Putting the "Venture" into Venture Capital again?

There has been concern in the UK for quite a few years that the VC community is not doing much venturing, certainly not in the new internet technology space. I (and many others) have certainly had some "interesting" discussions while working with VCs over the last 2 years on this subject.

However, Web 2.0 threatens to change all this, and put the funding as well as the technology back in the user's power. Since the cost of setting up a company today is far lower, and the impact if they are succesful is far higher, the risk/reward has shifted. In addition, many people's experience of VC's in the 2001-2003 period has made them fairly determined not to touch that sort of money until as late in the day as they can, and are thus going to Angels in preference or just bootstrapping.

This has led to an "Equity Gap" in getting funding in the UK New Technology circles, as reported succinctly here in Philip Wilkinson's blog at Crowdstorm.

Although not as pronounced in the US, clearly there are similar issues. But in the US, the VC community is responding, as noted today in TechCrunch , where venerable fund Charles River Ventures is firing up a "Quickstart " program.

The model is very simple...to quote:

CRV has created a standard template for investing, although in a phone call today they stressed that it is negotiable: target investment of $250k in debt which converts in an equity financing or acquisition. The debt will convert at a discount to what the new investors are paying, at a rate of 5% for every month until the new investment is made, up to a 25% maximum discount (this is considered a standard provision in angel financings). What this means in normal English: you don’t have to negotiate a company valuation now when taking this debt, making the negotiations a lot easier to finalize. An example transaction from the CRV website:

A simple example: if CRV loans your company $100,000 with a six percent interest rate, and six months later the company closed a Series A round, at that point the loan balance (with interest) would convert at a 25% discount (value = loan dollar amount plus interest / .75) into $137,333,33 worth of Series A stock. Given that seed funding amounts are typically very small compared to the amounts one might expect to raise in a Series A round, as the example illustrates, the aggregate discount amount, in this case $37K, is a tiny fraction of what is likely to be a multimillion dollar Series A financing.

The project is being led by CRV general partners George Zachary and Bill Tai, who estimate that they will do 25-50 Quick Start deals in the next two years. The hurdle to invest is low: just two of CRV’s five general partners need to greenlight the company, and the investment is made.

An excellent start for a streamlined approach to a portfolio play, but clearly less control per investment.

So, I wonder if any current UK VC's will follow this lead, or will it all be left up to angel networks? Perhaps this market gap will foster a new crop of VC's to fund these companies, maybe more akin to the Incubators of the 1990's?