August 1, 2018 | 4-minute read (730 words)
Any company that wants to grow needs funding – whether it’s the eclectic neighborhood bakery that wants to open a second location across town or your favorite social media app. The bakery owners could probably explore loans or perhaps they’ve saved over the years, but you’re trying to disrupt an industry, share innovative technology, change consumer behavior, change the world. Your path will look much different.
Chances are, you already have a targeted list of VC firms and angel investors who invest in your space, and we’ve shared our thoughts on the subject in the past. There is another option, and it doesn’t require your founding team to sell their kidneys. Meet the micro venture capital fund (Micro VC).
What is Micro VC?
Exactly like it sounds – a Micro VC fund is a smaller version of a traditional VC fund. Sometimes they are referred to as “seed stage funds.” The generally accepted characteristics of a Micro VC funds are:
The Micro VCs that we’ve gotten to know at Early Growth Financial Services are all very narrow. They don’t have the resources to invest broadly. For example, a venture capital firm may focus on B2B companies or social good companies, whereas a Micro VC might focus on B2B SaaS companies in only two regions that are focused on social good. Very narrow.
The blog world also paints the micro venture capitalist investor as extremely selective. In an Xconomy piece, WilmerHale partner Glenn Luinenburg used the phrase “an experienced and discriminating bunch,” – discriminating meaning they want to see how a product works, proof of a strong support team, evidence of product fit in a large market, and you guessed it, traction.
This is where, apart from size, micro venture capital firms from traditional VCs, who tend to take more risk (hence the term, venture). Micro venture capital specialists really want to lean on their areas of expertise; many of them being successful entrepreneurs and startup founders or partners themselves. Yet, they still focus on investing in the early stages of companies, because they know their money will make more of a difference at that point. These managers also may be using the fund as a proof point to raise a larger fund. Usually, entrepreneurs and investors meet at various micro venture capital events.
- The fund is under $100M (though many are less than $50M)
- Investments range from $25K to $500K
- Initial investment at the seed stage
Micro VCs are on the rise
VC/tech advisor Samir Kaji is currently tracking over 500 Micro-VCs. That number has doubled in a short time - just a few years, in fact. We’re seeing this growth trend with various corporate arms entering the ecosystem, as well. Technology seems to be the main driver for micro venture capital, and more broadly, the acceptance that tech is the future.
CB Insights has been following this trend since at least 2014, and last year dubbed it, “an explosion of Micro VCs.” The graph below from Pitch Book demonstrates the increased number of funds under $50M that closed in the past nine years. Remember a Micro VC can be as large as $100M, so this isn’t reflective of all deals. However, the increase in smaller funds is directly correlated to the increase in Micro VCs.
In the past few years, the number of funds has actually gotten smaller in this range, but the fund sizes are growing (meaning many have outgrown this range or have passed $100M altogether).
Target Micro-VCs in your fundraising
Our CEO Anurag Pal said, “In the past 5-10 years, we’ve been seeing more and more tech leaders exiting companies and staying active in the community. They’re using the money they made in tech to become investors, who tend to invest in tech.” These leaders aren’t exclusively Micro VCs, but there’s a clear correlation to the recent rise.
This shift is essentially helping democratize venture capital – creating a bigger pool and more deals, which means more opportunities for you. There’s no one right path for scaling your business. Assess your needs, decide what will work for you, and be sure to include Micro VCs into your potential strategy.
If you want to learn more about how you can capitalize on Micro VCs, check out this article written by us last year for Tech.co.