How Venture Capital’s new crop of micro-funds exceeds their weight
When Eric Bahn, Elizabeth Yin, and Shiyan Koh decided to launch Hustle Fund in 2017, they felt well positioned to succeed. Friends at Stanford University, they brought the experience of the 500 Startups accelerator, Instagram and NerdWallet, and their approach – writing $ 25,000 checks to startups and doing a due diligence after the fact – seemed be a new twist on traditional venture capital. They were going to have a shock.
“I think as a first-time fund manager we completely underestimated how undifferentiated we were,” Bahn said. Forbes. Nice pitch deck for investing in seeds, they heard. Join the list. To stand out with its second fund now over $ 30 million, Hustle’s partners are very active on Twitter – a social media service Bahn left before the need for self-marketing became evident – by writing discussion threads about holdings and starting a business and generally mixing it up with their peers. And part of that strategy is growing the table stakes for micro-fund investors looking to compete in a capital-flooded venture capital market, with new entrants like Turner’s Banana Capital start-up fund. Novak and Atelier Capital focused on Li Jin’s passion economy, both waves (no coincidence, each has around 70,000 Twitter followers).
For those who take the pulse of the venture capital market from the online discourse, micro VCs seem everywhere. But the data suggests a different story: There isn’t more – it’s just amplified, using specialist approaches and smarter internet distribution to exceed its weight. “For those who are raising now, there is another breed of VC,” says Bahn. We have no choice but to be self-promotional. Gone are the days when you just needed to raise capital and people will come to you.
Micro-funds – defined as vehicles of less than $ 50 million or less than $ 100 million to invest in startups – have best served the industry as a whole in volume, according to PitchBook data first revealed. times in the Midas Touch bulletin. These pools accounted for 51% of funds closed in 2020, compared to 58% of funds closed in 2010. And with mega-funds throwing large sums at private companies, these funds represented only 6% of capital raised overall in 2020, compared to 14% a decade ago.
These figures come as a surprise to the practitioners themselves. “Are you sure there are fewer funds today than there were over 5 years ago?” Ryan Hoover, co-founder of Product Hunt and founder of Weekend Fund, responded in an email. Nate Rodland, general partner of the Elefund micro-fund, says he is also surprised by this, especially when he compares his current investment to his experience across the table raising seed money as the founder of Robinhood in 2013. And to be sure, one of the limitations of PitchBook’s data is that this total does not include the industry’s network of angel investors, which is also experiencing a decline in business, or alternative solutions. small funding like rolling funds or evergreen vehicles.
Micro funds, macro marketers
According to PitchBook analyst Joshua Chao, there are a few possible explanations for the disconnection. The first: a loaded PR playbook that’s more reminiscent of the Miami mayor’s office than the stuffy venture capitalists of yesteryear. This is in part due to the evolving nature of those who support these funds as investors, called limited partners. While large venture capital firms may offer a college endowment or a pension fund like the Texas County and District Retirement System, emerging fund managers are increasingly looking to other venture capitalists, founders. of startups and angel investors as an investor base. “I think micro and seed funds rely heavily on public relations,” Chao said. “It happens through the news cycle that he or she is launching a micro-fund because it’s really essential for raising capital. ”
Unsurprisingly, those supporters are more vocal when a new fund is announced, says Nikhil Basu Trivedi, co-founder of venture capital firm Footwork, which announced a $ 175 million fund in April. “When these funds are announced, these GPs blow up their LPs, ‘We are announcing the company, talking about our launch,’ he says. “It’s the same as entrepreneurs who create businesses that speak to their investors. It’s happening on both sides of our ecosystem, and Twitter’s echo chamber is making it much more public. “
A large online presence is also increasingly important to get noticed by entrepreneurs, as big funds leave sooner, says Chao, noting that multi-billion dollar asset companies like Andreessen Horowitz and Tiger Global will support. now startups in the early stages with their much larger checks. By comparison, a single billion dollar fund was closed throughout 2010.
Another key tactic for micro-funds that can make them more visible is that they specialize in order to stand out. Take AllerFund, which is currently raising a $ 20 million fund to focus on start-ups battling food allergies, or Preface Ventures, a $ 23 million fund that targets enterprise infrastructure companies created by former engineers. Others focus on geography, like TampaBay Ventures, a $ 20 million vehicle for founders in Tampa Bay, Fla., Or Cortado Ventures, a $ 20 million vehicle focused on Oklahoma. And a growing number of funds are focusing on traditionally under-represented founding groups, like Sixty8 Capital, which invests in black entrepreneurs, or XFactor Ventures, a group focused on supporting female CEOs.
“Micro-funds tend to have a very specific idea of what they want to invest in,” Chao explains. “Saying, ‘hey, we just raised a fund focusing on ESG or the new founders in Brazil,’ that gives a bit more news. “
This shift to specialization does more for the industry than just drawing attention. “The positives certainly outweigh the negatives in this case,” he says. “There can never be too much capital. Not all startups are the next Stripe or Uber; they may not have this elevated vision. They may not be able to attract capital from larger venture capital firms. Specific funds for women founders and people of color, in particular, target these startups to put them on a level playing field and equalize much of the capital.
And specialized micro-VCs can provide expertise and funding to startups in areas that are not traditional hotbeds of interest to investors. At Lever VC, Nick Cooney has spent over 15 years in the alternative protein market, watching generalist VCs burn down support companies without expertise in the complex business dynamics and science of the category. In 2018, he co-founded Lever with Lawrence Chu, the former founder and president of BlackPine Private Equity; they track 1,600 alternative protein startups and have an in-house scientist to do due diligence on opportunities. Lever is more than happy, he says, to share the flow of transactions and his expertise with generalist co-investors as businesses grow.
“In the field of cultured meat, if an investor looks at a particular company that they have read in the media, they will hear how that company represents their benefits and their strategy,” Cooney said. “Unless they understand what all the other cultured meat companies are doing, it’s hard to assess that claim. “
And at the FemHealth Ventures fund focused on women’s health, co-founder Maneesha Ghiya says she works to support businesses that go beyond innovations related to OB-GYN. A 20-year investment veteran at ExSight Ventures and Highline Capital, Ghiya started FemHealth Ventures with Noraan Sadik at the end of 2020. “When I speak with the founders, they are thrilled because they say, ‘We are having a good game. from our presentations to saying what the category is and how it is treated today, “and for us they can skip it all,” she said. “We can recognize companies and assess them more effectively and efficiently. ”
Such expertise in the field will also generally be welcomed by other investors. At Bowery Capital, an enterprise software-focused company founder and managing partner Mike Brown says the company will welcome, or even seek, specialists to complete a round of funding. He quotes Klir, a Canadian startup that monitors compliance data for the water service industry. While Bowery may offer advice to Klir founders on starting a B2B business, the company’s staff are not experts in water systems or utilities, Brown notes. So in Klir’s $ 3.1 million roundtable that was raised last November, Bowery sought out several government contracting and utility management specialists to partner with the deal. “I find it hard to think that five to ten years ago I would be able to find these people,” he says.
So while venture capital micro-funds are not as prolific as they seem, many in the venture capital industry would like more. In a way, startups themselves take advantage of many of the same tactics as the companies they support to make a splash. While being the loudest fund in the market isn’t the best investment strategy in and of itself, no one seems keen to turn the volume down. “It’s so exciting, I think, in large part because the social contract is evolving between founders and their investors,” says Bahn. “About ten years ago, I said venture capital was much more like a commodity. Now that more and more operators are entering the mix as emerging managers, the value expectations of founders have changed. It’s great to see a new diversity of theses.