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.
Awesome, simply awesome. It’s great to see more traditional firms embracing this model. Great timing for this announcement, following Reddit’s acquisition. A few of the firms I’ve spoken with are contemplating going this route as well. Any clue on the the amount of money marked for these investments?
-Jason L. Baptiste
Well, they say an average of $250k, so 50 investments would be $12.5 million.
A cross between traditional venture capital, angel investment and may be micro loans?
BTW, I think you meant $137,333.33 and not $137,333,33
here’s my company. http://www.tamago.us totally new, ahead of its time. I could use a couple of million…but like the article states..VCs arn’t investing in consumer, and guess what… I have a meeting tommorrow, where I will present, in front of two Angels…so I can get more money…to 1) make it better, run marketing campaigns, build community, etc.
the real reason today’s start up does so much more with little money is cause the people who are creating them, people like me, can do everything from install memory, program it, and pitch it..
This is great news, more funds need to do something similar. Besides lower startup costs, the other reason this is good for entrepreneurs is that most of us also don’t have the time to go out and raise a full round, which is why raising debt is attractive (it’s what we did at Omnidrive).
The terms that CRV will make these investments on are very good, I wonder if they also reserve a first right to the Series A?
I am sure that CRV are about to be flooded with inquiries, the combination of having good terms, a small amount raised and the guys at CRV in the deal means that Quick Start will be a first stop for a lot of entrepreneurs raising money.
great idea. good to see a few later-stage VCs innovating and improving the model in response to recent changes in the environment.
definitely going to be a few bigger VCs left out in the cold over the next few years… if your name isn’t Sequoia, Kleiner, DFJ, or one of the tier I brand names, i think it will be a challenge to get into new wave of startup deals.
most new consumer internet startups just don’t need a lot of capital, and with founders, angels, and early-stage VCs aggressively writing checks & moving fast, bigger funds that aren’t well-known brands might get bypassed…
@lemon
No offense, but your service is hardly ahead of its time. Your idea of allowing people to sell content in an MLM-type fashion is already being done by a startup called BurnLounge. GigaOm reported that they’ve raised $13 million and have all the major labels on board apparently. Haven’t really looked at them closely but it sounds a lot like what you’re doing.
Great idea. Sevin Rosen quit the market, but Charles Riven are showing how they can be nimble and responsive to new models for capital.
I’m an entrepreneur who has been working out of my bedroom with a few buddies for almost 6 months, we are working on projects that truely use user contributed content to benifit the community with a reasonable business model . I would be interested in knowing what the best way is to get in touch with CRV or Angels who would like to help out.
Grant - the link in the post should be live by morning. That’s the best way to get to CRV. You should also contact Ycombinator.
Maybe this is the Odeo money coming back into play? And CRV is going to compete against Obvious with it?
Now that would be a juicy story…
Sounds like an interesting new model.
Grant - What are you projects? If you have a website that explains what you are looking to get funded you should link it in any comments that you make.
We have launched LGiLAB (http://lgilab.typepad.com) a partnership between LightSpeed Ventures and Gemini Israel Funds 6 months ago exactly built on that model. This approach is very relevant for funding new young internet startups and entrepreneurs like it.
great, vc now are ba.
good business model.
This is exactly what is needed in the UK. Right now the big VC’s (Accel, Benchmark, Atlas, 3i etc) are struggling to find investment deals because start-ups no longer need several million to get going but only several thousands upto half million and this “equity gap” is not being filled by the Angel community in the UK at a reasonable equity level.
Hopefully one of the VC pack will pick up on this idea and break the mould in the UK? Of course it means VC’s have to work harder to make the returns on their money which they loathe doing.
In the past one $5m dollar deal would suffice now they have to do three deals for the same value and return.
This is exactly what I’ve been waiting for. I would credit Y Combinator for leading the way. It’s about time.
Y combinator should raise a fund and take a hold of this market, we need his liberal views in this conservative arena. I think the notion of “investing in management” is so strong that the vision gets ignored. Of course we assume that the business model is going to come later. I think vision and business model are two separate things.
As I’ve blogged over at http://yoick.wordpress.com/200.....s-evolves/ — it is great to see another key player evolve along lines some of us have been running with for a while now (Israel, Australia and in the US, ycombinator).
Also good to see comments from a good representation of Aussie Web folk here. C u in SF next week!
Just what the doctor ordered! But the patients are not just in the US. Here in India too there are many startups that need only 100-200 K (goes a loooong way here). I believe Charles River have a presence in India. Hope they will universalise their new model.
Thanks for the news, Mike!
great move by CRV…the venture gap is where it’s at!
We need this in the UK, where there is an “Equity Gap” for Web 2.0 startup businesses - but I wonder if investments this size are best done via an Incubator model?
I’ve referred to this article in my blog here
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.
I like how they softpedal charging 74% interest on a loan. Hey it is just a small amount!
Yay! I’m all about angel rounds right now (raising capital) so the more the merrier!!
wow, I was just talking to my brother about something like this.
For me, the amount of funding you get is inversly related to your creativity. I’d love to have a 250k-500k just to market, and this looks like a great way to do that. Believe it or not, we’ve been able to run our site http://collegemedium.com on the salaries of a 23 yr old electrical engineer and a CPA. However, our competitors just got a huge chunk of cash, it’s time for us to go looking…
Wish me luck!
“We need this in the UK”
Would a VC like one listed in this article generally not consider investing in UK companies? I am in the UK and might be looking for a very small amount of investment.
BlogReader: Take $137,333.33 * 1.37 = 188 146.662; you have to take the second six month period to get the full year return.
The highest number is probably just after 5 months, with nearly 37 points gained. I’m too lazy to figure out the formulas to convert that to a yearly number.
Still, what’s $50k out of a few million dollars for someone that invests in you at an early stage and wants to take up to half of your Series A?
I’m with Eric on this one….
This is exactly what I’ve been waiting for. I would credit Y Combinator for leading the way. It’s about time.
I am new to the world of Angels, VC’s and the like. It states both ‘investment’ and ‘loan’ in their language and has specific interest rates associated. If an early stage company received $250K from this group, would it need to be paid back in a traditional loan sense if a series A did not occur in the future?
Thanking the community in advance for any insight.
interesting…. i guess
my question still comes back to what you really need to build a small startup that requires a cash infusion.
- people/resources
(possibly, although if you can find your initial ‘team’ you should be in it for the heart/energy/desire. anything else and you have employees!)
-hardware
(negligible, although it would be great to have a kind of sourceforge.net for startups, you get charged a monthly fee based on what you need, cap the fee at something seriously low, and provide initial bandwidth/project management groupware/source repository tools/etc…)
-development software
(see above)
this kind of model would allow you to focus on building your biz. getting initial/reference customers/creating your prototype/etc… without requiring a great cash infusion.
the issue really comes back to getting an initial team that’s fired up to build/create something without having initial $$$.
my opinions!!
peace
@BurnLounge
These guys do not do what we do…we’re a p2p network, we turn your computer into a eCommerce Machine…BurnLounge sells website tools/etc so “Music Fans”so they can create they’re own store…they then charge you for access to the Major’s labels.
Tamago is totally different. You should check it out instead. We have nothing to do with the web…and we ain’t like weedshare either.
sam(30): I agree that most startups should not require a lot of cash these days to build a reasonably good service but I don’t think the amount is Zero! This is particularly true when you go live with the service. It is almost impossible to maintain a site with purely part-timers and you can’t expect your entire team to be able to feed themselves on their own for any longer than may be 3-4 months.
We built Koonji (www.koonji.com) completely on personal and part-time resources but are now looking to raise capital primarily to build the content and grow the traffic. For that we need to make sure the site runs bug free and doesn’t crash too often! That needs both hardware/bandwidth resources as well as people. Also you need to spend some money on basic marketing/PR.
This fund sounds like a good idea. My only concern is that most of these funds end up prefering repeat entrepreneurs to lower their risks. I think, a small fund exclusively focused on first-time entrepreneurs is the need today. They are the people who can’t afford to put $100-200K of their own money in their ventures and need that cash to bring their ideas to fruition. Also, how many folks have really had more than one “big” hits! You need to fund the first-timers to find the next Google, Yahoo!
This is awesome news, and honestly something very much inline with the requirements of the entreprenuers today. I like the comparison to Obvious in one of the comments above. 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.
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.
The big attraction of the Y Combinator model is that the money doesn’t come with a huge boatload of strings attached.
Check this out from the article:
“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…”
Just stop right there. You’re already waaaaay more complicated that the YC model. And while this complexity may be easy for the VC firm to deal with, it is absolute hell for the entrepeneur to deal with. (And if you are cynical like me, this is the point. “It’s standard, just sign it.”)
If CRV wants this to work, they need to attach fewer strings. Anti-dilution clauses are understandable, because future VC’s will exploit anyone who doesn’t have them.
But if the young company can’t even afford to pay a lawyer to _read_ the contract, they’re just not going to bother. Or be stupid and sign something they don’t understand.
sudhir(32)
the model that i described, would allow anyone with an idea, who’s willing to reach, to create his business/site, and to get it past the point where it could actually be a prototype, but before it was a definite success. at this point, you have something that’s up/running, with live customers/traffic, or whatever it is that the site uses as it’s 1st milestone of success.
this would give you serious leverage regarding raising your 1st/next level of funding, as you could actually point to a ‘team’ with an actual revenue generating business.
thinks of a hybrid between idealab/sourceforge, that gives you an online incubator if you will.
peace…
I dont understand how can can be compared to YCombinator. Agree with Dan Weber — seems like a “Heads I win, Tails you lose” kind of approach to funding.
Thanks Michael for pointing out the right direction. PremiumPosts, thanks for the hint. We are in stealth mode for now that is why I don’t add the link. Besides, although TC is the best place to get exposure, I believe the real public interest should come from within.
Excellent move. I think a wet blanket has been thrown on technology innovation - here I mean very defensible technology - because of the vc game plan recently. This is smart because guys with a great idea who need more than 50K from their uncle can but don’t have a million teens pounding on their site, can actually get some cash at what appears to be very reasonable terms. Congrats.
http://www.MARKSEREMET.com
Agreed Sam. One should be able to reach the first milestone with almost no cash. The small seed fund is needed to bridge between the first milestone and where you have gained traction with the consumers (it takes a while!). Most established VCs require a growth curve that shows true traction with the community before shelling out a few million dollars for expansion. Of course, in many cases you may not need that once you have truly gained consumer traction (if there is a strong business model). That is why many VCs are being left out in the cold.
Commonly known, ordinary VC funding requires referrals to get your business plan read. Now they’re looking at seed funding, how strongly will they enforce that?
Dan Weber, Bharath: sure, that’s more complex than YC’s offer. It might also be a better deal financially (although money isn’t the only factor, both YC and CRV have connections and mentoring available).
How much participation does YC take? 6%? They get an awesome deal right there.
Marc Fawzi over at Evolving Trends was talking a few months ago about a sort of TechCrunch-style VC group–i.e., a group of in-the-know investors who hand-picked things and used very small investments, like CRV looks to be doing. I think that’s what he was talking about, at least. I don’t remember.
$250k is more than enough to for a small team to bootstrap a startup. I think this is great news.
If you would like to speak to George & Bill and others at CRV, apply to come to the next STIRR Founder’s Mixer - http://www.stirr.net/event/8. CRV is our sponsor and will be on hand to discuss the new Quick Start Program in detail.
Hey Mike…
Looks like you wil be receiving a check from CRV for the number of deals you brought in here for them
Reward your advisors and partners with equity
As part of the CRV QuickStart program, CRV wants to make sure that the key people who helped you build the company are appropriately rewarded for their contribution at the time of Series A financing. Each of the following individuals/institutions would receive a five-year warrant to purchase (at today’s fair market value) shares of the company’s common stock representing one third of one percentage point of the company’s full-diluted capitalization at the time of the Series A closing:
1. the person who introduced the deal to CRV;
2. the company’s principal third-party advisor (e.g., a professor, a fellow entrepreneur, or a mentor); and
3. an institution selected by the company that supports its vision (e.g., a university, non-profit organization, industry group or other foundation).
Sean, it appears any new sign ups for stirr founders are put on wait list. Hope to make it.
Blog Reader writes - “I like how they softpedal charging 74% interest on a loan. Hey it is just a small amount!”
But, Blog REader is missing the point. CRV is not charging 74% interest because CRV is not cashing out when the Series A is raised. CRV continues to hold equity in the invested company - with all of the risks associated with a startup investment.
Thanks, Elliott
Great citypixel.com could use a few bucks
Hi all - thanks for all of your positive feedback about CRV QuickStart. I’m personally very excited about the program because it facilitates more transparency in our (CRV’s) relationships with entrepreneurs. Though I’m now on the venture side of the business, I was most recently active in the open source community, where I was able to see how the values of transparency, honesty, and meritocracy -fostered- innovation.
Susan, are you considering ideas or do you require a working model/prototype before one could apply?