Updated
Charles River Ventures, an early stage venture capital firm, has launched a new investment strategy, offering rapid but tiny $250,000 checks to Internet start-ups.
The program, called QuickStart, recognizes times have changed, and that Internet companies no longer need the vast amounts of cash that most venture capital firms want to give to them. The CRV program also offers entrepreneur the friendly terms of the “convertible” seed round, explained below.
VentureBeat talked with the firm’s Silicon Valley team — led by Bill Tai, George Zachary and Susan Wu — about the program. They said that most Internet entrepreneurs can design prototypes and launch their ideas on a quarter million dollars. Under the program, if the start-up does well and needs more money to expand, Charles River will have the right to invest during the first round of institutional funding, called a “Series A.”
Many venture firms provide seed money to start-ups, but typically as an exception or on an ad-hoc basis. This is one of the first formal seed programs by a venture firm that we’re aware of.
The advantage of a seed round is that it done as a “convertible” loan, which means the $250,000 is essentially a no-strings-attached loan to an entrepreneur. There is no equity stake claim by the investor at the time, which is good for the entrepreneur, who can see how good his idea is first. If the idea gains traction, he can raise money in the series A and negotiate a high valuation for his company. If he can command a $5 million valuation, for example, the investor’s $250,000 seed money converts into only 5 percent of the company.
Zachary (pictured here) says he sees too many entrepreneurs giving away between 10 to 20 percent of their company in the seed round. They have fewer shares to give to employees, and they’re less attractive to venture capitalists.
Tai (pictured below) adds that most Internet companies need to move swiftly, and grow virally. Technology has become a commodity in most cases, he says, and most companies don’t need hordes of cash to develop it.
Zachary last year invested $4 million into podcasting company Odeo, which turned out to be too much money — or at least entrepreneur Evan Williams decided he didn’t want to use it. Instead, Williams bought back the company, and decided to launch an incubator instead, owning the vast majority himself.
Of CRV’s last five deals, four were seed rounds (three consumer Internet companies, and one chip intellectual property company). The partners acknowledged that some deals — such as solar companies — need millions. But they said a majority of the deal leads they see these days falls into this seed category.
CRV has downsized considerably in recent years. The firm now manages a $250 million fund, down from a whopping $1.2 billion fund they’d raised during the Internet bubble years. The team estimate they’ll do between 25 and 50 deals over the next three years.
Another advantage to seed/loan funding is that no public filing with the Securities and Exchange Commission is required. Entrepreneurs can thus stay in stealth mode longer, which can be an advantage.
There is almost no liability for the entrepreneurs, because the loan is made to a corporation formed around the entrepreneur. If the company fails, the company goes away, and the founders aren’t liable. “We’re all big boys,” says Tai, explaining that CRV doesn’t mind when this happens. “We go into this with eyes wide open.”
See CRV’s site for an example:
If CRV loans your company $100,000 with a six percent interest rate, and six months later the company closed a Series A round, at that point the loan balance (with interest) would convert at a 25% discount (value = loan dollar amount plus interest / .75) into $137,333.33 worth of Series A stock. Given that seed funding amounts are typically very small compared to the amounts one might expect to raise in a Series A round, as the example illustrates, the aggregate discount amount, in this case $37K, is a tiny fraction of what is likely to be a multimillion dollar Series A financing.
UPDATE: Wonder if CRV’s move will make seed investors feel crowded. Already, early investor Josh Kopelman has responded, suggesting the economics of the move makes sense, but that there may be some conflicts in CRV’s model.
Tags: inv:charles-river-ventures, people:Bill-Tai, people:George-Zachary, people:Susan-Wu28 Comments
-
Mike Dolbec said:
This sounds like a very standard seed deal that they are marketing as a new kind of financial tool. Clever marketing but not as unique you portray.
-
Matt Marshall said:
Mike, I agree that many individual VCs do this, but not officially firm-wide. The point is that CRV has made this entrepreneur-friendly investment official policy, right there on its web site. Many firms have shied away from such explicit statements, because some of them would — presumably — like to be able to get away with more. I think this is a real sign of change in the industry.
-
Bill Tai said:
Hi Mike (Dolbec) — While it’s correct that seed bridge ’structures’- as one off instruments have been around for a long time, I can’t think of another firm that is building this in a formal part of their portfolio and process. What we recognized here at CRV is 1) as a group, this is the stage that best fits our culture - we have the most FUN when we work with a handful or people with passion and an idea at the very start, 2) that it’s already the reality of our business given that we have been doing so many of these anyway, and 3) that our capital size is appropriate for this as a formal strategy. It would have been impossibe to execute this (especially the ‘having FUN’ part) formally had we stayed at $1.2 B per fund…
-
Brian McConnell said:
Bill,
I welcome what you are doing. I raised a small amount of angel funding for my current gig (see link). It wasn’t easy, and while the terms were OK, we spent too much time chasing a small amount of money.
We recently had to walk away from another angel, as painful as it was. I won’t go into details, but one thing I’ve learned if something doesn’t seem right, it probably isn’t, and that you have to be very picky both with hires and with whose money you accept.
So I think a source of no-hassle institutional angel funding would be a great thing for entrepreneurs, as it will enable them to rapidly prototype products without getting involved in complicated entanglements too early on.
-
Joe Rubin said:
I think it’s very smart. At FundingPost, we are seeing more and more companies raising less money to get started and there is a HUGE void left by the VCs in this area. While there are new Angel Groups popping up every day, seed VC is tough to find! It makes a lot of sense that the fund size is only $250M - down from $1.2B. That would be a lot of $250K deals to manage :)
-
Vaibhav Domkundwar - Better Labs said:
This is awesome news, and honestly something very much inline with the requirements of the entreprenuers today.
Now that more funds are opening up to smaller seed funding idea, the other part of the equation is really about making that money last longer, develop the initial product/service version with a smaller burn and test and evolve it slowly.
@Brian: I have atleast 2 founders in the same stage where they feel they are spending way too much time on raising a tiny angel round.
@Bill, @Mike: I think VCs with a formal seed model will help the situation Brain is talking about as QuickStart kind of models will likely be more risk-friendly than a group of angles, which can save everyone a lot of cycles.
At Better Labs (http://www.betterlabs.net), we have just started to open up our model to work with early stage startups in the Valley to deliver their alpha, beta and 1.0 versions which allows the founding team to run faster and more economically, as they evolve their service with user feedback. Look out for iLetYou (http://www.iletyou.com - the first one of our startup partners) going into Private Beta in the next few days. This fits right into founder who raise between $200k and $500K as we can work with them on a 18 month plan.
-
Daniel said:
It reminds me microcredit concept.
-
Edward Miller said:
EXCELLENT IDEA! Sounds easier than trying to find 10 angels.
-
Rohit Chandra said:
I am building a Web2.0 Killer App, that we KNOW will take off like a rocket!
While I would have liked to have raised outside money; and get more people involved; I ended up self-funding it because I did not want to expose the idea to other Angel groups. At the same time I don’t want to get money from people that I know who do not understand the Consumer Internet space.
Chasing this elusive investor was not the best utilisation of my time, and I must applaud CRV on this initative.
Questions:
1. What is the duration of this note?
2. Do these investments close faster than a traditional venture round? -
keanu zhang said:
I like this idea and i think it can be called innovation in VC industry. and this model can differentiate real foresighted VCs from VC teams.
-
Brian Berliner said:
I’m a big fan of the formalization of the seed program now known as CRV QuickStart. It’s all bout the dealflow. Read:
http://www.brianberliner.com/2006/11/01/crv-quickstart-its-all-about-the-dealflow/
For more. Enjoy!
-Brian
-
Startups.in/India said:
I’d not want to sound stupid but I’m assuming that CRV would only be looking at ideas with a working model/prototype. Is my assumption correct?
or..would they even be entertaining just the ideas..brilliant ones of course :) -
Krish said:
This sounds more like reinventing the wheel. Some of you should remember - the VC model started with something like this and it failed since most of the funded companies wound up and the founders went bust. The loan turned bad and had to be written off by the lenders. In a typical internet startup, what collateral can a lender look for except a few leased PCs and some ready-to-flee employees at the first sign of trouble…? History repeats.
-
Dave Lavinsky said:
This is a great idea. Traditionally, it has been very difficult for VCs to differentiate themselves from each other, and this certainly does the trick.
CRV should see a major influx of new concepts and business plans. Most importantly, it should see new ideas/ventures well before its VC competitors.
This also reminds me a bit of Grameen Bank. Grameen Bank founder Muhammad Yunus recently won the Nobel Peace Prize. Grameen Bank specializes in microcredit or very small business loans (average of $200). Since 1976, Grameen Bank has made approximately $5.7 billion in loans to more than 6.6 million people in India, mostly poor people who were shunned by traditional banks. The repayment rate is an astounding 98 percent.
Hopefully CRV will have similar success with this great concept!
-
acohen832 said:
This seems like an interesting concept. Often, small companies don’t have the resources or expertise to find the right type of funding that they need, especially during the beginning stages.
-
Mark said:
Finally - a seed program that does not take advantage of startups.
Check out Utah Investors - http://www.connect-utah.com/article.asp?r=1318&iid=38&sid=3 or Junto Partners - 30% of the company, 50k debt and your left leg
Good luck! I am very excited to see where this goes.
-
Eric Jackson said:
It will be interesting to watch other large VCs and how they react over the coming months. I believe many will follow CRV’s lead. Of course some will do a little of this on the side and some will be more focused.
There appears to be a larger trend at work here in this new low start-up cost and low capital needs world, which will lead to winners and losers:
Winners:
- The bluest of “blue-chip” VCs. The Sequoias and KPCBs of the world shine brighter when the maddening crowd is rushing to chase the latest trend of VC investing. They’ve been there and done that time-and-again.
- Existing Angel Investors who have a track-record. When a space gets hot (i.e., angel investing), those who have been there for a while are the old wise men. Josh Kopelman, Jeff Clavier, and others will see a rise for their services even as others rush in. There will be a flight to quality.
- Traditional VCs who are able to make the leap and really differentiate from other angel investors. Although CRV is a great firm, their success is not guaranteed. They need dealflow; their GPs needs to be seen as credible by non-nascent entrepreneurs; and they really need to be able to deliver value to their investments (beyond the simple “we love to roll up our shirtsleeves alongside our investee companies” platitudes).Losers:
- Stuck-in-the-middle VCs: Those VCs who do a little bit of angel investing and a little bit of traditional are likely to do neither well.
- Former Great VCs who don’t adapt to changing times: Remember when Softbank was king of the hill? Hot VCs who have yet to reach the echelon of Sequoia and KPCB are not assured of long-term success. They are also likely to stick-to-what-they-(think-they-)know-best. Dangerous, when the rules of the game are changing
- Later-stage/Mezzanine Investors: They just got even less relevant.Thanks,
Eric
http://breakoutperformance.blogspot.com/2006/11/are-angels-new-vcs.html -
James E Ragnauth said:
Hello i am from Guyana, South america can u send to more information and details
james E ragnuth -MAAT,ACCA -
Canadian Pharmacy said:
illicitly janitor bibliophile.vaulter.unraveling shuffling coursing
-
Santosh said:
Has any other venture firm responded to this move by launching similar program?
-
Bellame said:
-
Play Games said:
I just surfed in and found your site, I really enjoyed the visit and hope to come back soon. nice Site!
-
Oregon said:
-
Asoemd said:
Looks nice
-
wsfnl said:
-
colie dooley said:
i have a company called “green hybrid habitats” i have a niche that no other company has.i have house plans and marketing this could become huge. i could get gov grants but don’t want to unless i have to. my niche could redefine resdential green building
-
John Marshall said:
I agree completely
-
rotech healthcare said:
Hi I thank you for a wonderful site. You have done very good job.
20 Trackbacks
1:18 am
Naff’s Net » CRV launches friendly seed rounds said:
[...] VentureBeat had a great article about Charles River Ventures’ new Quick Start program that invests $250K into seed-stage enterprises. As I understand it, the key components of the program are: [...]
4:11 am
Charles River Ventures Evolves « Yoick - Hightechwire said:
[...] VentureBeat has a great interview with the Charles River crew that validates two things: [...]
8:15 am
Redeye VC said:
A whole bunch of seed…
I woke up this morning to some interesting news. Charles River Ventures is now investing at the seed-stage. This is a smart reaction on their part to several market trends: The fact that it costs less to start a software/Internet
8:41 am
VentureBeat Wire » Venture capital fund raising on track for biggest year since 2001 said:
[...] Notably, more funds raised in 2006 are larger funds. About 22 percent of the capital raised in 2006 are invested in funds of $500 million or greater, the largest percentage since VentureOne began compiling the data in 1992. That compares to only about 8 percent of the funds raised in 2005. This goes against the moves by firms like Charles River to shrink their funds. VentureBeat Community [...]
2:03 pm
evilutionary virtual log » Blog Archive » Going micro-seeding said:
[...] [source] [via] [...]
8:30 pm
Venture Capital: George Zachary on QuickStart for Entrepreneurs | Entrepreneurship with John Furrier: Podcasts with Entrepreneurs and VCs said:
[...] Launched today, George Zachary talks about Charles River Venture’s QuickStart program, a seed funding program to jumpstart “capital light” companies. He talks about the benefits to entrepreneurs, why it’s good timing for the current landscape, and why he is excited about it. With 1,000 emails in the QuickStart quickstart@crv.com inbox on day 1, George and Bill Tei better be excited! Listen to a longer, more indepth discussion with John Furrier. More news here, here, here, and here. [...]
8:38 pm
Venture Capital: George Zachary on QuickStart for Entrepreneurs | PodTech.net: Technology, Business, Media, and News Podcasts said:
[...] Launched today, George Zachary talks about Charles River Venture’s QuickStart program, a seed funding program to jumpstart “capital light” companies. He talks about the benefits to entrepreneurs, why it’s good timing for the current landscape, and why he is excited about it. With 1,000 emails in the QuickStart quickstart@crv.com inbox on day 1, George and Bill Tei better be excited! Listen to a longer, more in-depth discussion with John Furrier. More news here, here, here, and here. [...]
9:08 pm
Venture Blogging » Praise CRV for their $250,000 Convertible Loans? said:
[...] Ring the bell, sound the alarm use the Amber alert – this is great. Charles River Ventures is sucking up the risk factor, rolling the dice and betting on ideas and early stage ideas. Toss out customer traction, trailing revenues and anything else other than a Web 2.0 idea that needs a cash infusion to prove fruition. Read this by Matt Marshall – read it again and in 3 months look for the update on the flood of business plans this is getting. Better yet track the number of announcements from venture funds spinning off $30 million seed funds that are looking to bring 30 companies into their venture portfolio in the next year. Charles River Ventures again – I commend you. [...]
6:16 am
anglsft blog » Blog Archive » VC’s jumping into the funding gap? said:
[...] Charles River Ventures, and an early stage VC firm, has launched a program called Quickstart to rapidly invest small amounts of money in a variety of startups. The investment size will be around $250,000, which is definitely taking a step into the space where Angels typically make investments. Read more about their “friend convertible seed” rounds here. They said that most Internet entrepreneurs can design prototypes and launch their ideas on a quarter million dollars. Under the program, if the start-up does well and needs more money to expand, Charles River will have the right to invest during the first round of institutional funding, called a “Series A.†[...]
1:59 pm
Venture Capital By The Spoonful « ==================== adam jusko’s bessed blog said:
[...] VentureBeat has a nice write-up on it, as does TechCrunch. [...]
9:32 pm
Venture Chronicles said:
[...] Well done Bill, George, and Susan… you can send my $250k check to 4800 Great America Pkwy, Suite 415, Santa Clara 95054. VentureBeat » Charles River Ventures introduces friendly “convertible†seed round: Charles River Ventures, an early stage venture capital firm, has launched a new investment strategy, offering rapid but tiny $250,000 checks to Internet start-ups. Technorati Tags: Charles River Ventures, Quickstart Posted in Venture Business || [...]
12:45 pm
Mission Creek / VCs acting as Angels said:
[...] full post here [...]
2:49 pm
BKM Blog » Blog Archive » Charles River & Quickstart said:
[...] VentureBeat interviewed CRV here. [...]
11:10 pm
CRV QuickStart: It’s All About The Dealflow at Brian Berliner’s Brain said:
[...] Matt Marshall wrote: [...]
11:09 pm
VentureBeat » MySpace founders shortchanged, Yahoo’s binge over, Timebridge, Mashery, FON, Workday said:
[...] Charles River Ventures STIRRs — Fresh from announcing its new attractive seed investment strategy (where it gives out $250,000 checks to promising ideas, Silicon Valley venture firm Charles River is getting submerged by entrepreneurs eager to pitch. It’s also been invited to mix with the masses — at the Nov. 15 STIRR event, a gig usually reserved for start-ups to give one-minute pitches. The Charles River gang — George Zachary, Bill Tai, and Susan Wu — will get 60 seconds to pitch the crowd. We bumped into Susan Wu today at the Web 2.0 conference; she said she was overwhelmed with dealflow. [...]
7:19 pm
VentureBeat » The Charles River Ventures Quickstart Caculator said:
[...] He calculates the seed round on the “QuickStart” formula popularized by Charles River Ventures, which we wrote about last week. CRV is writing small checks in return to start-ups in exchange for getting a discount on an investment in a company’s first round. [...]
7:19 pm
VentureBeat » The Charles River Ventures Quickstart Calculator said:
[...] He calculates the seed round on the “QuickStart” formula popularized by Charles River Ventures, which we wrote about last week. CRV is writing small checks in return to start-ups in exchange for getting a discount on an investment in a company’s first round. [...]
10:10 am
VentureBeat » Founders should live on Ramen noodles, and $2,000 a month said:
[...] The Less-Is-More theme continues: [...]
11:25 am
VentureBeat » Susan Wu, the first virtual venture capitalist, blogs said:
[...] The blog is called Reality, a play on the theme of her interest, which is virtual worlds. She’s one of the three partners at CRV who made waves earlier this month after launching the Quickstart seed program for start-ups. [...]
11:41 am
VentureBeat » Entrepreneur Idol competition shows digital media is hot — perhaps too hot said:
[...] Held at Stanford, the competition provided great insight on the interests of some of Silicon Valley’s future business leaders. More importantly, it provided an opportunity for Stanford students to practice pitching to VCs, and get consideration for CRV’s Quickstart program, which provides $250,000 in seed money for promising ideas. [...]