A couple of years ago, the team at Bullpen Capital astutely observed that seed round financing had evolved from a single event to a multi-stage, continuous process. In general terms this meant that unlike in previous years, companies often needed to raise several seed rounds before closing a traditional A round. Terms such as Pre-seed and Post-seed became parts of mainstream vernacular, and each point of the seed process exhibited unique investor and company profile characteristics. The reason for this shift could be largely explained through the breadth and diversity of seed stage funding options that had become available to entrepreneurs — Angels, traditional venture firms, platforms, and seed firms of all sizes presented themselves as viable sources of capital to companies seeking seed financing. Analogous to the increased complexity of seed financing market is the now extremely intricate nature of the Micro-VC landscape. As I’ve written about extensively in the past, the rapid growth in the number of new seed stage focused Micro-VC firms over the past few years has been nothing short of staggering, outpacing even the most aggressive numbers that some within the industry have prognosticated. The chart below outlines the growth of Micro-VC: * Using CB Insights and personal tracking data A confluence of factors has driven this growth, including: · Increased emphasis by LP’s in investing in smaller, emerging venture firms. · Continued cost efficiency for very early stage startups, leading to record company formation #’s. · Compelling data that evidences superior returns for emerging funds. · Glamorization of the VC industry, leading to a desire for many to start venture franchises. · Strong interim performance data buoyed by dramatic mark ups. · Ubiquity of technology solutions that now exists across every major industry vertical. Up until recently, I’ve conversationally grouped the 300+ firms together in the broad bucket of Micro-VC. Similar to the aforementioned shift in seed financing, defining Micro-VC as a singular and heterogeneous entity simply no longer serves as a useful representation of the rapidly maturing market. For entrepreneurs seeking to raise seed capital from these firms, it’s an incredibly importance nuance to understand prior to fundraising. As I view the landscape today, the Micro-VC market is distinctly trifurcated, with three clear groups of firms present. Proof of concept funds With the sheer explosion of firms mentioned above, the bar for raising capital from institutional Limited Partners (primarily endowments, large family offices, and Fund of Funds) has become increasingly difficult for new entrants. Absent a long and successful institutional track record of investing, most new managers must demonstrate the ability to perform as an institutional investor under the firm’s thesis prior to receiving allocations from sophisticated institutional LP’s....
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