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November 01, 2006

Charles River Ventures Offers Entrepreneurs a Great Deal

Charles River Ventures announced its QuickStart Seed Funding program today.  From the details in their press release and on their web site, it’s a great deal; take it if you can get it.

The QuickStart program solves two problems for entrepreneurs and at least one problem for VCs.  It got nice coverage in this morning’s NY Times:

“Doling out small loans is an unconventional strategy for a 36-year-old venture firm that has about $1.8 billion under management. But Charles River said it hoped that the program, to be announced Wednesday, would allow it to tap into a new generation of entrepreneurs who are increasingly starting companies on a shoestring.”

The basic program is quick approval (or, presumably, nonapproval) of loans up to $250K for startups.  These are loans to your new corporation (which they’ll help you start), not to you personally.  That’s important; it’s the first thing I checked (and one of the first things they say).  You’re risking enough.  Your judgment won’t be good if you’re worried about having whatever personal assets you haven’t already mortgaged be on the hook if things go south.

The interest rate is more than reasonable at 6%.  There is a catch but it is a very reasonable one (and the reason for the program from Charles Rivers’ POV).  Charles River gets the option of providing up to half of your first round of financing if and when there is such a round and they get to convert the debt at up to a 25% discount in that round so that amounts to some extra interest. But the company only pays this “extra” interest if there is a first round of equity investment and if CRV participates (CRV doesn’t have to).

Presumably (from what they DON’T say), if your company should be sold prior to requiring more equity, CRV just gets their equity and any interest due back.  We all know that many web startups today don’t need much more than a quarter million to become at least acquisition candidates if not going businesses.  I’ve written CRV asking for clarification of this because it sounds like it might be too good to be true.

The main problem this solves for you, the entrepreneur, is having to accept too much dilution too early in order to get angel financing.  If you’re only ready for $250K or less, you don’t want to give up a big share of the company early because there are probably going to be other rounds at which you are going to be diluted again.  Used to be that $250K didn’t go very far; but, given how cheap computers or just raw computing power for rent is now and the ease of getting some programs written, this can be enough money to build at least the start of a very real business – especially if you understand that you and any other founders don’t get rich on salary during this time.  Pizza is still the recommended diet.

The second benefit for entrepreneurs is that the overhead of raising an angel round for a small amount is high in terms of both time and legal bills (which are always paid by the money-raising corporation). CRV positions this program as quick and easy and it does sound like they have templates in place.

This program is an innovative approach to a problem which has been vexing VCs as well.  Startups can get started with less and less money (although they usually underestimate what marketing’ll cost AND the time required to get code running).  VC funds, themselves, are usually not efficient unless they can put at least $100 million to work.  You can’t really do that $250K at a shot.  Even a first round of say $500K per VC is probably only worth doing if it can lead to follow-on rounds in winners. 

Moreover, quick exits compound the problem for VC funds.  Doubling a half million in a year when a company sells out may sound like a good return.  But it really means that the VCs themselves did a lot of work for which they earned “only” $500,000.  They have no follow-on opportunity in the company.

What CRV has done is position themselves to have first dibs on companies which have had a chance to prove themselves and will now be at a stage where they can efficiently use much larger amounts of capital.  CRV will already know the company when the A round time comes so they will have not only opportunity but also good information when it comes to making a follow-on investment.  Very smart.

Smart VC Fred Wilson has a good post on this program and why his firm, Union Square Ventures,  is NOT doing the same thing right now.  However, he pays CRV the highest possible compliment for a VC: “There is a lot to like about this deal. I hope Charles River shows us the best deals that come out of this program!”

From an entreprenuer’s POV, I think it’s a great deal.

I blogged a primer on angel investors previously.

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