VentureBeat

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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.

The buzz around the growth of virtual world site, Second Life, is drawing more scrutiny from real-world regulators who fear they’re losing grip with the growing economy.

The site appears to have hit a sort of critical mass — and the attention is fueling even more activity.

A U.S. congressional committee has launched an investigation of the site, to see that people pay taxes properly on income they make at the site. Outsiders are scratching their heads at reports that several thousand people are pulling in $20,000 annual incomes by selling virtual goods and services, and saying “How can I get a piece of this?” Silicon Valley venture capitalist Bill Tai has been pitching Second Life founder, Philip Rosedale, on the idea of creating a central bank, which Tai would — benevolently, of course — run himself. Rosedale has held him off.

And now there’s a marketing start-up, Crayon, which says its launch Thursday will be the first real business to launch inside of the site.

Up to $500,000 in transactions take place daily at Second Life, and the economy is growing by 10 to 15 percent a month.

Logitech has acquired Slim Devices, the Mountain View maker of open source home networked music systems, for $20 million in cash plus a performance-based payment that will amount to “several multiples” of that.

This is a hit for the 20-something founder Sean Adams. He founded the company in 2001, and got by on almost nothing — by relying on a community of developers for the company’s main products, the Squeezebox and the Transporter.

He reached profitability on a mere $330,000 in angel backing (see comment from VC backer Bill Tai at bottom of our last piece), and then raised another angel round not long ago. Assuming the total funding was $1 million, this is a great accomplishment.

Here is Sean’s note to his users.

We wrote about the latest Squeezebox here, about how it lets you play your music anywhere in the house, and how its Web-based platform hooks it up with all kinds of services, from Pandora to Rhapsody.

Tai, who is a venture capitalist at Charles River Ventures, said Logitech has a friendly structure for retaining employees it acquires, and that if performance objectives are met, in several years there is payment that is several multiples of the $20M.

The success of Slim Devices is one more sign that any consumer entertainment device going forward must have a Web-based platform.

Meanwhile, Tai gives his late-evening two cents on what the deal says about the venture capital model:

On the venture front, it’s another indication that the huge wave of infrastructure investing that occurred during the build up of the Bubble has laid the groundwork for extremely low cost “company creation” — the web and open source have allowed pure web-based companies AS WELL AS companies like Slim Devices, which ships its value in a “hardware connected form factor,” to deploy their services for nil, and acquire customers through the web at extremely low cost. The high IRR (internal rate of return) part of our business in now expressing itself in more granular, horizontal bets than big vertical ones.

(Our emphasis added.)

The NYTs’ Pogue runs a story singing the high praises of the Squeezebox, a product from Slim Devices which lets you play your computer’s music anywhere in the house.

This is an intriguing company, based in Mountain View.

Beginning next week, the Squeezebox will do something no other hi-fi component can do: it will hook into Pandora… a sophisticated music-recommendation site. You name a band, singer or song that you like. Immediately, you hear a new “radio station” that plays…only musicologically similar songs. If you type “Billy Joel,” Pandora plays songs with “mild rhythmic syncopation, mixed minor and major tonality, a dynamic male vocalist and vocal harmonies.”

…But in the case of Slim Devices, you get a real taste of the creators’ personalities. The company bends over backward to make itself an open, transparent, right-minded outfit. The server software is open source, meaning free and open to the public to modify; as a result, you can download Squeezebox plug-ins that give it even more abilities…

We say intriguing, because the company is not a product of today’s hyped-filled moment. Two years ago, it was already focused on this area. The founder is Sean Adams, who now can’t be more than 26, and who started an Internet service provider in high school. Backers are Charles River Ventures’ Bill Tai and former Xoom.com CTO Vijay Vaidyanathan, who contributed $330,000 in an angel round.

Other cool tidbits here about the company:

Sean Adams aims to find out just how much traction a small design team can get leveraging the open-source movement. With the assistance of hobbyist code developers, the 25-year-old engineering-school dropout has secured a small foothold in the market for music-streaming systems. Now he’s courting investors to help take his 12-person startup, Slim Devices Inc., to the next level….A couple of employees working in a small back room handle final assembly and test of Squeezeboxes in batches of a few dozen units. Another room serves as a workbench, piled high with prototype circuit boards, where Adams sometimes tinkers well into the night.

And like some of the PC industry’s forebears, Adams never got an engineering degree but has had a lifelong passion for discovery and invention…”Without spending any money on marketing, we got the word out about the product,” he said. “The first 80 systems I soldered by hand, with parts I ordered on my credit card and pre-orders I logged myself.”