Wednesday, November 1, 2006

CRV QuickStart: It’s All About The Dealflow

Looks like the story of the day is the CRV QuickStart announcement from Charles River Ventures. It's basically the formalization of a Seed-Stage investing program that many VC firms have:

  • They put in up to $250,000 as a convertible note to get you to Series A.

  • The note earns interest and CRV has the right to roll the note and the interest into the company's Series A at a discount of up to 25%.

  • CRV also has the right, but not the obligation, to contribute up to 50% of the Series A funding.


These are all perfectly standard "market" terms. I did exactly the same thing with Allocity, which was seeded in precisely the same way by Mohr Davidow Ventures (and subsequently acquired by EMC). Angel investors also do convertible notes all the time. This really is the simplest way to structure things at the seed-stage.

But, lots of VC's do seed investments like this. Why is this one special?

It's not so much that it's special, but it's very smart for CRV to formalize the program and make it public. It's also wise for them to show the terms in public. That way, everyone knows what they are signing up to when they send in their investor pitch.

For CRV, this does one thing: It gives them access to a lot of dealflow and allows them to make more, smaller investments. It's a smart move.

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

I agree! Now, Fred distinguishes his firm from CRV QuickStart by stating that Union Square Ventures is much more hands-on. I don't know how hands-on CRV intends to be with this program, but there is nothing stopping CRV from hiring a person or two to shepherd these seed-stage companies to greater success. Time will tell.

Josh Kopelman wrote:
It also is a recognition of some of the challenges that larger venture funds face. Take a hypothetical traditional $400M VC firm. In order to achieve a 20% IRR, the fund must return 3x their initial capital over a 7 year term -- or $1.2B. Now say this hypothetical VC firm typically owns 20% of their portfolio companies at exit (an industry average). That means that at exit their portfolio needs to create $6 Billion dollars worth of market value (ie, $1.2B / 20%). Assuming that their average investment size is $20M, that means that they invest in 20 companies -- this assumes an average exit valuation of $300M PER COMPANY. Given the tight IPO Market and an average M&A exit value of less approximately $150M, this math creates some real challenges.

Josh makes an excellent point, but it's a grander discussion than the topic at hand. And, it's a discussion worthy of a separate post. CRV QuickStart is not intended to solve this dilemma -- it's just about getting earlier access to quality dealflow.

Josh goes on to point out some conflict of interests around the way that CRV has structured the deal:

  1. A convertible note could cause CRV to want a low valuation in Series A so that their early risk will purchase them more shares. I.e., will CRV really be helping the companies make progress during the seed round, or will they be motivated to hold back in hopes of buying more of the company in Series A? This is poppycock. It's absolutely in CRV's interest to help the companies during the seed and to secure a great valuation and solid footing with a VC syndicate partner.

  2. Concern about bad optics if CRV decides not to invest in the Series A. Yeah, that's something that would need to be addressed. However, if the company cannot address those simple optics issues, then I have little hope that they can build a successful company.

  3. Josh questions whether someone like CRV could devote the hands-on time necessary to nurture many of these investments. I think that's a great problem for CRV to have. I agree with Josh, but believe that CRV can solve this easily by hiring early-stage entrepreneurs and advisor capitalists (like myself) to help them with the load and give them a piece of the action.


Michael Arrington wrote:
Angel investors, ranging from individuals like Ron Conway and Jeff Clavier, to small funds like YCombinator and First Round Capital, have taken real market share from established venture capitalists by moving quickly and investing small amounts of capital instead of force feeding unwanted millions on a young startup. While taking a ton of early capital may sound enticing, companies can price themselves out of small but lucrative acquisitions simply because they’ve taken too much capital.

I love what Paul Graham is doing at YCombinator. I would add Perry Wu to the list.

Matt Marshall wrote:
CRV has downsized considerably in recent years. The firm now manages a $250 million fund, down from a whopping $1.2 billion fund they’d raised during the Internet bubble years. The team estimate they’ll do between 25 and 50 deals over the next three years.

This sounds a bit like what was happening at Sevin Rosen Funds, another firm that has been around a very long time and has naturally been shrinking the fund size based on the current VC market. SRF had found great success doing seed-stage and incubator type deals in the past (informally), but has struggled lately with the fact that the seed-stage companies are Internet properties. It's great that CRV is formalizing their program and adapting. That's the only way to survive.

Best of luck to CRV and their team.

I predict a very busy holiday season for Tai, Zachary, and Wu!


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2 comments:

  1. seems fairly similar to Holtzbrinck's Fast Forward scheme
    http://www.holtzbrinck-ventures.com/?fast_forward (you'll need to translate to english)

    As with all of the schemes, what happens if the VC does not want to invest, how is the loan repaid? (that's assuming that the company the loan was made to is still going) Obviously if the company is wound up then the loan is lost.

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  2. [...] Charles River Ventures “formalized” seed program known as QuickStart. In the article, CRV QuickStart: It’s All About The Dealflow, I concluded with: I predict a very busy holiday season for Tai, Zachary, and [...]

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