Jay Parkhill November 1st, 2006
With all the talk about the venture model being “broken”, it is interesting to see at least one fund addressing the issue head-on. Charles River Ventures has announced something like a quick-and-easy bridge loan program with its new QuickStart plan. While the plan may be more marketing than anything else, as described below, I think it represents a significant change in the way VCs are looking at their portfolios.
The basic idea is that it costs much less to build a product than ever before. Josh Kopelman cites a figure of $500k-$1M, though in some cases I think it can be far less than that.
Given the lower costs, many companies just don’t need a $2.5M round, at least not until much later in the process. QuickStart is designed to get $250k to companies in the form of bridge loans. The investment can go forward with consent of only 2 of 5 CRV partners, so presumably the funding can happen faster as well. The net benefit, then, would be less dilution and less time spent chasing the investors, allowing entrepreneurs spend more time building a product.
On the other end of the investment, IPOs are few and far between and M&A exits command a much lower valuation than most VC firms need to generate solid IRR on $5M – $20M investments. Firms simply have too much money to invest and too few highly profitable exits to build their reputations on. QuickStart seems like a way for CRV to hedge its bets by seeding more companies earlier and seeing which ones sprout.
There are certainly problems with the QuickStart model, as pointed out by Josh and others point out.
The biggest ones are interlinked. As VC investors, CRV is expected to take an active role in the business. With numerous small investments, though, it is not clear how easy it will be to do this. Further, since CRV also intends to invest in later rounds, it may have some incentive to keep the valuation low in order to improve its conversion rate for the bridge funds.
In the end, of course, none of this is really new ground. VCs have invested in seed/bridge rounds for a long time and will continue to do so. QuickStart may be nothing more than CRV’s existing internal policies given a name and a marketing pitch. The fact that an established firm like CRV felt it needed to do it, though, speaks volumes about the current investing climate.
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