November 1st, 2006
Charles River Ventures' Quickstart: Good move
Dilution is the greatest challenge an entrepreneur faces. Early in the life of a company, when there are a lot of good ideas and very little in the way of resources to make them happen, a lot of people give up way too much of their company to get some traction. Angel investors have a nasty habit of being vampires, too.
Enter Charles River Ventures Quickstart. The firm isThis is good for entrepreneurs. It's also good for venture investors. doing convertible loans to startups, hoping to cash in on the appreciation in value of seed-stage shares by converting at a 25 percent discount, with the option to invest up to 50 percent of the capital raised, in the A Round. The startup company becomes liable for the loan, so if it fails Charles River is just the first one in line to collect a debt.
This is a good thing for entrepreneurs. It's also good for venture investors, who will get another signal indicating that their job is to grow companies not just cash out. The best VCs never forget this, but lots of VCs who are not tuned into the enterpreneurs' interest come and go, making little in the way of contributions to portfolio companies.
My experience is that the seed-stage bridge loan is much less dilutive. At the same time, investors aren't always entirely comfortable with it. When I was at SoftBank in the mid-90s we did some of this and found that it turned off some funds at the A Round.
Fred Wilson has a good commentary on the reasons this is a good move for the entrepreneur (and why his firm can't do it today). He quotes Ron Conway, a seed-stage investor in my company, BuzzLogic, who was quoted in The New York Times about the CRV move: “I think the earlier the V.C.’s (sic) get into the food chain, the better.”
Josh Kopelman adds his thoughts, making some excellent points about the alignment of interests between startups, lenders and venture capitalists. He raises a question about whether, because CRV has the option to invest in the A Round, its decision not to follow a seed-stage loan with capital could hurt the startup:
When an venture investor has an option (but not an obligation) to take a certain percentage of your next round, I've always thought it created the potential for some bad optics. If they exercise their option, and participate in the round, it could be a wonderful thing for the company. But if they choose not to exercise their option, what signal is it sending to other potential investors?
My feeling is that the entrepreneur's responsible to make the case for future investment by delivering on plans and showing constant progress and learning. Only you can make your company fly.
If, it turns out, CRV decides a company doesn't fit its investment thesis when it reaches its A Round, the firm should be available to investors to explain that. If CRV doesn't want to invest because of the company's failure to deliver, then CRV and the entrepreneur lose, so the aligned interests show clearly it's time to try something else.
Matt Marshall at VentureBeat provides more detail about the Quickstart announcement.
Mitch Ratcliffe is a veteran journalist, media executive and entrepreneur. See his full profile and disclosure of his industry affiliations.
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| 11/01/06
