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Monthly Archive for November 2006

Our take on “converts” or seed bridges

November 17, 2006

There has been plenty of discussion recently among entrepreneurs regarding bridge loans for startups, also know as “converts”. Josh Kopelman wrote a nice post here, and Matt Marshall posted a bridge loan calculator for entrepreneurs here. Lots of people ask us our view on these structures, because we’re focused only on Seed and Series A deals. Despite the convenience of converts, we at True don’t do them (though we did participate in a bridge-convert at Meebo, as angels prior to closing the True fund). We don’t like them because they have the potential to create multiple conflicts of interest between the investor and entrepreneur. Worse, these conflicts are inserted into this crucial relationship on day one.

As entrepreneurs ourselves, we started True with the core belief that the venture industry should be better aligned with entrepreneurs. We literally named the firm True in reference to aligning a bike wheel. Clear alignment of incentives between our firm and founders is critical to everything we do. I’ll discuss some of the potential for conflict below, with the caveat that for non-professional investors, there can be some advantages to the convert. If you’re an angel from another industry, I admit that it could be risky for you to price a deal in a market in which you don’t have knowledge or experience. For experienced entrepreneurs and investors, in our view the conflicts clearly outweigh the convenience.

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Posted by Jon
Tagged Industry
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Nothing ventured . . . .

November 16, 2006

This post is derived from an article that I was asked to write for my high school alumni magazine (print, not online). The article discusses part of the founding of True, so we thought it might be of interest more broadly to entrepreneurs.

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The Northern California afternoon was hot and sunny. I walked to the railing and saw Silicon Valley stretched out before me. As I considered the power of entrepreneurship and innovation in the valley below, the weight of my decision hit me. Just a few minutes earlier I notified my employer that I was leaving to start my own firm. There was no turning back. It was June 2005, and one of my career’s most significant transitions had just begun.

Though I envisioned this moment many times, I was shocked by the strength of my conflicting emotions. I was exhilarated, uncertain and yes, afraid. The challenge I was about to undertake would risk my savings, entail a year of non-stop travel and require a rigorous audit on the entirety of my professional life. The odds were against me. Starting a new Venture Capital firm is hard to do, and most new efforts fail. Investors think new firms are at a disadvantage, so they are reluctant to invest in all but the biggest firms. The big get bigger, and the perception is that bigger is better. I believed small firms had many advantages.

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