Crunch's Angels from AOL

Sometimes it's not what you know, it's who you know at America Online Inc.

This was certainly true for U.K. startup Crunch, a music download site that hired this week the former managing director of AOL UK as its CEO. David Phillips, who has been with AOL in the U.S. and Europe since 1994, brings his own cachet and his friends' cash. Late last year, while still at AOL Europe, he helped Crunch raise money (although he won't say how much) from twenty angel investors, many of whom were current or former AOL executives (though he won't say who).

"These were Internet industry people," Phillips says. "A number of prominent executives and former executives in AOL."

As if that weren't enough for the fledgling music site, AOL Europe has agreed to take an equity stake in Crunch for an undisclosed amount - exercising an option written into a contract the two companies had signed in August.

AOL Europe, a joint venture with Bertelsmann that launched in 1995, has a dominant position in the European Internet world. With its wealth of experience in the U.S., the company frequently turns out executives who have longer track records in Internet business than those that come from local competitors. In addition to experience, those executives have the stock options needed to turn themselves from wage slaves to angel investors.

Crunch's association with AOL dates back to 1995, long before the music site was established. Cofounder Liam McNieve was the legal counsel for AOL when it arranged the partnership with Bertelsmann that became AOL Europe. In September, when AOL Europe launched Netscape Online, a free Internet service provider, the company contracted Crunch to be the exclusive supplier of music content to the new site. As part of that contract, AOL obtained the option to take an equity stake in Crunch.

But just because they're in bed together doesn't mean there's anything "sleazy" going on, Phillips says. Rather, he says it's just business as usual in the U.K. startup scene, where AOL is such a dominant player that most Net companies have an AOL affiliation.

"There's a whole network of ex-AOL employees who have started second-generation Internet companies, mostly in the U.S. but also in Europe," Phillips says.

"Basically, I didn't do the legwork, I just did the introductions."

As for AOL's taking an equity stake in the company, Phillips and former Crunch general manager Jon Davis say the move is a validation of Crunch's strategy.

Andreas Schmidt, CEO of AOL Europe, concurred in a statement released Tuesday:

"We believe that Crunch has the ability and drive to achieve its goals and become a leading music and e-commerce company," he said.

Phillips says that although he may have encouraged AOL Europe to exercise the option to buy a stake in Crunch, he wasn't involved in the decision.

"I was certainly involved in convincing senior management at AOL Europe that their exercise of the option was a good prospect," he says. "But they already knew I was leaving. Independent of my involvement, the Netscape Online employees were passionately enthusiastic about Crunch because Crunch had the perfect demographic."

Norton says that the AOL connection is a helpful one here, and that people who've gotten rich off the company's stock are always looking for new investments.

"When we did our funding, we did speak to a couple of people who were ex-AOL," he says. "People have known you because you work there. When you announce you're leaving, people say 'Hey, what are you doing? Can I back you?'"

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