Both Startups and VCs can draw inspiration from the week’s news. A serious investor/entrepreneur became dismayed with the strategic direction of his VC backed company. So, he bought out the VC and other investors and gave his company the freedom that he hopes results in future success. On the opposite end of the spectrum, a VC known primarily for managing large funds initiates a new investment philosophy by offering startups early stage investments (in the form of convertible loans) on a wide scale for the first time in their history.
Well, here’s my twenty cents or so on two interesting stories that demonstrate that in Web 2.0 “Less is Certainly More.”
FIVE REASONS CRV QUICKSTART WILL PROBABLY SUCCEED
We usually don’t have strategic innovation on the part of large VCs. But it has happened, Charles River Ventures has christened a new investment approach and a seed stage targeted fund called CRV Quickstart as the latest gambit in the search for a viable VC investment strategy for Web 2.0 Startups. {I'm still a little skeptical but, I'm expecting everything to work out for entrepreneurs with good ideas and even better work habits.} Numerous blogs have posted interesting posts including: CRV Quickstart, Change In The Venture Model Or Bubble 2.0, After the Reddit Sale: The Age Of YCombinator Clones, and The Business of Business and The Business of Raising Capital, among many, many others. Here are the Five Reasons that I think CRV has a good chance of success, even with a slowing economy and an even slower IPO market.
1. Informational Advantage-VCs learn a great deal about emerging technologies and business model sustainability from their interactions with Startups. The time period CRV spends with a Startup between the seed stage and Series A can be construed as a prolonged due diligence period. CRV greatly expands the number of Startups they interact with. With increased deal flow in Web 2.0 Startups, it is highly probable that CRV will get an inside peak at the technological direction of many, many Startups. More Startups plus more deals equals more information and a higher level of confidence in making investment decisions.
2. Risk Advantage-CRV can leverage their informational advantage to create a risk advantage over other VCs who invest in companies at later stages. CRV will have an informed opinion concerning the Startups’ probability of reaching a successful exit. CRV learns early on whether a particular Startup warrants significant additional funding, potentially reducing the number of unsuccessful Series A investments they make by a large margin.
3. Reduces Investment Uncertainty -CRV Quick Start responds to the present markets’ extreme uncertainties. CRV will evaluate and close deals with many more Startups than usual. Consequently, they may be able to increase the probabilities of success in a market that appears to be ruled predominantly by fate. The bar has lowered significantly in terms of what is actually needed to start and manage a successful Startup. Instead of making large scale VC investments in Startups who can’t possibly put that much money to work, it is a better strategy to close a large number of small deals and increase the probabilities of success.
4. Structure-Every VC has a development model that Startups are expected to follow. This affects capital structure and corporate governance, among other things. CRV has the first seat at the table so they will influence the structure of Startups in a manner that they are accustomed to.
5. Ownership-CRV’s early investment gives them the opportunity to work towards establishing their target level of ownership with valuations suitable to facilitating multiple rounds of funding and a successful exit.
TWO REASONS WHY OBVIOUS CORP. HAS ALREADY SUCCEEDED
Entrepreneur buyouts of VCs are rare, but this trend will continue. Well-heeled entrepreneurs with proven track records and passion for their newly developed technologies may push to include buyout clauses in their VC deals. Man y blogs had a lot to say about the birth of Obvious Corp. Some interesting posts include the following: The Obvious Corp - Evan and Biz take back Odeo and Ev's New Company, among others. Below are two reasons why Obvious Corp. is already successful even though the ink on the corporate resolutions aren't even dry.
1. Risk-Evan Williams, Biz Stone, and the rest of their team completed a buyout of VC interests in order to lower the firm’s risk. Now they don’t have to worry about valuations, scaling, multiple rounds of funding, and mandatory exit strategies. They can just cut costs and focus on products that meet consumer needs. No more strategy meetings, no more projections…just plenty of servers, code, and hopefully, a rapidly growing base of consumers. I like the general idea of Odeo, but I love Twitter. Twitter is probably the most valuable part of Obvious. With renewed focus watch Twitter grow and Odeo restructure.
2. Longevity -Obvious Corp. will extend the life of Odeo and Twitter. VC backed Startups usually have to move quickly on an evolutionary curve through successive funding rounds to reach an initial public offering or merger/acquisition. Reaching critical mass in a highly valued target market with multiple funding rounds inflate the company’s valuation; therefore, increasing the value of investors’ equity. VCs can’t afford to fund companies with a natural growth cycle. They must, due to their fiduciary responsibilities to their LPs, emphasize an acceleration of growth that either puts a Startup on the road to becoming the next Google or Vonage.
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