Quickstart: CRV’s Seed Strategy

Charles River Venture’s announcement yesterday of offering $250k micro-loans to entrepreneurs, generated a lot of discussion:
Techcrunch
Don Dodge
Paul Kedrosky
Stowe Boyd
Fractals of Change
Fred Wilson …

The list goes on. I had a few conversations with friends in the venture business, and asked them whether they were going to start a similar program, especially because I have been bugging everybody lately with statements such as VCs only come to the rescue of victory!

Here are some nuggets of those discussions:

Alex O, Trinity:

“I think that this is clever marketing; more power to them. I have a ton of respect for CRV, and I hope that the idea works out well for them. The structure described in the Techcrunch article is almost exactly what many angels offer to seed-stage startups, with the addition of the right to invest in the A. In practice, quite a few firms will do something like this too, although perhaps less formally. Some firms give partners “mad money” to invest a little money in early ideas. Others will tranche a Series A, with a little money up front and then more money at a higher valuation on the achievement of agreed milestones.

The benefits of this approach are clear, and are outlined on CRV’s site. The biggest stumbling block for any VC firm doing this type of seed that I can see is the implied “taint” if they DON’T decide to invest in the Series A. For sure, there are many good reasons why the company may be great, but it just hasn’t developed into a good fit for the seed VC’s portfolio. But, still, the question will remain in other investors’ minds. Another possible stumbling block is if another Series A investor doesn’t want to share the round, and gets into a tug-of-war with the seed VC. But I think that’s less of an issue.

So, yeah, this seems like an idea worth trying. We’re also doing some very early-stage investments (including literally 2 guys and Powerpoint), and that’s true of many firms. One of the differentiators in this business is helping to put a company together, as well as funding companies that self-assembled.”

Paul Dali, Dali Hook :
“S– in general I really like the idea. the obvious concern is partner bandwidth on such small investment amounts, which is legitimate. We, as a firm, are also very interested in doing very early or seed deals. I agree, early stage investors are getting harder to find, because of the work involved, lack of IPO market, and size of their respective funds. This approach by CRV seems very creative.”

Counterpoints:

“Please do not quote me by name… but I am not sure that there is a lot you can do with $250k. Maybe Joe Strauss can, because he does not have to pay himself a salary. Not sure the best entrepreneurs will be attracted to this type of structure. What the entrepreneurs want is relationships, introductions and time, which is not what I think they will get from this structure. Particularly if they are going to do 25 to 50 in 2 years.”

“Interesting idea however our viewpoint is that you need to work very closely with seed companies and it would be hard for venture firms to provide the help and support with 25 seeds a year. We have many different programs to help entrepreneurs get their companies started. We do all kinds of seed investing.” – Warren Weiss, Foundation.

And for India, it doesn’t seem to be an option quite yet, as Sumir Chadha of Sequoia India says: “We are not planning to do anything similar at Sequoia Capital India… hard to say whether its a good idea or not since this is US market focused. In India, we only back an entrepreneur fully – i.e. either we back him and give him the full resources of the firm or we don’t – no middle stage.”

Okay, now you need to hear the massively opinionated Sramana’s point of view:

Venture Capital is a service business. VCs “hand craft” every deal. CRV’s announcement is the first of its kind to “productize” the seed-stage venture capital business which is hurting from lack of attention. Yes, it will take some work to process these micro-loans, but it can be done. Get some interns, train them properly, or get a screening team in India. Do all the things that product companies do to scale. After all, you guys preach this mantra to every entrepreneur. Now, practice what you preach.

I like this. George and Bill, congratulations on leading the industry! I hope more VCs replicate this program.

Powerpoint financing needs to come back, or we will choke the industry.