Venture Funding – Less is More
Charles River Ventures just launched a program to fund companies with small loans of $250,000 instead of through equity investment. I thought I would weigh in with my two cents from the perspective of an entrepreneur.
There are two main stages companies go through, product development and business execution.
Product development is not capital intensive. We started with a development team in the Ukraine, a freelance designer in Romania and a research team in
India. The software and hardware we needed to launch were cheap. Getting our prototype to the market was inexpensive.
Business execution in most cases is capital intensive. You need US based resources to handle Marketing, Sales, Business Development, Financials, and these don’t come cheap. You need to lease an office. You need to have scalable infrastructure. You need money.
The issue many entrepreneurs face is that taking VC money during the product development cycle makes little sense, because 2-3 million dollars is about 10x more than is needed. This completely dilutes the founder’s equity position and does little to actually help the company. Further adding conflict to the situation, many web-based products are being bought as features by the internet heavyweights. This makes it even harder to justify giving up more equity for more cash than is needed.
On the other hand, if entrepreneurs don’t take the money during product development they end up having to beg, borrow and starve to launch their businesses.
So getting back the Charles River Ventures program, I really like it. It allows entrepreneurs to take money and build a product without diluting their equity. No reason to take 3mill if only 250k is needed. If the company is acquired before they raise venture money they still maintain 100% of the equity. If they do raise money later, CRV only asks for a small discount on the terms they negotiate with the lead investor.
From the VC’s perspective it works equally as well, letting them get in on the ground floor with a minimal investment, but with the right to take a significant equity percentage if the company does decide it needs to raise money.
Entry filed under: Start-up.