Venture Capital By The Spoonful

November 2, 2006

For those of us thinking about seeking investors now or in the future, there’s now a new possibility for the “seed stage.” For someone like me that doesn’t have a real handle on the VC thing, it’s pretty easy to understand, which right there makes it appealing.

Charles River Ventures is a VC firm that does big deals, but they’ve just launched CRV QuickStart,which does very small deals. If I understand correctly, you bring your idea to CRV, and if they like it, they will offer you a “loan” of up to $250,000 to help you get your startup off of the ground.

I put the term “loan” in quotes because they give you the money, but you’re only liable for it if your business makes it to the next round of funding, known as the “A” round, which is the round where the bigger VCs usually come into play. If your startup gets “A” funding, Charles River Ventures converts the “loan” they gave you into a piece of equity in your company.

In the example they used, they might “loan” you $100,000, which would then turn into $135,000 worth of shares in your company once it’s funded. Since the “A” round would generally mean you’ve secured at least a million in funding, it’s not difficult to pay them equity in exchange for their having ponied up some cash to get you started. CRV also gets the right to fund up to 50% of that A round. (This last part about the right to fund half the A round seems to concern some others who’ve written about this; doesn’t seem like a big deal to me.)

The big idea here from the VC end is that it takes less money to get ventures off the ground these days AND it’s difficult to find companies that are going to grow big enough to give VCs an exit route if the VCs are handing over gobs of money. (It’s easier to make some cash out of a 100K investment that becomes a multimillion-dollar business than it is to pour millions into a startup in hopes that it will become a billion-dollar business.)

There’s been reaction to this from various blogs, notably other blogs of “seed stage” VCs.

VentureBeat has a nice write-up on it, as does TechCrunch.

The two notable seed-stage VCs to weigh in are Fred Wilson of Union Square Ventures and Josh Kopelman of First Round Capital. Both are very complimentary of Charles River Ventures as a VC firm; their reservations center around whether this is a big VC firm making investments in companies without being particularly hands-on in lending expertise to those companies. Startups don’t just need cash, they can also use the business acumen that most VCs have to offer based on the VCs’ successful track records.

I don’t know if Bessed is an attractive property for the QuickStart program, as so much of these types of investments seem to revolve around companies that build software that is automated and can scale easily. But I think CRV has done the best job of any of these seed-stage firms of making it clear to the average entrepreneur what they have to offer and what they expect back. It takes away a lot of the mystery around how the VC process works, which is a good thing for those of us who aren’t in the know.


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