In the Loop The Loopt team (CEO Sam Altman is second from right) use GPS-equipped phones to locate their friends.
Early to Rise Venture capitalists are increasingly likely to make bets on start-up ventures--usually ones less than 18 months old.
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When it comes to venture capital, small may indeed be the new big. A growing number of firms are giving away small amounts to young start-ups. Reporter Ryan McCarthy explains
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Thinking Small
Published May 2007
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BUY A REPRINTTechstars, a Boulder, Colorado-based venture firm, launched a similar program last year, offering start-ups as much as $15,000 and a three-month stay in Boulder, in exchange for 5 percent equity. Charles River Ventures, one of the nation's oldest venture capital firms, has also created a seed-level program, albeit with a slightly different approach. The CRV QuickStart program, launched in 2006, provides tech start-ups with low-interest loans of an average of $250,000 called convertible notes. Should the borrower go on to raise venture capital, the loan can be converted into equity at a discounted rate (a maximum of 25 percent off). The deal also gives Charles River the option to participate in the Series A round. "What we've noticed is that there is often an inverse relationship between the amount of money entrepreneurs raise and the quality of their companies," says George Zachary, a partner at Charles River Ventures.
For entrepreneurs, of course, these deals are a mixed bag. On the plus side, you get to keep more control. Angel investors, for example, often ask for a 20 to 40 percent equity stake right off the bat and will want to have some control of operations. Y Combinator, QuickStart, and other seed investors take much smaller stakes. What's more, there's no haggling over valuation--a process that can take months when dealing with VCs or angels. And getting accepted to these programs can be painless. You simply submit a description of your business or a prototype and sign a contract, a potentially crucial time savings that can help get your product to the market faster. The downside? If your venture hits it big, giving away a sizable stake in your company for a few thousand dollars might seem like a bad deal.
Still, QuickStart was appealing to Mike Phillips, co-founder of Mobeus, a communications software company based in Cambridge. Lacking a prototype or any significant market research, Phillips knew his company would have a hard time attracting VCs or angels. Indeed, without a clear idea of how big his company could become, he was hesitant to talk to any investors, whom he knew would ask him to place a specific value on his company and be eager to start talking exit strategies.
Instead of entering a guessing game about the future prospects of his company, Phillips used $300,000 from QuickStart--a 6 percent loan that he was able to close in just two weeks--to build a prototype and research the market while working closely with Charles River. The relationship has worked well enough that Phillips has just closed a multimillion-dollar Series A round with Charles River and Sigma Partners. The funds will help Mobeus bring its software to the consumer market, which Phillips expects will happen this summer. The ease and relative calm with which the deal proceeded almost made him forget he was dealing with a venture capital firm. "It's just a much simpler deal," says Phillips. "In a way, this is more natural than a typical VC deal because it gives both sides a longer time to get to know each other."
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