Seed stage companies are hot, at least in Silicon Valley

Seed stage investing is picking up in Silicon Valley, according to several backers and entrepreneurs, a sign that investors are feeling more confident and that exit opportunities for young companies are improving.

In Silicon Valley, startups are reporting that they are getting money fast, and some of that money is coming from people who are new to angel investing.

At Y Combinator, about two-thirds of the 26 startups that were presented at Demo Day two months ago are already funded, according to Partner Jessica Livingston.

The Mountain View, Calif.-based incubator and seed stage investor had to hold an extra third session at Demo Day—which is a graduation ceremony of sorts for founders who have spent the previous 10 weeks developing their companies—because so many investors, some new to Y Combinator, wanted to attend.

“As Y Combinator gets better known, we get better applicants, so some of our companies were further along than they’d been in the past,” Livingston said. “But I also absolutely think it’s the investors, especially the angels. They’re starting to get excited about investing again. It’s thrilling for us.”

Whether the increased activity signals a national trend is hard to tell. The University of New Hampshire’s Center for Venture Research, which tracks angel investing in the United States, reported that angels decreased their investments in seed stage startups last year by 10% compared to 2008.

Venture capitalists, on the other hand, did 27% more seed stage and 18% more early stage deals first quarter than they did last year, according to the National Venture Capital Association, while VCs cut back on their late stage deals.

Dave McClure, who oversees seed investing for the San Francisco-based Founders Fund, called seed stage investing “trendy” compared to what it was just six months ago.

Venture capitalists with larger funds are going after young companies along with the angels, according to McClure. “It’s not necessarily the best thing for [the VCs] because they’re not always dedicating enough attention to the companies, but it’s great for the people who are familiar with that area,” he said.

The founder of Greplin, a Y Combinator-backed company, said he expects to close an angel round at the end of this month. Greplin founder Daniel Gross, 18, said he applied to Y Combinator in part to avoid joining the Israeli army after he graduated from high school in Israel where he grew up. He presented Greplin as the “next Google” and expects to raise about $350,000 by the end of the month.

“I was building it for myself [after almost crashing a car while searching on my iPhone for directions to a party],” he said. “I realized a lot of other people wanted this as well.”

Etacts, another Y Combinator-backed company, organizes Gmail and voicemail messages so that it’s easier to keep track of personal and business conversations. The company’s founders say that it has attracted a long list of well known individual investors, including noted angel Ron Conway, ex-Netscape CTO Eric Hahn, YouTube co-founder Jawed Karim and actor Ashton Kutcher.

Etacts’ co-founders, Howie Liu and Evan Beard, set out to raise $500,000, but earlier this month they said that they closed a round for $672,000 and turned a couple of investors away.

Appearing at Demo Day helped to generate “buzz” that they would have a hard time generating themselves, Liu said. He also said that an improved economy helped in their fund-raising efforts.

There are also more angel investors, according to Chris Gill, CEO of SVASE, a.k.a. the Silicon Valley Association for Startup Entrepreneurs, a nonprofit that invests in startups and mentors founders.

Gill suggested that more investors are going after young startups, because IT companies are cheaper than they used to be.

Similarly, across the Pond, more investors are paying attention to seed stage deals. Index Ventures announced late last month that it has launched a new fund called Index Seed and is stepping up the pace of its early stage investments as the plummeting costs of launching a startup make seed investments more meaningful. The capital to support Index Seed will come from Index Ventures V, a $440 million fund that the firm closed last year. London-based Index—which has previously backed Boku Inc., MySQL, Playfish, Skype and Zend Technologies, among others—will focus on seed deals in partnership with seed capital investor TAG (a.k.a. The Accelerator Group).

New technology, such as open-source software, cloud computing, Internet telephony and free publicity platforms, such as Facebook, all mean starting up a business today is not the costly business it once was, said Index Partner Saul Klein.

“When I helped to start a business in Boston in ‘95, to buy a Web server was $1 million. Nowadays you can rent server capacity from Amazon for [$77] a month,” he told Reuters.

An investor who pumped $500,000 into a startup five years ago would be paying $50,000 to $100,000 today, Gill said, because the Internet and cloud computing have dropped the costs of making and acquiring technology. Cheap companies create more potential angel investors.

“If you’ve only taken a few million dollars and sold your company for $30 million, you and your co-founder may walk out with $6 million to $8 million each,” Gill said. “There are a number of new people looking to be angels who are not joining the standard angel groups. We don’t know who they are. They are coming out of the woodwork.”