Oxyfish

Charles River Ventures started quite a tempest in the VC blog teapot by announcing their QuickStart seed program. Matt Marshall wrote about it, Josh Kopelman had a very nice response, and Fred Wilson has an opinion too. Seems like it’s not very different from what VCs (including CRV) have been doing for quite a while. As they say:

“The formalization of this program is a natural evolution for us at Charles River Ventures,” said Bill Tai, general partner, Charles River Ventures. “Over the past year, roughly one-third of the projects we have committed to have been seed projects. It’s a sign of a fundamental change in the nature of company formation today, particularly in the Internet segment.”

Formalizing the program sounds like a good idea, and we are considering a similar program here at Woodside Fund. (Update: we figured out that 20% of our deals are already at less than $1m for the first investment.) But, I think there are three very important points that haven’t been explored very deeply in the discussion:

• The bridge loan can create clear mis-alignment of incentives between investors and entrepreneur
• If the VC chooses not to go forward, the company is at a significant disadvantage trying to raise additional capital
• Success of the program for the VC depends on a fairly high attrition rate

Josh Kopelman mentions both of the first two in his post about the program, and has also written a separate post about the problems of bridge loans. An even more detailed article on the first two was written this week by Jon Callaghan in PEHub, which I highly recommend.

The third point is one that I want to explore a bit, as it is barely touched on by Fred Wilson. Just because a company takes a small amount of money does not mean it takes less time. Most early stage VCs claim to add quite a bit of value to their entrepreneurs, helping with recruiting, strategy, resources, customers, etc. Seed stage companies usually require MORE of this than more mature Series A companies. And yet, this kind of program contemplates investing an increased number of companies given their small investment size. Where will the time come from?

The investment thesis most VCs have for this kind of investment is that it’s a small amount of money that is designed to both prove a business model or technology is possible, and preserve option value. In many cases, the business model or technology will not prove to be quite as fantastic as the entrepreneur predicted, and the option will be declined. In fact, the dictates of portfolio theory (and investor time) almost require that most of the options be declined. This comes back to point number two above, that many entrepreneurs will end up at a disadvantage going into Series A.

At Woodside Fund, the way we address the above issues is through complete transparency. We work with our entrepreneurs to clearly define the milestones, and what the expectations are around what happens if they are not met. Since we work closely with our entrepreneurs, we can change the milestones if necessary, but we are wary of plans that shift too much. We find that the transparency and proper expectation setting goes a long way to preserve our relationships with our founders, even when things go wrong.

As early-stage venture investors, we look at everything from seed through Series B, sometimes even Series C. We look for areas where we can add value, and make returns for our investors. But we also remember when we were entrepreneurs, and we work very hard to make every investment successful both for us and our company teams.

This entry was posted on Tuesday, November 21st, 2006 at 1:26 pm and is filed under Venture Capital. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.