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.