VCs look to compete with angels, but is it good for entrepreneurs?

Charles River Ventures announced  their new "Quickstart" program -- which has them looking a little like an angel investor and putting ~$250k to get an idea kicked off. Innovation should be applauded, but I'm not actually sure this program (and others that are similar) is in the best interest of entrepreneurs.

Although CRV gets points for uniqueness in structuring as debt, to mirror angel funding, there are plenty of other examples of VCs trying to play in the new, cheaper, Web 2.0 world. General Catalyst has been doing more "hatches" than ever, and everywhere I turn now people seem to be cutting EIR and seed deals -- often with one or two people and a powerpoint deck. I can think of at least four mobile startups that were seeded recently in Boston. Not to mention Y Combinator, Blackhawk Equity, First Round, and other boutique VCs.

So there is obviously an overall trend towards trying to get in earlier... but what does that mean for the entrepreneur?

I think it will fundamentally change the way entrepreneurs relate to VCs. Typically, once you are in a VCs portfolio, the VC is "in." This is what makes it so hard to raise VC funding in the first place -- they make very few investments per year, and the partners generally sit on only a handful of boards, but once on the other side of the gate they generally are your biggest supporters.

But, if VCs are going to be doing 5, or 10 (or 25 in CRVs case) seed-stage deals, then that culture is at odds with the new reality. Now you have a bunch of seed round deals competing for an A-round, when the number of A-rounds is likely to stay the same. So the VC is now trying to figure out which 10% of his seeds are going to get the A... which means that the vast majority of seeds will be left high and dry.

Now, if an angel investor had put in $200k and was not continuing in the A-round, that would not be surprising (and is in fact typical). But, for a VC to not continue investing in the company is absolutely a strike against the startup as you would try to approach a different VC. And VCs are essentially looking for any way to pass on a deal, which means those startups are now screwed.

Essentially you have decided to put the fate of the company into the hands of one partner/firm, for a measly $250k, where that partner will necessarily be spending very little time to help make sure you succeed (he is balancing 25 seeds after all). So, by and large, I would steer clear of raising what is really an angel round from VCs. It's a good bargain for them (lock-in effects) and a bad bargain for you.

There are exceptions to every rule, so I could imagine it working if:

1. If the VC is boutique and does not compete to lead later rounds of funding (Y Combinator)
2. If $250k is all you need
3. If there is a particular partner/firm that you absolutely want to work with
4. If you have seeds from two VCs, effectively creating a "pre A-round" situation, not dissimilar to a tranche
   
   and lastly, as always with a startup you have passion for (is there any other kind?)
5. If it's your only choice of funding, and your heart is set on this startup.
   

read: Charles River Ventures - about CRV - CRV QuickStart (from Evhead)

Technorati Tags: crv, venture capital, fundraising, startups, angel

Comments

[Michael Goodman]

Great advice Nabeel. I think the immediate perspective would be that the earlier you can get a VC "in bed" with you the better. It's a very good point that this is basically like marrying with the high likelyhood of no sex.

[Jasonium]

Just found your blog via Digg, why don't more entrepreneurs keep blogs? The honesty is great.

Keep it up.

[Sam Goldsmith]

Interesting thoughts. But of course some of us don't have the luxury of knowing a lot of VCs, so any option probably seems better than nothing. With that in mind the opportunity to get to "sit" with a VC and let them know more about your concept, the better -- even if it means giving up some theoretical competitive ability for raising money.

[jack]

I recently found a very interesting website:
http://alreadylinked.com/
There you can purchase ad space for your Blog etc.

[Nabeel Hyatt]

Susan Wu, an associate at Charles River, mentioned to me that she had replied to this post - but it seems to have been absorbed by the blog-gods.

So I will at least post to her "rebuttal" of some of the comments on the blogosphere to the CRV quickstart program:

http://reality.org/2006/11/05/some-clarification-about-crv-quickstart/