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:
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. As a result, nearly 50% of new Micro-VC firms formed now are proof of concept funds.
Typical characteristics of these funds include the following (of course, there are exceptions):
· Typical fund sizes of $5MM-$15MM.
· Initial check sizes of $200K-$500K.
· Rarely will look to lead a round, but rather will seek the role of an active syndicate partner.
· LP base is primarily High Net Worth individuals and family offices.
· 1–2 partners (typically 1).
· Investor profile is typically that of a former successful angel investor, operator, or someone that previously worked at another venture firm, but may not yet own a relevant attributable track record robust enough for institutional investors.
· May be a firm that has a novel or very specific thematic hypothesis that requires demonstrated execution.
· Fund size often serves a limiter of pro-rata follow on capacity. In recent years, this has led to exponential growth of Special Purpose Vehicles (SPV’s).
Similar to companies at the pre-seed level, the key for these firms to reach the next funding event (Fund II) is demonstrating tangible traction and sustainable differentiation.
Traditional Micro-VC firms
Roughly five years ago, the term Super Angel was retired for describing this class and replaced with the more appropriate Micro-VC moniker. For the most part, Micro-VC’s raising in the 2010–2012 had similar characteristics related to investment thesis (filling the gap between angel & A rounds), size of fund, and check sizes. Today, just over 1/3 of Micro-VC managers fall into this category.
· Fund sizes of $30MM-$50MM+.
· Initial check sizes of $500K-$1MM.
· Frequently will serve in role of lead investor in seed rounds.
· 1–3 partners.
· Investor profile is someone that has achieved success as an institutional investor elsewhere (i.e. PivotNorth, Cowboy, Streamlined VC, Resolute VC, etc.), or someone that successfully executed with a previous proof of concept fund (SoftTech VC, Maven Ventures, etc.).
· Often will take a board seat, which often is ceded to a Series A investor in the future as appropriate.
· LP’s are a mix of institutional and non-institutional LP’s. Institutional LP’s usually comprise 50–70% of the LP base.
Some firms in this category will remain in this peer group, while others will evolve to the stage below.
Full stack Micro-VC firms
While I continue to use the term Micro-VC regularly, the truth is that many in the industry find it directionally inaccurate and in some cases, derogatory. These objections certainly have some merit given the nature of how these firms operate, and the amount of capital deployed per partner. From my perspective many Micro-VC firms are essentially full stack venture firms that simply have maintained a focus on seed stage financing (similarly, many late seed rounds are really A rounds). Approximately 10% of the Micro-VC universe referenced above falls into this group.
· Fund sizes of $75MM-$150MM.
· Initial check sizes of up to $4MM, although most commonly $1MM-$2MM.
· Nearly always lead/price rounds.
· Frequently invest later in the seed process.
· 2–4 partners, typically 2–3.
· Follow-on ability extends well past just next round of financing.
· Investor profile is typically that of someone that had success as an institutional firm, whether at another venture firm, or having gone through one or more of the stages above. Examples of this include Data Collective, Floodgate, Amplify, A capital, and Felicis Ventures.
· Nearly always take a Board Seat.
· Heavy concentration of institutional LP’s.
Many firms in the grouping will continue to raise funds in this size range, while others may follow the path of firms such as True Ventures or First Round Capital and continue to scale their franchises further.
It’s certainly been a very eventful few years within Micro-VC, and one that certainly bears a close watch over the coming years.