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.

Roundup in Silicon Valley:

FON exploits opportunity to stir up WiFi interest in San Francisco — Search engine company Google is having a heck of a time getting “crazy nut job” local SF residents to agree to its plans for a city-wide WiFi project. So while big Google is stymied, another company, FON, is hoping to slip under the regulatory radar with a grassroots campaign: Offering hundreds of its La Fonera wireless routers at an event it calls “Freedom Friday,” to be held at SF’s Union Square from Noon to 2 p.m. tomorrow. FON’s been having its own challenges drumming up interest in its product, so perhaps this will create some viral buzz? As mentioned, Google is an investor in FON.

Williams buys back podcasting company Odeo — As mentioned elsewhere, Evan Williams, who started San Francisco podcasting site Odeo after selling his blog software, Blogger, to Google, has parted ways with his his venture capitalists.

You knew things were choppy at Odeo when Williams suddenly started giving candid assessments last month about having tried too much too quickly with Odeo. He then shut down Odeo’s Audioblogger, which had let users post audio to a blogger.com blog via a telephone call.

Now we find out he’s bought Odeo from his venture capitalist backers, and renamed it Obvious. Though, from his comments on the site (”We’re not sure how it’s all going to work”), it isn’t entirely obvious. Included in the assets is Twitter, another service we’ve mentioned before — which lets friends know what you’re doing. He says it is “going to be huge.”

George Zachary, the venture capitalist at Charles River Ventures who had invested in Odeo, tells us he actually made money on the deal.

Which reminds us, Zachary has launched a blog — Perhaps the Odeo story is what made investor Zachary decide to launch his own blog, called Sense and Cents. He tells VentureBeat his goal for the blog is to navigate the core of “who we are as humans and what we need.” He notes how technology advances in communications are letting us do things we’ve never done before. He says he wants to “talk about and connect interesting sociological issues and how they integrate and show themselves with technology and experiences of consumer internet.”

Wonder if he’ll try his hand at podcasting? ;)

Are there enough shopping search engines? — Ok folks, we’ve got at least a dozen shopping search engines now, of every stripe and flavor. We just wrote about TheFind.com last night, and now we see yet another one launching: Ugenie. GigaOm has a write up. It has an office in Silicon Valley, among other places, and was founded last May by two Amazon.com alums. It has raised $5 million in funding from BlueRun Ventures and Sierra Ventures and now has 15 employees, but it is not clear what new it is bringing to the table.

Revenge of the server farms — After disappearing after the first Internet bubble burst, the server farms are back. The NYT has the story: Equinix of Foster City, Calif., is building its first new center in Chicago for $165 million and expects to open it late next year. When it opens, the server farm will be 95 percent occupied and demand 30 megawatts of power, enough electricity to power 30,000 houses.

Check out Palm’s colorful new Treo 680 — They’re getting thinner too. See image here at left.

Six Apart launches Vox, another blogging tool — Sigh, do we need another blogging software? The answer is no. But if you’re someone who has been on the sidelines, a non-techie fearful of taking the blogging plunge, this one is worth a good look. The first generation of blog software was clunky, but this latest, called Vox, has a easy and good looking finish to it. It is latest software from company Six Apart, and is free. We created this blog in three minutes, no more.

Oracle kills RedHat — Oracle introduced its open-source Linux operating system (see our wire story from this morning), and the market killed RedHat today. It lost a quarter of its value in trading. Despite the likely dire consequences for RedHat, some people are skeptical that it will help Oracle, though:

I really don’t see why anyone would pay $50,000 per CPU for a license to use a tarted-up version of Oracle Fusion Middleware when so many clever subversives on the edges of organizations are already doing all these cool Web 2.0 things now for pennies a month and there are so many really sensational, and far less expensive, enterprise-level integration solutions available or in the works.

eBuddy raises 5 million euros — See the story here on VentureBeat’s wire, from earlier today. (Another reminder to subscribe separately to our news wire, which is the RSS button on the left of homepage, if you haven’t done so already).