Exploring the Surge of Micro VCs: The New Frontier of Startup Investment

n recent years, the appeal of micro VCs has surged. They have been gaining popularity as a new “breed” of venture capitalists. According to Crunchbase, the number of micro VCs has risen by a remarkable 120%, and around 58% of micro VCs are located in the US.

Micro VCs represent smaller firms with less capital and have a more hands-on investment approach than traditional VCs. They are an important source of funding for startups that don’t meet the criteria for securing funding from traditional VCs. Since micro VCs have less money than big VC firms, they target seed-stage startups that are too small for larger VC firms to consider.

Traditional VCs vs. Micro VCs

Firstly, let’s do a quick recap on venture capital. Venture capital serves as a form of private equity investment for funding early-stage companies with substantial growth potential. Venture capitalists look for startups that have the potential for significant returns, either through an initial public offering (IPO) or a strategic sale. This type of investment is a critical part of the startup world, since VCs provide funding, support, and guidance.

However, unlike traditional VCs, micro VCs are firmly focused on investing in early-stage startups. This allows them to take more risk as they invest smaller sums of capital into a larger number of startups.

In 2022, a whopping 70% of investments by micro VCs went into backing seed and early-stage startups, according to data from the National Venture Capital Association. This surge of capital in the early phases of startup growth plays a crucial role for supporting innovation and entrepreneurs during the early days of building a startup, helping them turn fledgling ideas into viable businesses.

Advantages of micro VC firms and why founders are choosing them

Many startup founders look for investment from micro VCs. This is because micro VCs make decisions quickly and they have lower overhead costs compared to traditional VCs. meaning they can allocate a higher proportion of their capital directly into supporting their portfolio companies.

Micro VCs also tend to be highly involved with portfolio companies. They collaborate with CEOs and management teams on a daily basis, providing advice and mentorship.

The majority of active micro-VCs are founded by experienced founders and ex-Chief Executive Officers (CXOs) from startups as well as former VC experts. This means they can provide assistance, guidance, and business solutions to these young entrepreneurs through their own professional networks.

Why micro VCs are on the rise

Micro venture capital funds are expected to grow rapidly over the next five years due to rising demand in industries such as information technology, retail, consumer goods, manufacturing, and others.

There’s several reasons for that, let’s take a look.

Increasing startup activity:

According to this report on the state of micro VC funds, the rise of entrepreneurship and the growing number of startups across various industries have increased the demand for early-stage funding. Micro VCs play an important role in providing companies with funding for growth and development.

Technological advancements:

Technology is advancing at a rapid pace, which has lowered the barrier to entry for building a tech company. Micro VCs see the potential in investing in companies that may disrupt traditional markets.

A better regulatory environment:

Many regions have introduced initiatives to encourage entrepreneurship, innovation, and investment in early-stage companies.

Breaking money barriers:

With a lower capital threshold, more people can jump into the venture capital game through micro VCs. It opens the door to back all sorts of ideas and innovations, which is great news for everyone since we get a more interesting mix of startups, making the whole startup scene richer and more diverse.

Risk tolerance:

Micro VCs are risk-taking champs compared to the big players. They're not afraid to put their money on untested, fresh ideas. The increased appetite for risk supports innovation and helps startups that might struggle to get cash from other places.

Agility in a dynamic market:

While big VC firms might be tied up in red tape, micro VCs can pivot quickly with the changing winds of the market. They spot new opportunities and swoop in, giving startups the support they need in fast-paced industries.

Regional and worldwide development:

Last but not least, micro VCs are supporting both local and international startups, especially since the rise of rmeote work after COVID. They’re boosting startup scenes in different regions by helping out local economies and creating industry hubs in different spots around the world.

How does a micro VC fund work?

Micro VC funds have several key partners who make decisions on which companies to invest in. They are typically structured as limited partnerships, where fund managers are assigned as limited partners. Fund managers typically come from entrepreneurial or investment backgrounds, and use their experience to choose promising startups. They raise money from investors who want to support innovative companies and of course, make a significant return. This includes angel investors, high-net-worth individuals or family offices.

Micro VCs typically invest anywhere between $500,000 - $1 million per company, although they may occasionally put down a larger investment. Funds tend to range between $10 million to $50 million, and fund managers specialize in specific sectors or geographic regions, where they can use their expertise and build a network.

In contrast to conventional venture capital firms, micro VC funds operate on a shorter return timeframe, and look to make an exit within 5-7 years. They usually take a smaller equity stake in the funded companies compared to traditional VCs.

Micro VCs mostly invest in early-stage companies operating in sectors such as Software as a Service (SaaS), Artificial Intelligence (AI), Banking, Financial Services, and Insurance (BFSI), healthcare, life sciences, consumer applications and platforms, e-commerce, and listing platforms. Approximately 60% of micro VC investments in 2020 were made in companies within these sectors.

Lyft is one notable example of a successful startup backed by a micro VC. It’s now become one of the most widely-used ridesharing services. Upon its 2012 launch, Lyft received early-stage support from prominent micro VC firms, including Mayfield Fund.

Unicorns funded by Micro VCs

Lyft - K9 Ventures
Robinhood - Elefund
Coinbase - Initialized Capital (which was investing out of a $7 million fund at the time)
Flexport - Anorak Ventures

Key market trends for micro VCs

According to this report, there are 3 key market trends to pay attention to:

1. An increasing emphasis on diversity and conclusion

Micro VCs are focusing on supporting diverse founders and leadership teams to help shape a more inclusive startup ecosystem.

2. Impact investing

Many fund managers are also looking to prioritize investments in startups that have a positive social and environmental impact.

3. The rise of remote investing

Finally, since COVID-19, remote investing is on the rise, which has opened up new opportunities for founders and funds to facilitate a more globalized investment landscape.

What factors do micro VC funds consider before investing?

Funding stage:

Micro VCs invest in very early-stage startups, so startups looking to raise pre-seed to pre-Series A funding. They may participate in follow-on rounds in Series A and above.

Conditional funding:

Micro VCs typically provide funding to startups during the post-MVP (minimum viable product) stage. They may issue an initial investment followed by subsequent contributions, or opt for a periodic funding approach, such as monthly or quarterly cheques, actively participating in the growth strategy of the supported ventures.

Sector:

Some micro VCs invest in one specific sector, and others across sectors, depending on the fund managers’ expertise.

Number of deals:

Micro VCs can invest in 50 to 100 deals every year.

Deal size:

They invest anywhere between $500,000 to $1 million. Traditional VC firms invest much larger checks, such as $50 million or even up to $1 billion.

How can you become a micro VC?

First things first, scope out those early-stage startups with killer growth potential and a solid business plan – that's where you want to put your money.

Once you've spotted some promising picks, crunch some numbers to figure out your risk tolerance, expected returns, and how you plan to cash out. Think about how much money you're ready to throw in and when you're looking to make your exit.

Networking - a big one. Make friends with entrepreneurs, join a crew of other micro-VCs or hop into an accelerator program.

And remember: stay in the loop on the legal stuff and due diligence. Keep an eye on changes in securities laws, tax perks, and any other rules that might come into play.

Key Players in the Global Micro VC Market

The following data has been sourced via Eqvista.

Fund Size – $0-25M

Fund size: $25M-$50M

112.VC | SF | Enterprise
212 Capital | Turkey | Multi-sector
Aligned Partners | SF | Enterprise
Amplify Partners | SF | Enterprise
Aperture Ventures | NY | Healthcare
Arafura Ventures | sf | Multi-Sector
Arena Ventures | LA | Multi-Sector
Birchmere Ventures | PA | Multi-sector
Bluepointe Ventures | SF | Multi Sector
Blume Ventures | India | Multi-sector
Bowery Capital | NY | Multi-sector
Bullpen Capital | SF | Multi-sector
Caffeineited Capital | SF | Multi-sector
Cervin Ventures | SF | Enterprise
Chicago Ventures | IL | Multi-sector
Clear Venture Partners | SF | Enterprise
Cloud Apps Capital Partners | SF | Enterprise
Collaborative Fund | LA | Multi-sector
Contour Venture Partners | NY | Multi-sector
Core Innnovation Capital | LA | Multi-sector
CrunchFund | SF | Multi-sector
Crystal Tech Fund | VA | Multi-sector
Cultivation Capital | MO | Multi-sector
Dace Ventures | Boston | Multi-sector
Data Point Capital | Boston | Multi-sector
Deep Fork Capital | SF/NY | Multi-sector
Draper Associates | SF | Multi-sector
Ecosystem Integrity | SF | Cleantech
Engineering Capital | SF | Enterprise
Expansive Ventures | SF | Multi-sector
FF Venture Capital | NY | Multi-sector
Flywheel Ventures | NM | Multi-sector
Freestyle Capital | SF | Multi-sector
Frost Data Capital | LA | Big Data
Frost Venture Partners | LA | Multi-sector
High Line Venture Partners | NY | Multi-sector
Hoxton Ventures | UK | Multi-sector
Illuminate Ventures | SF | Enterprise
Initialized Capital | NY | Multi-sector
Inversur | Chile | Multi-sector
K9 Ventures | SF | Multi-sector
Karl

Final thoughts

The number of micro-funds that have been established in the United States has increased fourfold over the past decade, and this is a positive thing for startups and society as a whole. They offer advantages that traditional VC don’t, and are also strategically positioned to help startups grow and scale.

They are transforming early-stage venture capital, and attracting a new breed of LPs that are ready to cater to this new sector of VC. Hopefully, as more micro VC funds are created, we will see more diversity in the ideas and founders getting funded.

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Exploring the Surge of Micro VCs: The New Frontier of Startup Investment

Traditional VCs vs. Micro VCs

Advantages of micro VC firms and why founders are choosing them

Why micro VCs are on the rise

How does a micro VC fund work?

Key market trends for micro VCs

What factors do micro VC funds consider before investing?

How can you become a micro VC?

Key Players in the Global Micro VC Market

Fund Size – $0-25M

Fund size: $25M-$50M

Final thoughts

Interested in the full research paper?

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