Small VC firms making waves

The number of small venture capital funds being raised and deals being struck has been steadily increasing since 2008, but they face major competition from more lucrative funds with teeth.

PitchBook data presented by Forbes suggests that Micro VC Funds (and their little cousin, Nano VCs) made up 51% of funds closed in 2020, down from 58% of funds closed in 2010, and due to the massive size of most blue-chip VCs those deals only represented 6% of capital raised overall in 2020 compared to 14% a decade before. 

Like the startups looking to be acquired, Micro VCs need to find their niche, make a splash online, and network like crazy with early-stage companies in order to be noticed. Though the overall market share of Micro Venture Funds has declined in recent years, there are more funds than ever. 

Despite some foreseeable challenges ahead with a trending decline in seed-stage deals and pipeline issues, the appearance of new small, differentiated funds isn’t slowing down.

The Micro VC Landscape in 2021

So how many Micro VC firms are there?

Before we get started, it’s important to note the difference in terminology for small VC firms: Micro VCs vs. Nano VCs. Nano VC firms are the even smaller cousin to Micro VCs – although many people lump both under the title of Micro VC Firm. 

A Nano VC typically raises around $15m – $25m, and sometimes even less, whereas a Micro VC firm will raise anywhere between $25m and $100m.

Back in 2018, Crunchbase helpfully charted the growth of both Nano VC firms and Micro VC firms in the U.S. over the previous decade. Both rose at a steady pace between 2008 and 2018, driven by a glut of first-time fund managers entering the market.

Number of US Nano VC Firms 2008-2018

Image Source: Crunchbase News

 

Number of US Micro VC Firms 2008-2018

Image Source: Crunchbase News

This trend has only accelerated in recent years.

What Micros Are Specializing In

Here are some industry betting trends by Micro VCs compiled by CB Insights:

  • At the sector level, Internet and mobile dominate micro VC investments – capturing 85% of unique company investments by micro VCs since 2011.
  • Within the Internet sector, Advertising, Sales & Marketing tech, and Business Intelligence, Analytics & Performance Mgmt saw the highest percentage of deals among sub-industries.
  • eCommerce marketplaces and apparel & accessories firms also ranked highly, with ed-tech rounding out the top 5 most popular markets for micro VC investments over the period.  The focus on capital-efficient technology sectors makes sense for Micro-VCs but doesn’t translate as well to more capital-intensive areas such as life sciences (pharma, biotech) and cleantech (renewable energy, batteries, etc).
  • While enterprise-facing sub-industries were the top places for internet bets by micro VCs, Gaming and Social ranked highest among micro VC investments into the mobile sector.

Notable lucrative Micro VC deals include SV Angels’ investment in Dropbox and Lowercase Capital’s investment in Uber. Of course, not every fund is going to be able to back a Silicon Valley unicorn, and there are some industry trends Micro VCs need to keep an eye on.

Micro VCs Are Susceptible to a Slow Down in Early-stage Funding and Deal Flow

Due to their smaller nature, Micro VCs typically rely on early seed funding for startups, but there is data suggesting that seed-stage deals are declining:

“With seed up massively between 2006–2014 and A and B rounds relatively flat what you see is a widening of the funnel going into traditional venture. This is why many VCs are waiting and letting deals mature a bit before leaning into rounds. Traditional VCs have raised larger funds that allow them to pay slightly higher prices and still hit preferred ownership sizes. And when seed deals have nowhere to go you end up with “seed extensions” where seed funds and angels are buying an extra 6–12 months of runway to try and reach a phase that can attract traditional venture.”

Major players driving up valuations and seed-stage deals decreasing seems to paint a dire picture for young funds’ pipelines. That being said, the Micro VC value proposition has always been in their specialization. Investors get excited participating in a sector they’re passionate about, and this specialization can give them an edge when bidding against larger competitors.

Industry-Specific VCs

Specializing in a core business type makes young VCs attractive as thought leaders within a specific space. Some examples include:

  • AllerFund: Dedicated to driving social impact for the food allergy community.
  • FemHealth Ventures: Seeks to invest in women’s health by targeting conditions that affect only women.
  • Lever VC: Makes early-stage investments in alternative protein companies.
  • Preface Ventures: Early stage investments for founders building the frontier of enterprise infrastructure and software.

Geographic Specific VCs

With Silicon Valley being largely oversaturated, many young VCs look to tackle target companies in underrepresented geographic markets. Some examples include Tampa Bay Ventures in Tampa Bay, Florida, and Cortado Ventures in Oklahoma.

Venture Capital Focusing on Representation

Many young Venture Capitalists and Angel Investors are focused on investing in underrepresented groups in American business. Some examples include:

  • Sixty8 Capital: Sixty8 Capital is shining a light on undercapitalized founders, those who have encountered barriers due to race, gender, sexual orientation, or proximity. 
  • XFactor Ventures: Invests exclusively in female-led businesses.

Beyond their expertise, Micro VCs are also incredibly nimble when exercising due diligence to be able to beat competitors to the punch while still making informed decisions and are often able to provide more energy and resources to the startups they invest in. Many young VCs also team up with larger VC firms when those larger firms are looking to diversify their investor base.

The fact is that a small VC can not afford to be a generalist, but being a specialist opens up many opportunities. As the younger generations enter more into the investment pool, having a focus on helping change the world for the better by using capital will become ever more important – and this is where the Micro VC truly shines.