On Wednesday Charles River Ventures will announce a new project called “Quick Start” (link should be live in the next few hours) which is designed break away from traditional venture capital investing models and get small amounts of capital to new startups very quickly and without much equity dilution.
Venture capitalists investing in the consumer space have been having a tough time the last couple of years (with notable exceptions). Valuations are rising, many startups are getting to acquisition without raising venture capital at all, and many well-known VCs are simply calling it quits.
What’s different? Part of it is the very low cost to launch a startup today. Joe Kraus, founder of recently acquired Jot, wrote a now famous post last year talking about the difference between launching Excite.com ($3,000,000) and Jot ($100k). In that post, Joe said “The sources of funding capable of writing $100,000 checks are a lot more plentiful than those capable of writing $3,000,000 checks. It’s a great time to be an angel investor because there are real possibilities of substantial company progress on so little money.”
Angel investors, ranging from individuals like Ron Conway and Jeff Clavier, to small funds like YCombinator and First Round Capital, have taken real market share from established venture capitalists by moving quickly and investing small amounts of capital instead of force feeding unwanted millions on a young startup. While taking a ton of early capital may sound enticing, companies can price themselves out of small but lucrative acquisitions simply because they’ve taken too much capital.
Through Quick Start, Charles River Ventures is fighting back against this trend. CRV is a huge and very old venture firm - they’ve invested around $1.8 billion over the last 36 years. But with Quick Start, they are looking to invest relatively small amounts of capital ($100k - $500k) in very early stage companies that have little more than an executive summary, a few powerpoint slides and maybe a demo. This early capital is supposed to get these startups to the point where they can raise a more traditional Series A round of financing, or even get acquired.
CRV has created a standard template for investing, although in a phone call today they stressed that it is negotiable: target investment of $250k in debt which converts in an equity financing or acquisition. The debt will convert at a discount to what the new investors are paying, at a rate of 5% for every month until the new investment is made, up to a 25% maximum discount (this is considered a standard provision in angel financings). What this means in normal English: you don’t have to negotiate a company valuation now when taking this debt, making the negotiations a lot easier to finalize. An example transaction from the CRV website:
A simple 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.
The project is being led by CRV general partners George Zachary and Bill Tai, who estimate that they will do 25-50 Quick Start deals in the next two years. The hurdle to invest is low: just two of CRV’s five general partners need to greenlight the company, and the investment is made.
For startups this is good news - another source of early stage investment capital at attractive terms. If you are looking for early stage capital, this is another place to look.
Update: The angels and early stage guys are weighing in. Josh Kopelman, founder of First Round Capital, says that CRV may have trouble becasue they aren’t set up to give a lot of attention to these small investments. Fred Wilson makes a similar point, and also notes that CRV requires venture capitalist “lock-in” because they have an option to take up to 50% of the Series A round.
Comments
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Susan
I wonder what happens if “Series A” never happens. In an extreme case say the company raises $250K and then you never see them again. I am sure CRV has something in place to prevent this or maybe it feels that this will be rare. ( Most Entrepreneurs will not abuse the program).
I think the CRV model is great. There is no one unique model that will work for all but entrepreneurs should have more and more choices.
I do not see CRV as an angel or seed fund killer. As Vaibhav from betterlabs pointed out first time entrepreneurs may need help on a lot of things besides money. CRV recognizes that partially by encouraging their company to have advisors.
In Y combinator you give up more equity but if the 90 day experience adds value to building a large company then it is worth it. For an entrepreneur 20% of $100 million is $20 million and 40% of $30 million is $12 million. Percentages can be quite misleading.
An entrepreneur to some extent gives up the ability to shop the deal around at Series “A” because of the CRV option. However, because of the CRV connection maybe the entrepreneur gets 100% from CRV and quickly.
Thus the bottom line in my opinion is that angels, Y combinator, seed funds, Quick Start can all co exist and are great for entrepreneurs. Different strokes for different folks..
What happens if the seed round is enough to make the company profitable? How does CRV ensure they are a part of the success in this case?
I think the deal point that most entrepreneurs will want to push back on is the option CRV gets to take up to 50% of the A round. The practical effect of this will often be to scare other VC firms away from the A round, thus giving CRV effective control over the company if it ever needs to raise money beyond the seed round. I’d push back hard on that point - maybe propose that CRV receive an option to take 20% (not 50%) of the round.
Just to clear up the confusion, what we are advocating is that CRV has the right to participate equally in the Series A round with other investors. We picked the # of 50% because the usual is to have 2 venture firms as an investor in the Series A.
If the entrepreneur wants more than 2 firms, that is totally fine. And we are willing and happy to split the Series A round equally with those new investors. For example, if the entrepreneur wanted 4 firms, then we would like to invest in 25% of the Series A.
Sorry about the confusion. We were just trying to make things simple on our website.
All we are asking for is in exchange for the $250K loan is to have the opportunity to invest an equal portion as other investors in the Series A. I hope that helps clear things up.
Yes George, that helps but I still would like to know if you’d require the startup to have a working prototype before submitting the business plan/present the concept to CRV.
Is it as good as it sounds?
It seems to us that the Quick Start CRV model presents a potential conflict of interest:
It appears that CRV could benefit from foot dragging a very good new business idea in order to obtain higher equity stakes at low cost, and promote weak ideas to find a serie A investor who would pay them back their initial investment plus interest plus 25% discount.
We would like your position on this potential conflict of interest as we currently have selected innovative French start-ups that could be very good candidates for this program in order to help them succeed in penetrating the North American market.
Time will tell, but I expect more CRV announcements like this over the coming months.
More traditional VCs will continue to flock to this stage of investing. This suggests that there will be some 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
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Dan (34)
It isn’t as complicated as you claimed. They are only asking that they be guarrantted an invite to subsequent rounds of financing, which is only fair (imagine you investing in an idea and when the idea comes to friutation, someone else reaps the reward.) Again bear in mind that eventhou it is technially an equity/loan .. there is no personal or any other guarranttes if the company happens to go bellyup, everybody walks away with no hard feelings.
Comparing the CRV to Ycomb programme is absurd. Name 3 thriving companies that were started with $5k and even at that, they require you to give up 1 - 10% stake. CRV doesnt require such … meaning you’ll get a fair market valuation of your comany at the loan/equity rollover.
As for the loan interest, it’s capped at 25%. Who on earth will give you up to $250k in unsecured loan , with no credit (unless you are a serial entrepreneur, you have no entrepreneur credit) at such resonable terms? Some of you made it sound like the interest is akin to pay day loans 420%.
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ties to sequoia
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