CRV's Feeds the Seeds

by Joey deVilla on November 2, 2006

A little late to this item, but I think it's a bellweather for the startup market, so I'd be remiss in not commenting on this story from VentureBeat: 

Charles River Ventures, an early stage venture capital firm, has launched a new investment strategy, offering rapid but tiny $250,000 checks to Internet start-ups.

The program, called QuickStart, recognizes times have changed, and that Internet companies no longer need the vast amounts of cash that most venture capital firms want to give to them. The CRV program also offers entrepreneur the friendly terms of the “convertible” seed round.

Of CRV’s last five deals, four were seed rounds (three consumer Internet companies, and one chip intellectual property company). The partners acknowledged that some deals — such as solar companies — need millions. But they said a majority of the deal leads they see these days falls into this seed category.

CRV is just reacting to the fact that conditions are very different for startups today. They don't need to spend a lot on non-differentiating infrastructure and platforms, they can rely on a lot of individual word of mouth for marketing driven by blogs and wikis, and it's easier to deliver rich user experiences through standard browser clients. All of this lowers the barrier to entry in the software business to historically low levels. You don't need millions to invest in deep, proprietary platforms on which you'd build your business. VCs whose stock in trade was raising billions and investing millions were getting themselves frozen out of this segment of the market.

The reaction to the CRV news has mostly been positive, but two of the more prominent early-stage VCs have made a couple of interesting observations. Josh Kopelman at First Round Capital says:

I've always believed that one of the key roles a seed-stage investor plays is to help their portfolio companies raise a Series A round.  One of the reasons I don't like bridge loans, is that there is not alignment of interest between the lender and the entrepreneur.  As a lender, I would convert into the price of the next round — motivating me to keep the next round valuation low.  As a shareholder, my motivation is aligned with the entrepreneur — we both get rewarded by a higher second round valuation.

In other words, as a lender with an option to convert into an owner, a Series A financing has your seed lender acting like a potential investor, rather than as an existing owner. The difference is simple and important: potential investors want to buy low, while existing owners want to sell high.

There's also the question, raised by Fred Wilson at Union Square Ventures, of whether a big firm like CRV has the bandwidth to give these tiny opportunities the TLC they'll need to move from idea to product.

[W]e 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.

While some firms are quitting the scene, in part because of the new financial dynamics, it's nice to see another VC graybeard try to adapt to the new reality.

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