Guest: George Zachary - Charles Rivers Venture
Host: John Furrier - PodTech

John Furrier - PodTech
We're here at PodTech.net, across the street from our office on Sand Hill Road, at Charles River Ventures with George Zachary, partner of Charles River here in Menlo Park on Sand Hill Road. Welcome to the Podcast.

George Zachary - Charles Rivers Venture
Great to be here.

John Furrier - PodTech
So you're announcing today the big new VC Model, you guys announced QuickStart which is a...

George Zachary - Charles Rivers Venture
We call it the big small VC Model. Small is big.

John Furrier - PodTech
Well, everyone's been talking about VC Models changing, is dead or whatever, it's evolving, you guys just announced a real innovative program, talk about what you announced today and what it means for entrepreneurs?

George Zachary - Charles Rivers Venture
Sure. What we announced today is QuickStart program, which is our desire to fund entrepreneurs who have cool ideas with $250,000 in the form of loans, so there's no equity dilution to begin with. And that loan turns into equity, if and when the entrepreneur wants to raise equity.

John Furrier - PodTech
So basically right now the start up environment has been talking about, all this VC funds have ton of money, they've got to put it to work. But the cost to start up these days is small, Linux servers, there's no technology tax. So entrepreneurs have to give away a lot of -- their company to an Angel, go raise an A round, you guys have been involved in early stage and in a mid stage. What is it mean from them, they don't have to give any of their company away? Talk about how it works? Most entrepreneurs are familiar with convertible notes.

George Zachary - Charles Rivers Venture
Yes.

John Furrier - PodTech
And then Angels kind of shepherd them to an A round. Talk about the program, and what you guys are going to do with entrepreneurs here?

George Zachary - Charles Rivers Venture
Got it. So the program is -- it is actually a convertible note. It actually converts into the series A, so it is a loan. We're kind of taking the best of Angel activity without the equity dilution. So, traditionally angel's deals are, hey, I'll buy a quarter million dollars of your company in exchange for 10% or 20% of the equity of your firm. Some of the best entrepreneurs I know said, "Man, I screwed up giving away 10% to 20% of my company before we knew what we were doing, why did I do that?" One of the things that we're seeing is that Angel investors, primarily individuals, call us up after they invest in the companies, and they say, "hey, you want to take a look at my -- one of my 20 Angel investments, and I just invested in them a month ago and do you want to look at it"? And I think, sure, we started realizing, why did they give up 10% to 20% of the company so someone could call us. That's how we got to it, and then we noticed that we just had really good people coming to us. We said, we'll give you the quarter million bucks, we'll give it to you as loan, and when you're ready to raise a venture, we'll do it.

John Furrier - PodTech
So let's talk about what's changed, so from my perspective, I'll say we do a lot of Entrepreneurship Podcast, we talk to VCs and entrepreneurs. In the old days, the VCs were these guys here on Sand Hill Road, kind of the Wall Street of the West, if you will. They were hard to get access to, Angel investors usually were the introducts and they're helping entrepreneurs just get settled, here's some cash, get your prototype going, and then they would help introduce to a VC. Now you've got Internet, you've got Blogs, you've got events, social media, the viral marketing, and the access is -- similarly we're doing a podcast here that will be open to million of people, so they can get to a VC, and you can get to the start ups.

George Zachary - Charles Rivers Venture
Exactly, and they can find out who we are, and what things we invest in, and they can go to our website, and find out what things we like, what things we're appropriate for. We can check out what they're doing online as well too.

John Furrier - PodTech
So really it's about the access side of it, and you get involved earlier, and you get involved anyway, so the process tends to start when you get involved which is after the Angel investor in the old way would bring it to you. Now what you're saying is, you're putting some capital to work in a loan which favors the entrepreneur, but also favors you, because you can get access to the entrepreneurs early, understand in the diligence process, so its a win-win. Talk about that dynamic?

George Zachary - Charles Rivers Venture
Which part of it, because it's...

John Furrier - PodTech
The entrepreneurs wants to get access to you guys, and you want to get access to them.

George Zachary - Charles Rivers Venture
Sure, so in terms of how the process works. The entrepreneur emails us to quickstart@crv.com, and says, "Hey, I want to do this". They put together a one page summary, maybe a link to a prototype, maybe a PowerPoint summary. And then we take a look at it, and if we're excited about it, we'll meet with the company, and it only takes two people at CRV to make a decision to fund $250,000. That's how the mechanics of the process work. So far it's day one and we've gotten over a 1000 emails.

John Furrier - PodTech
From entrepreneurs?

George Zachary - Charles Rivers Venture
Mostly from Entrepreneurs.

John Furrier - PodTech
How are you going to get all this out? Just normal processing?

George Zachary - Charles Rivers Venture
Just normal processing, going through email, and making one minute decisions on what things to take seriously. So we're encouraging people to make their summaries compelling. It doesn't include lots of fancy PowerPoint; it just includes very clear definition of what they want to do.

John Furrier - PodTech
So if you're an entrepreneur, if you're going to talk to an entrepreneur, or they're listening to this podcast, what would you tell them to expect, and how you see this envisioning rolling out?

George Zachary - Charles Rivers Venture
I would tell them to expect that, we're going to look at every email that they send us, because we want to, its actually pretty fun for us. The only thing that's not fun is, not sleeping enough. And what they expect from us is that, if it's interesting, we will definitely get back to them within 48-72 hours. So there's three of us here looking at all the email that's inbound, and we're going to keep doing that. It actually doesn't take that much of work to read the emails.

John Furrier - PodTech
The VC business has been changing obviously; the funds were big, now they're kind of getting smaller, so they can manage it. But for a while there, during the downside, the Bubble Crash, there wasn't a lot of Angel investing, and everyone said, Angel's kind of took there lumps and so entrepreneurs were suffering. Now the Angels are kind of getting back in the market, but now what you're basically doing is saying, you're going to be part of that process. How is the VC business changing now versus what it was five to seven years ago?

George Zachary - Charles Rivers Venture
Sure, it has changed structurally, and some really important reason. One thing is the amount of money and demand has grown so large that most venture firms now look more like private equity firms. So, I think we're back to the roots of venture, which is taking a risk, and basically betting on peoples concepts and things that they want to do. Our desire was driven from that versus just managing lots of money. Is that what your question...

John Furrier - PodTech
Yeah, tell me about the risk side, because that's...

George Zachary - Charles Rivers Venture
The risk side has really changed, ten tears ago, most venture groups would look at more enterprise level deals, and they would call eight CIOs, and say, "Hey, will you buy our complex system product for $200,000, and can we send the sales person out there to sell you the product?" Venture firms could go and do the diligence. Now you can start businesses which are much simpler, which are much lighter weight for the customers. I'll give you an example, 10-20 years ago people would build application software companies, and you could call up the biggest financial services companies and ask them, will you buy this, and you'll get concrete answers back of whether they'll buy it. Now it's pretty different, because most of the buyers are either consumers, small businesses, or people at enterprises who can make purchasing decisions on products that are $5,000 and below. So, what we need to be able to be good at right now to do this part of the business well, is to be a good judge of whether those things work. So, there's two ways you can handle that. One is, you can wait till it scales up, and invest after its already successful. Which is what most venture groups have been doing, we've been doing that, or what we can do is step in early, and take more of the risk, but basically spread the risk by making lots of these investments.

John Furrier - PodTech
What about, also the fact that now, and especially in the web space, Web 2.0 Internet, in such high velocity proof points, you know pretty quickly if its (Voice Overlap)or not.

George Zachary - Charles Rivers Venture
That's exactly right. That's the thing we saw, with the quarter million dollars you can get a site up and running, and you can start getting customers. Yesterday's acquisition of Wired by Reddit, they raised a $100,000 and had a million customers. That's really unprecedented.

John Furrier - PodTech
If you guys were involved, you might have advises them, maybe not to sell, maybe take more capital and go global, or I'll say their interest was pretty much to sell, which might have been a choice that an Angel investor might not be able to advice them on some of the liquidity potential there. Is that a good example?

George Zachary - Charles Rivers Venture
That is a very good example. In a case like that, if we had been there, Angel investors, and they wanted to actually sell the company, we would have been in favor of it. We're actually always in favor of what the entrepreneur wants to do, because if they don't want to do something, and we do, who does it?

John Furrier PodTech
Exactly, you've got to run the business .

George Zachary - Charles Rivers Venture
In that case if they wanted to sell the company, we would basically cash out a loan plus interest on the loan. The reason why we're undertaking this program is, we're not interested in making money on the interest, so we're not interested to do this to be a bank. We're interested to do this is, access to as broader deal flow as possible. The reason why we believe that is, we believe that very few deals are going to generate the majority of all the gain. And the best thing we can do is to be in as wide a deal portfolio as possible early on. The way that works well for the entrepreneurs, by making it as a loan, so it's powerful to them. We're not insisting on being a board member, so there are no formal board meetings, the entrepreneur can get up and running. There aren't lots of legal forms to fill out.

John Furrier - PodTech
It's classic Seat Financing.

George Zachary - Charles Rivers Venture
It's Seat Financing.

John Furrier - PodTech
Let the entrepreneur carry the ball, develop their business, and establish their mission, and go do it. So you're basically providing in essence a loan. Talk about the loan, are they liable personally for the loan, or is this going to be part of a corporate loan that has their houses on the line, or how does it work?

George Zachary - Charles Rivers Venture
The individuals in the company are not liable for the loan. It's a no recourse loan to the individual, its loan to the company. If the company's concept in business goes away, they do not owe us the money personally. We go on their list of creditors, that people who've sold them furniture and servers, et cetera, et cetera. It's a very low risk way for individuals to start something.

John Furrier - PodTech
It's great for the entrepreneur, and for you, on your side, its money. Your risk is that you could lose the money, but the upside is, you get more investments, and you could see one hits faster, and you can shut stuff down, not follow on, and put the money behind the good ones.

George Zachary - Charles Rivers Venture
That's exactly right. So, I'll give you some examples on the math. Our expectations, we'll do about 50 of these investments. If we do 50 at about a quarter of million dollars, that's $12.5 million investment of a $250,000 fund. So, we're not taking a huge risk for our investors, but we're giving ourselves a super great portfolio to get involved with.

John Furrier - PodTech
Charles River has been around for a while, on the East coast, now in the West coast as well. I mean, great, great name, premier VC firm. This is kind of interesting, you guys are obviously validating the marketplace in terms of what the environment is like? What it was like for you guys to sit around in the partnership, and talk about this. Take us through some of the inside, and the philosophies, was it like a (Voice Overlap) or has a good sold through or how did that kind of ...?

George Zachary - Charles River Ventures
No, we just started noticing, we were doing more and more of these deals, and then we realized, okay, two deals is interesting, three deals is a trend, four deals means that this is pretty -- this is a real part of the market. One of our investments -- two of our investments that are in China, one's called Maxthon and the other one's called Wangyou, started with a quarter million dollars. Maxthon now has 71 million downloads, Wangyou has eight million users, and Maxthon has a total of seven people in the company. Now this is -- that's 10 million downloads per employee. So, this is proof that...

John Furrier - PodTech
This is a market, this is not a bubble, this is real macro, and micro economics in play here, where there's a major consumer behavior shift, and maybe in the Internet specifically, that you can get real, real attraction, not I got a reference of a customer who may buy a product, but like real significant milestones from a VC perspective.

George Zachary - Charles River Ventures
That's exactly right. There's the cost structure side of things which is, it's cheaper than ever to do anything by an order of magnitude, but at the same time the overall audiences, you guys know, is expanding exponentially. So you've got this broadband audience of people that are looking to the PC and mobile internet as their form of entertainment and information. And if you draw lines on the chart and you watch PC usage in terms of minutes per day versus compared to TV usage, the lines are crossing in the next two or three years. You guys follow this well. My belief is these new consumer services are going to be the biggest generating entertainment and information service companies created so far. We keep seeing it, Google, YouTube.

John Furrier - PodTech
The Internet's is a platform which is global, its phenomenal, so anyone who's got a business has got the Internet as a platform. I think this is a homerun. Contact Quickstart@crv.com and check it out. Final question. Take us through, in your mind, a scenario of success. I come to you, I'm starting PodTech a year and half ago, you give me a loan, and things are going well. Take us through, in your mind's eye, about the process. You get a loan, it converts to an A round. Explain to the entrepreneur how that process works, do you guys do the whole A round yourself or is it...

George Zachary - Charles River Ventures
That's a great question, because there's some confusion about this. So, yes, we've give you the $250,000 loan, and now you, the entrepreneur is saying, "Hey, I want to raise two or three million or five million dollars" -- actually we don't care what number you say, and we'll say, great, if you want us to, we'll introduce you to other venture people, would be great for what you're doing and that we trust. And if the entrepreneur says yes, I'll take you up on your suggestions, we'll introduce them. They're also totally free to go meet whatever other venture firms, and other venture investors that they want.

John Furrier - PodTech
Is there a write of first refusal on a deal?

George Zachary - Charles River Ventures
There's not a write of first refusal. All we ask is the ability to participate equally with any other investors you bring in. So if you bring in a total of two venture firms, we'll participate equally with this new firm. If you bring in three firms, we'll participate equally with each one of those firms. We're not actually interested to create some kind of competitive, putting it in your face, with other venture firms. We're just interested to get into the best deals.

John Furrier - PodTech
And you earn that right, because you took the risk, and you want to maximize, it's not a lot of forcing the entrepreneurs. So let's just play this out. Let's just say that, you get a quarter million dollars, you get all these millions of people, you get great traction, everyone's like, hey, thumbs-up, this is a real deal.

George Zachary - Charles River Ventures
Yeah!

John Furrier - PodTech
Let's raise $10 million, and we've identified VC1 and VC2, who want to put in $5 million, how do you guys play into that? Do you come in and say, lets' put the $10 million three ways, or is it?

George Zachary - Charles River Ventures
Its up to the entrepreneur, they can say, let's put the $10 million -- if the entrepreneur wants two firms or three firms, all that we ask is that we have the chance to be one of them.

John Furrier - PodTech
Equally with the others?

George Zachary - Charles River Ventures
Equally.

John Furrier - PodTech
Okay

George Zachary - Charles River Ventures
We're not asking for us to own a controlling part, we're asking -- the entrepreneur's totally free to set whatever valuation with whatever amount of capital they wants

John Furrier - PodTech
It's a great news for entrepreneurs. Actually my final question, this will be final question I promise. What does this mean for the VC business, obviously for the entrepreneur's it's a homerun, lot of experimentation going on right now, so it's perfect for the way the market is globally. For the VC market, how do you see this affecting the VC, obviously there's a lot of buzz and excitement, obviously behind this, you've been in the business for a while. How is this going to change the VC market, if any?

George Zachary - Charles River Ventures
My guesstimation is that there'll be other groups that say, we like what the CRV guys are doing. We should be doing more of that. But, there's a big group of people who're earning very high maintenance fees, say, hey, we should be more like private equity firms, and we'll just wait for these guys to develop the stuff. We'll wait for CRV to bring it to us. I think the business is going to bifurcate into people who're going to copy our model, and other people who're just going to stay, and manage really large amounts of capital.

John Furrier - PodTech
It's just the growth of the VC businesses, about 30 years old, and still evolving, right. I mean risk management, risk capital is still the key to the entrepreneurs gain, and that's what you're doing.

George Zachary - Charles River Ventures
That's right.

John Furrier - PodTech
Okay, cool. George Zachary, partner at Charles River Ventures, explaining his new QuickStart program here. Charles River, located in Boston area, and in Sand Hill Road, here in California. Great firm, great stuff, congratulations.

George Zachary - Charles River Ventures
Thanks, thanks for the attention.