“Micro-VC firm”.  “Emerging Managers”. These are terms that invariably come up in any discussion about the current state of Venture Capital.   And for good reason – Smaller, newer fund managers seem to be surfacing by the day and seem to be a key theme in the evolving world of Venture Capital. Look, the 80’s and 90’s represented great times in Venture Capital.  With innovations in mainframe computing leading the way, Dell, Sun, Apple, Microsoft, and Cisco all underwent wildly successful public offerings.  Of course, the decade that followed this golden era was marked by two significant economic down cycles. Outside of Google and a few other edge cases, the exit market relative to dollars raised by Venture Capitalists was extremely unfavorable, resulting in an extremely poor pooled performance for the industry. Although sweeping changes in Venture tend to be dawdling at best, the long-term underperformance from 2000-2010 served as a powerful change agent for the industry.  The industry is clearly experiencing its first true “rinsing” cycle.   In the hearts of entrepreneurs and LP’s alike, struggling legacy firms are giving way to Emerging managers. Coupled with the continuing LP concentration around a select group of industry bellwethers, LP capital allocation strategies today resemble a barbell; heavy on the ends, light in the middle. On one end of the barbell are large, platform plays.  These “brand name” firms are viewed by most to have the best probability for persistent market outperformance.   As expected, these firms are able to raise larger funds, and more frequently. Last year, the top 10 firms accounted for ~65% of the total capital raise. Names such as Sequoia, Redpoint, Greylock, Accel, Benchmark, NEA, and Andreessen Horowitz populate this list. On the other end of spectrum are Emerging managers, many of which can be characterized as “Micro-VC’s”, which I’ll cover in the following narrative. The “What” First, what exactly is a Micro-VC? Perhaps overly simplified, a Micro-VC firm is a firm that raises funds of  <$100MM from 3rd party capital sources, and whose initial investments are primarily at the seed stage. Most Micro-VC funds that have successfully closed are between $10MM-$50MM. The “Why” So why is this happening now? Aside from the broad-based underperformance within the industry, there are several specific reasons behind the Micro-VC boom: 1)   Cost efficiency of startups – With the advent of cloud computing and lower component costs, it’s easier and cheaper to start a tech company than ever (by a factor of 5-10x from 10-12 years ago).  This makes a $25MM Micro-VC fund eminently viable. 2)   Dislocation of economics within legacy firms – Many legacy firms still maintain economic structures where “tenured” partners enjoy a disproportionate...

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