in 1999 that went public in 2010.

But over the past decade or so, he says he's noticed a major gap in the investing market--a gap that inspired him to go off and start his own fund.

It's called Costanoa Venture Capital, and Sands describes it as "an early-stage investor in cloud-based services." Costanoa officially launches Wednesday, although the firm has quietly made 10 investments over the last several months in companies such as Datalogix, a purchase-based audience targeting used by Facebook, and Risk I/O, an innovative online security start-up.

The firm's name, Costanoa, refers to the indigenous Ohlone people that lived in what's now commonly referred to as Silicon Valley, but it's also an allegory for what Sands wants to accomplish. Namely, Sands believes the venture community has strayed from its roots, and Sands wants to "recreate the venture capital business of the '90s."

It's not just Sands that believes there's a problem in the venture community. According to the now (in)famous Kauffman report last year, just 20% of venture funds generate returns that beat a public-market equivalent by more than 3%. And the money that is made is generated--year after year--by the same elite funds.

Part of the problem, Sands believes, is that venture capitalists have been throwing too much funding to entrepreneurs raising seed and Series A rounds. By raising too much capital, many entrepreneurs are forced to scale too quickly.

"Big gaps don't happen that often," he says. "I think that market is between angels and classic venture capital."

Costanoa is aming to make "right-sized" investments--the term that refers to seed and Series A investments in the $500,000-to-$3-million range. And by keeping the fund small--it's just Sands for now--Sands believes he can grow companies organically through old-school time and patience.

"We are not chasing momentum," he says, "but rather trying to create it."

Published on: Dec 12, 2012