Samir Kaji at First Republic has been following seed stage investing for a while now. I have written before about the rise in Micro VC funds, which are typically <$100 Million funds run by a solo General partner or two partners. Many angel funds are in the sub $25 Million range, as well.
Over the last 10 years (since Jeff started Soft Tech Venture Capital) there are over 250 Micro VC firms that have been started. I had a chance to talk to Samir yesterday and asked him 5 questions to explain and understand this phenomena. Here is an edited version of our conference call.
1. What are Micro VC funds and why are they a thing now?
As the cost of the software startup drops, the amount of money required at the early stage has reduced as well. At the same time the number of startups has increased and so has the number of angel investors. Micro VC funds are deploying smaller capital at the earlier stages than traditional Venture firms. Typically 10 years ago, the VC fund would be $100 – $200 Million and invest in 20-30 companies, between $2 Million to $20 Million per company. Now the larger funds are deploying $5 Million to $50 Million as their fund sizes have increased to $500M to $1 Billion.
2. How many of these Micro VC funds are there are where are they located?
Close to 40% of the 250+ Micro VC funds are in the Silicon Valley said Samir. 25% of them, or about 60 are in Asia and Latin America. About 30 are in Europe (largely London and Germany) and the rest in Chicago, Boston and New York.
3. What value does a Micro VC provide besides cash?
Depending on the Micro VC, expertise and connections are the most important things they provide besides cash. A good Micro VC is already thinking about your next round and has built a good network of connections to help you with follow on funding. Since most Micro-VC funds are small by nature, many often cannot exercise their full pro-rata in follow on financing rounds, and almost certainly do not have the ability to serve as a lead in the next round of capital. Instead, they have a well curated list of investors who they have worked with before to help introduce startups to their network. Expertise varies by investor, but most will be able to help you hire good people and also help you with Go To Market, Pitch preparation and some early business development.
4. When and how should entrepreneurs approach Micro VC?
Typically after you have a little traction is when most Micro VC’s will be interested is what I learned. Most want to see some validation of your startup. Some of them do work with Accelerator programs, but I have seen many of them working their network of entrepreneurs to get introductions to other potential entrepreneurs.
5. Will there be more or fewer Micro VC’s in a few years? Where is this headed?
Micro VC’s are here to stay, said Samir. In fact, he sees more of them will emerge in the next few years. The main reasons are that there are enough entrepreneurs who have had some modicum of success and dont want to do a startup again, but want to use their expertise, connections and network to help diversify their risk and give back by helping other entrepreneurs. So, they will in fact continue to exist. He did say that the Micro VC’s with more tenure will likely move “up market” and start to raise larger funds and become the next generation VC funds, while newer, smaller GP’s will start to become Micro VC funds.