Startup Funding: The CRV QuickStart Seed Funding Program

From Charles River Funding: QuickStart Seed Funding

Charles River Funding (Boston & Silicon Valley) is launching a new program looking to move them down the food chain and get into companies while the gettin's good. Read the NY Times article: Venture Firm Is Giving Loans A Try. (registration required)

Here is how the loan works:

• A standard interest bearing loan will be made to a corporation, which we will help you establish if you do not already have one in place. This arrangement eliminates any personal liability for the loan.
  
  
• It is our intention to convert our debt into equity if and when your company closes its Series A round. If the company successfully raises its Series A, in exchange for sharing the risk with the entrepreneur, CRV receives a discount on the conversion price when the loan is rolled into the Series A. The discount will be a maximum of 25% (determined ratably at five percent per month, depending on how long it takes to create a Series A financing, up to the maximum).
  
  A simple example: if CRV loans your company $100,000 with a six percent interest rate, and six months later the company closed a Series A round, at that point the loan balance (with interest) would convert at a 25% discount (value = loan dollar amount plus interest / .75) into $137,333.33 worth of Series A stock. Given that seed funding amounts are typically very small compared to the amounts one might expect to raise in a Series A round, as the example illustrates, the aggregate discount amount, in this case $37K, is a tiny fraction of what is likely to be a multimillion dollar Series A financing.
  
  
• In addition, CRV would like the opportunity to support the Series A financing and thus retains an option to contribute up to 50 percent of your Series A funding. For example, if you raise a $3M Series A round, we can contribute up to $1.5M of the round.

Redeye VC thinks the move is to address exit trouble:

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 6 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.

From VentureBeat

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.

Zachary  says he sees too many entrepreneurs giving away between 10 to 20 percent of their company in the seed round. They have fewer shares to give to employees, and they’re less attractive to venture capitalists.

There is almost no liability for the entrepreneurs, because the loan is made to a corporation formed around the entrepreneur. If the company fails, the company goes away, and the founders aren’t liable. “We’re all big boys,” says Tai, explaining that CRV doesn’t mind when this happens. “We go into this with eyes wide open.”

Fred Wilson of Union Square shares his analysis

I think that's a very fair deal. The loan is structured very similarly to what some angels are doing these days (loans that convert at a discount) and Charles River gets to take up to half of the round on the same terms as the other new investor.

Read the first bullet: There's also no personal liability. Something that Utah investors could take note of. 

Comments

[Devin Thorpe]

Thanks for this great post. You note that local early stage investors could learn from this program. I agree. One key is the modest discount to Series A financing and what I take is a commitment to convert if there is a Series A. Seed stage companies need seed stage investors that will really commit!

ddt

[Shane]

Devin says: "Seed stage companies need seed stage investors that will really commit!"

Hallelujah!