CRV QuickStart

The venture capital industry is evolving, trying new things to adapt to changing realities in the enviroment. That’s a good thing and further proof that the venture business is not broken, but in fact changing.

The latest move comes from Charles River Ventures, one of the older firms in the business, who are announcing a new program called CRV Quickstart to provide loans (no warrants, no equity) of up to $250,000 to entrepreneurs with interesting ideas. Miguel Helft (fourth link to him in the past 30 days, I hope this one doesn’t end up dead because of Times Select) has the story on the New York TImes website.

I agree with Ron Conway who told Miguel:

“I think the earlier the V.C.’s get into the food chain, the better.”

We are reacting to this new environment too at Union Square Ventures as I explained in my recent post on the Union Square Ventures weblog on Deal Size.

I have posted a bit about Paul Graham’s Ycombinator in the past. The Quickstart program reminds me a bit of what Paul is doing and one of Paul’s investments, Reddit, which was just sold to Conde Nast, was featured in Miguel’s story today.

You may ask, why don’t you guys do this? Well for one, we are not staffed at the moment to respond to the deluge of opportunities that Charles River Ventures is likely to get from this initiative. We are already looking at so many opportunities and we have a fund that is designed to do four to five new deals per year.

And second, we really want to engage with each and every investment we make. I read comments all the time on my blog and elsewhere that suggest that the new environment rewards firms that can make a much larger number of investments because web services are capital efficient and you can do more with less. Well that may be true, but we have been rewarded the most over the years when we engage deeply with a company and we are not going to lessen the engagement simply to get more names in the portfolio without thinking long and hard about the tradeoffs.

Finally there is David Sze’s comment:

But David Sze, a partner at Greylock Partners, which has led small
investments in promising Internet start-ups like Digg, said the program
could force entrepreneurs to commit to a particular venture firm before
they are ready to do so.

“I’m not sure whether there will be an advantage to an entrepreneur,” he said.

David is referring to this feature of the CRV Quickstart program:

Charles River would then have a right to be part of the company’s first
real round of venture financing, where it would invest beside others.

I went to the CRV Quickstart page to learn more about this feature since it’s really the key to the whole program for Charles River. Here are the details:

It is our intention to convert our debt into equity if and when your company closes its Series A round. If the company successfully raises its Series A, in exchange for sharing the risk with the entrepreneur, CRV receives a discount on the conversion price when the loan is rolled into the Series A. The discount will be a maximum of 25% (determined ratably at five percent per month, depending on how long it takes to create a Series A financing, up to the maximum).

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.

In addition, CRV would like the opportunity to support the Series A financing and thus retains an option to contribute up to 50 percent of your Series A funding. For example, if you raise a $3M Series A round, we can contribute up to $1.5M of the round.

I think that’s a very fair deal. The loan is structured very similarly to what some angels are doing these days (loans that convert at a discount). And then Charles River gets to take up to half of the round on the same terms as the other new investor.

There is a lot to like about this deal. I hope Charles River shows us the best deals that come out of this program!