Revolution Growth, a new investment vehicle led by former AOLers Steve Case, Ted Leonsis and Donn Davis, has raised $450 million in their first investment fund.

Originally, as I reported in March, the growth fund was going to be $400 million, but more was added due to investor interest.

The figure is a large one for a new venture and includes two dozen limited partners.

According to a letter to its partners, which I posted below in its entirety, Revolution said it will make 10 to 12 investments over five years in the consumer space of about $25 million to $50 million and mostly on the East coast, where its principals live and work.

The fund will focus on the “speed-up” stage — which is apparently just past venture stage and not yet in growth.

While both Leonsis and Case have done a lot of investing in the Web 2.0 space both together (Revolution Money) and apart (the Groupon and LivingSocial social buying sites, respectively), this is the first time the pair of well-known Web pioneers are creating a more formal investment partnership.

The pair are also investing $75 million of their own money in total in the Revolution Growth fund.

Revolution’s three partners said they will also be deeply involved with entrepreneurs at its companies.

“We are not just investors, but former CEOs and business builders who have the expertise and passion to be actively involved with the companies we back,” said the letter. “By making only a few investments each year, we will have the time to really help the entrepreneurs with whom we partner.”

Well, you can read about the Revolution Growth fund yourself here:

letter

The service, called Serve, will let consumers make purchases, take cash withdrawals from ATMs and make person-to-person payments from their computer or their phone.

The card will be funded by a user’s bank account or credit or debit card–even from one of the company’s major competitors, like Visa or MasterCard.

In the beginning, Serve will be fairly traditional and be accepted anywhere that American Express is accepted, but eventually it could give way to a mobile payments solution on the phone, using such technologies as near-field communication (NFC).

“What we are trying to do is put into place a platform–not a card, or an e-wallet–that enables digital payments and commerce that allows consumers and merchants to seamlessly move between online and offline,” said Dan Schulman, Group President, Enterprise Growth at American Express.

What Schulman said he wasn’t interested in experimenting with yet was NFC, which allows users to waive their phone at the register to pay. The technology is still in its infancy.

“That’s incredibly uninteresting…That’s a form factor shift, not a value proposition change,” he said. “The distinction between online and offline is going to blur and become moot as you go out three to five years from now.”

Schulman has been thinking about these problems since joining American Express in August 2010.

Previously, he was the president of Sprint’s prepaid division, having joined the third-largest carrier when Sprint acquired prepaid provider Virgin Mobile USA, where he served as CEO.

The Serve platform evolved from American Express’s $300 million acquisition of an Internet-based payments network that was part of America Online Inc. called Revolution Money, co-founder Steve Case’s investment firm.

To be sure, the launch provides new ways for the $54 billion company to diversify its user base.

“This will enable us to break into a younger demographic for sure, or under-served demographics, and people who’ve used debit, checking or cash. It enhances our ability to address different demographics in the U.S., but also the rest of the world,” he said.

On day one, Serve will be accessible online and from applications on both Apple and Android devices, with support for BlackBerry coming soon. Initially it will be in the U.S., but will shortly expand internationally. It will also downplay its associations with the large card company.

“We are really excited about the launch, it’s really different than what people might think about American Express. It’s not AmEx-branded, it’s cross-platform and completely open,” Schulman said.

He expects the platform to be very flexible and adapt to the market in future iterations.

To help promote the platform, the company is creating a number of partnerships that are all over the map.

One is with Ticketmaster, which will let users buy tickets to an event and then get reimbursed by their friends via Serve. Others include Concur and Flipswap. The service will also be available through a Facebook widget. To promote the widget, Serve will be letting users donate to certain causes. Serve will match contributions up to $100,000 for each charity.

While these are new areas that American Express does not currently serve, Schulman believes its experience makes the company a potential leader in digital payments.

He said it helps that they have 90 million card members and have partnerships with thousands of merchants worldwide. Also, he said, there are three crucial pieces of the puzzle that a company entering the space must have: trust, security and good customer service.

Of course, eBay-owned PayPal, Visa, MasterCard and a variety of other startups–including Boku, Zong, BilltoMobile and Square–are all vying for a position in the emerging digital and physical payments market.

Schulman admits there’s a lot of overlap with what it is doing and PayPal. “Yes, there are obviously things that are similar to PayPal. In fact, there are quite a number of people thinking about this as we are making a transition from a physical plastic world to a digitally-oriented payments world.”

For instance, PayPal will be conducting several pilot programs over the next year to test how consumers will use their PayPal accounts at the register.

Visa recently purchased PlaySpan for about $190 million to enter the digital payments world. Google also is planning its next move.

With all this talk about payments, American Express indeed expects to get paid as well.

To start, most consumer fees will be waived for at least the first six months, including fees for adding money to the account and transferring funds between Serve users. The first ATM withdrawal each month is free, but after that consumers will be charged $2. After the introductory period, consumers will be charged 2.9 percent plus 30 cents each time they load money (that drops to 0 percent for cash, debit and ACH).

Merchants will also pay, but will be charged a discounted rate for transactions made in stores and online since Serve is considered a prepaid card. Typically, prepaid discount rates are less expensive than credit rates, according to a spokeswoman.

But its not just the fees that American Express wants to collect. It also wants to collect consumer data to be able to offer well-targeted offers.

“We’ll probably make the equivalent once we are at scale, depending on funding and merchant mix through payments alone. We think that’s a great business. We also think that the data we can collect with consumers, assuming they give permission, will add a number of value-added services in connection with partners.”

Steve Case and Ted Leonsis are bringing their old AOL band back together once again, this time by raising a $400 million growth equity fund.

The pair, the legendary top execs who rocketed AOL to the top of the Internet business in the 1990s, are now making the rounds in New York and elsewhere to pitch their new investment vehicle, sources said.

The money raised will be part of an entity called Revolution Growth, which already exists within Case’s larger Washington, D.C.-based company called Revolution.

While both Leonsis and Case have done a lot of investing in the Web 2.0 space both together (Revolution Money) and apart (the Groupon and LivingSocial social buying sites, respectively), this is the first time they are creating a more formal investment partnership.

Another former AOL exec, Donn Davis is the third partner in Revolution Growth.

Sources said its focus will be on companies just beyond the venture stage to bring them to scale.

A savvy move for Amex, too. Though Revolution competes against entrenched credit-card companies and PayPal, among others, its alternative payment system, which reduces costs for accepting credit cards by up to 75 percent, is quite attractive to merchants who’ve shouldered those costs for so long.

Says JP Morgan analyst Imran Khan: “While it is hard to know precisely what direction AmEx plans to take the Revolution assets, we think the acquisition suggests the company is trying to be more aggressive in the online payments arena. We think PayPal’s existing account base and international footprint have given it a network advantage in the C2C space that is hard to dislodge. On the other hand, we believe significant room exists for market share gains in Online Payments by companies that offer innovative solutions, and this acquisition gives Revolution Money a stronger backer.”

But I suspect it’s going to take quite a bit more than that to unseat institutions like Visa and MasterCard, even with merchant fees of just 0.5%.

But I suspect it’s going to take quite a bit more than that to unseat institutions like Visa and MasterCard, even with merchant fees of just 0.5%.