Charles River Ventures QuickStart program

Charles River Ventures new QuickStart program provides loans of up to $250K which convert to equity on a Series A financing. George Zachary explains in a New York Times interview “We think there are going to be a ton of companies that get started with a quarter-million to build consumer services on the Internet,” said George Zachary, a partner at Charles River, which has offices in Waltham, Mass., and Silicon Valley. “In an environment where a fewer number of deals are generating the majority of the gain, we think it is important to see as broad a selection of companies as possible.”

Angel Investors, and some VCs, have been doing this for a long time. There are several advantages to the entrepreneur and the seed stage investor;

1. Valuation of the company is deferred until Series A financing. Valuation is always a problem this early in the game, and there are no good metrics or models to determine fair valuation.
2. Dilution is avoided, at least for now. It is not a good idea for an entrepreneur to give up 30% to 50% of the equity for a small seed investment. Better to wait until you have a demo or prototype, a few people hired, and a well thought out business plan. Then you can go to a VC for a few million, but have a better pre-money valuation...and give up less equity.
3. Time is important to small startups. It takes lots of time to raise money from angel investors, and even more time to find the right VC. A quick loan of $250K can give the startup time to get up and running, and get the other stuff in place before asking for serious money.
4. Advice is worth more than money at this stage. Angels and VCs can give advice that will save you lots of time and money. They also have lots of contacts in their network that will help you when asked. These contacts would probably not engage with you without the introduction and request from the Angel or VC.

These loans carry a small interest rate and usually convert to equity when you get your first round of financing. There is usually a "discount" or "warrant" for the seed stage investor that entitles them to a 5% to 25% discount on the price of the Series A stock, or a warrant that allows them to purchase shares at the Series A price anytime in the next 4 years.

The Charles River QuickStart deal calls for a discount of 5% per month up to a maximum of 25%. For example if you took a loan from CRV and then closed your Series A financing three months later, CRV would get a 15% discount on the Series A shares.

Charles River also gets the right to provide up to 50% of the first round at the same terms and conditions as the other A round investors. This is a reasonable deal for both parties.

Angel Investors have been doing this for years, and even some VCs on a limited basis. I know that North Bridge Venture Partners has offered this kind of deal to startups in the past. The VC business is changing. It is good to see Charles River Ventures taking the lead here.

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Comments

[George Zachary]

Don,

Thanks for a factual representation of what we are doing with CRV QuickStart. We launched this program at the request of quality entrepreneurs.

We've received tremendous positive feedback and we are excited to build and offer this program to bring the best and most exciting ideas into reality.

[Anil]

Good analysis. Apart from North Bridge, the other firm that comes to my mind is DFJ. However, one piece of advice to entrepreneurs who may believe that raising seed capital is becoming easier - usually these deals still go to people that have proven themselves before, are serial entrepreneurs, or have dealt with the firm before. So if you are a first time entrepreneur and dont really have a strong network, it will still be a battle.

[Eric Jackson]

Hi Don:

I agree that CRV deserves kudos for their leadership here. As with most good ideas, there are bound to be many firms following the trend. However, not all will succeed.

Here are potential winners and losers through this process:

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).
- 2nd and 3rd Time Entrepreneurs: They're even more sought after following this news than they were before. We are heading for a Hollywood-type star system where Bill Nguyen announces his idea for his next start-up at lunch and the deal is done by dinner.

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

http://breakoutperformance.blogspot.com/2006/11/are-angels-new-vcs.html