Just over a year ago, I posted a blog post about the state of the “Micro-VC” market. As a refresher, Micro-VC firms are venture firms that typically have the following characteristics: Primarily initially invest at the seed stage. Invest on behalf of 3rd party Limited Partners. Most commonly have fund sizes that are sub-$50MM. I’m not a huge fan of the Micro-VC moniker but will use it here for lack of a better term. At any rate, I’ve dedicated much of the last three years closely observing this end of the Venture Capital barbell, and it’s been fascinating study. While I anticipated major growth in this area of the market in 2011, I definitely underestimated the velocity and magnitude. In hindsight, it’s easy to see the why such mass proliferation has occurred. Viability of small fund sizes given current capital efficiency of start-ups. Low barriers of entry for Micro-VC funds entering the market. Unlike larger funds who rely on institutional capital (Pensions/Endowments), Micro-VC funds can be raised if a manager has a deep rolodex of High Net Worth individuals and Family offices. Funding gap between Angel funding and traditional Venture Capital. Renewed LP interest into Venture Capital sparked by the bull market within tech (note that $16B was raised by VC in 1H 2014, or 1.25X of what was raised in all of 2010). According to CB insights, there are approximately 135 Micro-VC firms that are actively investing today. I’d estimate there are an additional 40-50 freshman funds that are in active fundraise mode. In my seat at First Republic, I’ve been fortunate enough to have met over 125 Micro-VC managers over the past 24 months. Here are a few trends that I’ve observed within the Micro-VC market: Continued maturation of the industry; Successful 1st generation Micro-VC’s are raising significantly larger fund vehicles: The challenge for many seed stage funds is managing fund sizes that typically aren’t large enough to take full advantage of pro-rata follow on rights (and sometimes super pro-rata grants), an important element when optimizing for fund performance. Many top 1st generation Micro-VC’s have significant increased fund sizes over the past 1-2 fund cycles to enable full pro-rata participation with appropriate opportunities. Felicis ($96MM), SoftTech ($85MM), Floodgate ($76MM), and Data Collective ($125MM+) are recent examples of this. I’m expecting other top Micro-VC managers continue creeping toward $75MM-$100MM funds in the coming years. Blurred lines within seed fundraising: In the past, a clear line of demarcation was present between Seed rounds and Series A rounds. This is simply no longer the case. In today’s world, Seed financing has many dimensions and stages – The team at Bullpen Capital was 100% correct when they stated that seed is a process vs. a singular event. To note, I’ve...
Read More
