Over the last 3 days I had a chance to meet with 12 Micro VC funds with 1 or 2 general partners and less than $50 Million in capital raised.
Most of these funds were of 2013 or later vintage and many were less than a year old.
Seed funds and Micro VC’s are looking like startups themselves and that’s a good thing.
They are adopting lean methodology (1 or 2 partners alone, not a big staff, no admins, doing all scouting themselves), hustling to get their initial customers (investors and entrepreneurs), shipping an alpha version ($1 to $5 Million first fund with only friends and family), building traction and community (Blogging, networking, making investments) and then raising their seed round – a larger fund within a year for $5 – $25 Million) and looking for a way to differentiate their offering (focused investment thesis).
The new valley startup is the early stage seed investment firm.
There are over 250 Micro VC funds or super angels according to CB Insights. Most have under $50 million in investment dollars. In fact based on my cursory analysis, most are entrepreneurs who have decided to “spread their risk” among multiple startups than do one startup alone.
What are the steps to be a seed investment fund manager?
- Raise capital from high net worth individuals or be rich yourself to start investing. Over 90% of these investors are entrepreneurs themselves. Except for 3 of the 12 I met, most did not have a “big exit” or success under their belt. Your first fund might even be less than $1 Million (alpha prototype version). Then your follow on funds can be $5 and then onwards from there.
- Pick a niche or focus area and start to become an expert at it. There are Micro VC funds focused just on helping entrepreneurs who have a H1B visa, another set of folks just targeting startups in kitchen tech within food technology.
- Setup a fund manager (legal, finance), banking and website.
- Build relationships with other prominent investors or early stage angels who are doing deals to help you get “cut into deals”.
- Invest and help the entrepreneurs as much as you can.
Most of these seed investors are entrepreneurs themselves, so they are scrappy, hustle oriented and founders themselves, so they tend to keep their costs low, focus on a few investments and from the entrepreneurs I have spoken to so far, help the entrepreneur at the early stage, a lot more than your traditional VC firm with partners on the board.
In some cases the investor can be a part of your team, as an extended sales, BD or marketing expert, pattern matching from their other investments and helping you learn from other’s mistakes.
A decade ago or more, raising funds was pretty difficult, so if you were a VC fund, raising capital was the biggest challenge you faced. If you raised capital, then deploying that capital and getting good deal flow was relatively easy. Now, though given that there are so many Micro VC funds, even getting good quality deal flow is a challenge.
Most of the Micro VC funds tell me that their network of folks they have worked with before, entrepreneurs, other investors and angels are their best source of deals, and service providers (such as lawyers, accountants, etc.) do offer some deals, but not as high quality. They also are consistent in their thinking that “cold” inquiries are the “most irrelevant” source of companies to invest in.
To attract quality deal flow beyond referrals, many are adopting strategies to “build their brand” by blogging, podcasting, startup videos, running networking events, extensive PR, building a network of customers and partners for “introductions” to startups. Most though, are till trying to figure out how to get more high quality deals that they should be in.
If you are an entrepreneur looking to raise money from a Micro VC fund, the biggest challenge will be that the follow-on funding from these funds for pro-rata will be largely nonexistent to highly unlikely.
Many funds are so small that they have to spread the risk among enough startups, so they keep very little cash for follow on rounds (or dry powder). Many do claim that they will raise another fund within a year or two just to do follow on rounds, but that remains to be seen.