VentureBeat has a great interview with the Charles River crew that validates two things:
- My premise that venture capital ain’t broke: it’s evolving;
- George Zachary (a Charles River partner) makes sense.
In a move that reflects the times, Charles River has followed the lead we have pioneered at NICTA of providing an entrepreneur-friendly convertible seed round.
We all know that for $250k many Attention Economy/Web 2 ventures can get to product so why should they ask for more. Why should they give up a big chunk of equity when they don’t really need it. If they take funding via a convertible note, they are not having a valuation imposed on them and the investors convert at the next round valuation point.
In this vein, CRV has set up Quickstart, and here is Matt Marshall’s take on it:
…most Internet entrepreneurs can design prototypes and launch their ideas on a quarter million dollars. Under the program, if the start-up does well and needs more money to expand, Charles River will have the right to invest during the first round of institutional funding, called a “Series A.”
Many venture firms provide seed money to start-ups, but typically as an exception or on an ad-hoc basis. This is one of the first formal seed programs by a venture firm that we’re aware of.
The advantage of a seed round is that it done as a “convertible” loan, which means the $250,000 is essentially a no-strings-attached loan to an entrepreneur. There is no equity stake claim by the investor at the time, which is good for the entrepreneur, who can see how good his idea is first. If the idea gains traction, he can raise money in the series A and negotiate a high valuation for his company. If he can command a $5 million valuation, for example, the investor’s $250,000 seed money converts into only 5 percent of the company.
Well done guys.