Ted Leonsis first met Steve Case in May 1993. Case’s older brother, Dan, was Leonsis’s investment banker at Hambrecht & Quist. Dan Case was advising Leonsis’s company, Redgate Communications, as a rival company tried to acquire it. His advice was that Leonsis would be unhappy going with a big company but that he should really meet his brother, Steve, who was at a little company called America Online.
So Ted and Steve met and had breakfast, and eight months later Steve Case acquired Redgate, became CEO of AOL (AOL), and made Leonsis president. The rest — including a merger with this publication’s parent company, Time Warner (TWX), that is widely viewed as among the worst business deals ever — would be history if the pair had ever stopped working together. But they haven’t, and their D.C.-based investing firm, Revolution, has gone on to seed the likes of ZipCar and LivingSocial. Now they are going after early-stage startups outside Silicon Valley. On Sept. 30, they announced that their new fund for this purpose, Revolution Ventures, had raised $200 million. “Our goal is to be the leading entrepreneurial company on the East Coast,” Case says.
Case has been investing in companies for about a decade, ever since he retired from AOL Time Warner in 2004, but didn’t bring Leonsis on until 2007, for a startup that became Revolution Money. “Before that, I had bought my sports teams [the Washington, D.C., Wizards and Capitals] and was kinda ready to go gracefully into the sunset,” Leonsis says. Revolution Money, an alternative payment system, was acquired by American Express (AXP) in 2009. “That set the template, for us, of what makes for a smooth exit.” Then, this March, ZipCar was acquired by Avis (CAR) for $500 million.
Revolution’s distance from the Valley is, to Case, an asset. He says he sees “the dawn of the second Internet revolution coming,” which will finally overhaul the health care, manufacturing, and energy sectors. “The government is the principal buyer and regulator of those services,” he says, “and we’ve been here in D.C. for 30 years. We’re pretty well known.” Tige Savage, a partner who co-oversees the Revolution Ventures fund, says that “Steve and Ted are determined to transform industries.” Of course, they already did once, back in the 1990s.
Ted Leonsis on loyalty: “We hate companies that flip. It’s always a better idea to let things mature.”
Steve Case on allies: “We believe in the power of partnerships — the success of AOL had a lot to do with our tapestry of alliances.”
This story is from the October 28, 2013 issue of Fortune.