TechCrunch announced today the new Charles River Ventures Quickstart program. It is a program designed to ensure that CRV gets access to deal flow in this latest startup boom of Web 2.0, where the costs to effectively get a company up and off the ground (and potentially to an exit) are substantially less than even $1 Million.
I like that CRV codified a process for making these seed investments. Namely, they set an appropriate amount ($250k), set a standard term sheet that is not over the top (discount to qualified financing of up to 25%, 6% interest), created a simple decision process (one pitch, and 2 out of 5 partners approve), and they didn’t try to jam a valuation or terms in to the Series A.
The last point is a critical one. Many times VCs will offer seed money, but do it with a structure that is tied to some Series A term sheet. Entrepreneurs should be wary of committing to a Series A deal before being ready to seek a Series A deal. CRV wisely avoided this issue.
Without knowing the exact details of the program, what was made public sounds like a reasonable deal for entrepreneurs looking for a small amount of capital to get their big idea off of the ground and may save time from rounding up 5 angels @ $50k each or at least 2 to 3 angels to fund $250k.
The program is also a statement from CRV that they’re serious about being seed investors. Many times a VC will say that they’ll do a seed investment, yet they end up digging into the business and creating an evaluation process that starts to resemble a Series A financing – taking up valuable time from the entrepreneur looking for information that is not yet available about the business. The CRV process seems efficient, assuming they stick with it as written.
Lastly, in today’s NY Times, David Sze at Greylock, provides a counter point that entrepreneurs should be cautious about commiting to a venture firm this early in the process just because they’re offering $250k.
He is correct to caution in this manner … assuming that CRV is requiring that they be involved in the next funding round as the lead or co-lead. However, if this is treated as a way to get access to deals early-on and to establish whether a longer-term relationship between the entrepreneur and VC makes sense, it could be a win/win approach allowing each side to take the other out for a test drive before committing more formally in a Series A where preferred stock and board representation is at stake.
If it turns out the relationship is not going to work, CRV at least gets a small piece of the company in preferred stock assuming the company raises funding from another firm, and the entrepreneur at least screened out one firm and knows more about what to look for in a prospective venture capital relationship and what to avoid.
— brian[UPDATE] Fred Wilson posted on this topic as well today and had some interesting insights, and information that I missed on CRV’s approach to the Series A. I agree with Fred that it’s a fair ask for the right to 50% of the round. CRV won’t invest their 50% if they do not like the deal – price, terms, team, market, etc. However, it does not preclude the entrepreneur from getting another venture firm involved or from getting a fair valuation for their company.
paidContent has a post on the topic here.
VentureBeat interviewed CRV here.
And Josh Kopelman from First Round Capital has some interesting thoughts here, particularly on potential downside for the entrepreneur if CRV does NOT exercise its option to invest in the Series A.