NEWS & EVENTS
Boston Globe- Charles River Ventures rolls out a seed-money program for Net start-ups
Boston Globe- Charles River Ventures rolls out a seed-money program for Net start-ups
Nov 1, 2006
Charles River Ventures Rolls Out a Seed-Money Program for Net Start-Ups
By Robert Weisman, Globe Staff | November 1, 2006
The Waltham venture capital firm Charles River Ventures plans to roll out a funding program today meant to help a new generation of low-cost Internet entrepreneurs rapidly launch new ideas before raising venture funding.
The move is ‘‘a sign of a fundamental change in the nature of company formation today, particularly in the Internet segment,’’ said William P. Tai, general partner in Menlo Park, Calif.
Tai said the cost of getting an Internet site going has dropped substantially in the past few years, with entrepreneurs using commodity servers, open source software, and viral marketing to draw customers. As a result, Internet entrepreneurs need less capital on the front end while they build out sites and test their market potential.
Charles River, through its new CRV QuickStart program, will offer such entrepreneurs loans of as much as $250,000, known as ‘‘convertible notes’’ — meaning the venture firm can convert them into equity if and when the start-up raises its first round of venture capital.
The firm, traditionally one of the nation’s leading early-stage venture investors, will also introduce the entrepreneurs to other venture backers.
In effect, Charles River is positioning itself as an alternative to angel investors, a class of mostly wealthy individuals who provide smaller financing rounds to start-ups.
‘‘It makes sense, particularly because these are entrepreneurs they are going to want to know,’’ said Mark G. Heesen, president of the National Venture Capital Association, who said he was not aware of any other venture firm offering formal seed funding along the lines of the Charles River Ventures program. ‘‘If their companies get acquired by an eBay, these entrepreneurs are going to go start other companies.’’
As recently as the dot-com era of the late 1990s, the price of entry into an Internet business could be as much as $100 million. One sign of the new model was yesterday’s acquisition by Wired Digital of Reddit.com, a Boston online news aggregation site that raised less than $100,000 for start-up costs from angel investors. The parties, which did not disclose the purchase price, said Reddit would be relocated to San Francisco, where Wired Digital and the affiliated Wired magazine are based.
‘‘Compared to five years ago, the cost structure to get an Internet site going has gone dramatically down in terms of the labor, tools, and operating expenses,’’ said George Zachary, another Charles River general partner. ‘‘At the same time, because of the Internet and broadband, companies have a bigger potential customer base.’’
Even before launching the seed funding program, Charles River Ventures had been offering loans, which don’t require public filings with regulators, to entrepreneurs who want to remain in ‘‘stealth mode’’ for three to six months before closing venture rounds. Four start-up companies, three in Silicon Valley and one on the East Coast, have received seed funding from Charles River Ventures in the past quarter. The program to be unveiled today formalizes such arrangements.
‘‘This gives us broad access to a broad set of entrepreneurs,’’ Zachary said. ‘‘And it allows us to participate on an angel and seed level, which we haven’t done historically.’’
Former venture capitalist Howard Anderson, a professor at MIT’s Sloan School of Management, said the Charles River Ventures move might be a way to jump-start a consumer Internet industry in the Boston area, which has trailed Silicon Valley in Internet start-ups. ‘‘The other VCs in town won’t let this go unanswered,’’ Anderson predicted.
Heesen said the entire venture industry is wrestling with the new economics of the Internet sector. ‘‘The costs have come down so dramatically that some Internet entrepreneurs don’t need venture financing,’’ he said. ‘‘It’s kind of ironic, because we created this space, and now we can’t play in it sometimes.’’
Robert Weisman can be reached at weisman@globe.com.