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Quickstart: CRV’s Seed Strategy

Posted on Thursday, Nov 2nd 2006

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.

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Comments

We’ve received overwhelmingly positive feedback to Quickstart.

We aren’t changing the focus of Charles River Ventures. We still do Series A equity investments.

What we are responding to is the change in the market environment. It is very clear that exciting companies can get started and scaled with $250K. For example, one of our companies, Maxthon, took less than that amount with 7 employees and is profitable and has over 71 million users in Asia.
Wangyou.com has over 8 million users and is profitable as well and took a similar amount of capital. So the notion that you can’t accomplish much on $250K is false by evidence.

The reason we are doing this is that quality entrepreneurs asked us for it. They asked for a program where we give them $250K so that they can get out and test a concept without having to negotiate a seed level equity valuation. In exchange, they offered us the right to invest in Series A when they decide to raise it. Also, part of the QuickStart loan program is that CRV doesn’t take a board seat. That’s done on purpose to make it scalable for CRV and becausew the feedback we got from these entrepreneurs was “I need to move fast and be flexible and test the concept asap and be stealthy” at the same time.

We also do seed equity rounds too. But we are finding that most of the entrepreneurs we are seeding want a seed loan.

This is just an extension of what we do. We continue to do equity investments.

And we welcome others to participate with us in the seed phase as well as the Series A.

All we are doing is offering choice with transparency to the entrepreneurs. Isn’t that what the internet is all about?

In closing, we are hearing the stodginess from some investor corners. We didn’t purposefully set out to disrupt others business models. We are just following the new emerging opportunity. Just like we respect in great entrepreneurs.

Sincerely,
George

George Zachary Friday, November 3, 2006 at 3:14 AM PT

I completely agree, that negotiating an equity deal for $250k is a massive waste of time. I have done it in the past, when I was an inexpeienced entrepreneur, and lost my shirt.

And I also agree that entrepreneurs need some money to experiment and test concepts. Especially on the internet, the feedback loop is quick and ready, and not being able to take advantage of it is a shame.

Typically, to move from a powerpoint stage to an internet site stage with traffic, a small amount of capital that doesn’t trigger a huge, ridiculous dilution, is essential.

Sramana Mitra Friday, November 3, 2006 at 12:10 PM PT

This is a bad idea. Taking the money without the added benefits, and the very real potential of not getting Series A because the seed investors don’t see a deal. For $250K startups can finance that themselves and get a better valuation when they need capital.

tom foremski Saturday, November 11, 2006 at 12:07 PM PT

Really? Startups can finance $250k themselves? Like college kids? You must be kidding, Tom!

Sramana Mitra Wednesday, November 22, 2006 at 2:59 PM PT