Micro Venture Capital: A Growing Opportunity for Investors

Micro venture capital is a growing opportunity for investors, offering a chance to support innovative startups with smaller investment amounts.

Typically, micro venture capital investments range from $10,000 to $50,000, providing a more accessible entry point for investors.

This model allows investors to diversify their portfolios by backing multiple startups at once, reducing risk and increasing potential returns.

Investors can also benefit from the potential for higher returns, as micro venture capital investments often come with equity stakes in the companies they support.

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Early-stage financing trends are a crucial aspect of micro venture capital. Micro VC firms have significantly increased their early-stage funding participation over the years.

In Q1 2014, early-stage deal and dollars involving micro VC firms globally hit $627M across 242 deals. This marks a notable milestone in the growth of micro VC firms.

Early-stage funding participation by micro VCs has expanded markedly from just a couple years ago. Compared to Q1 2011, micro VC early-stage funding increased 77% while deal activity grew 64%.

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Micro VCs are relatively disengaged, investing small amounts in many early-stage startups.

Their due diligence process is minimal, which can affect the success of the startups in their portfolio.

Micro VCs rarely take board seats or lead investments in their portfolio startups.

Their shareholder agreements are not sophisticated, which can impact the startups' ability to grow and exit.

Startups backed by micro VCs have a lower likelihood of exiting via acquisition or IPO.

Investors portray micro VCs as being relatively hands-off, which can be a concern for startups seeking guidance and support.

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Our research focused on micro VCs, which generally met three criteria: fund size ≤$100M, 80%+ of investments were at the early-stage (seed/Series A), and 10 or more investments since 2011.

We analyzed data from 135 micro VCs, including 212 Capital Partners and 500 Startups, which are just a few examples of the many micro VCs in our study.

The median size of a micro VC fund is $25 million, significantly smaller than the $81 million median size of traditional VC funds.

Ad, sales & marketing tech and BI & analytics are the hottest among micro VCs, making up a significant portion of their investments.

In fact, these sub-industries saw the highest percentage of deals among micro VCs, with 85% of unique company investments by micro VCs since 2011 going towards Internet and mobile sectors.

Internet and mobile dominate micro VC investments, capturing 85% of unique company investments by micro VCs since 2011.

Advertising, Sales & Marketing tech, and Business Intelligence, Analytics & Performance Mgmt are the top sub-industries for micro VC investments within the Internet sector.

The focus on capital efficient technology sectors makes sense for Micro-VCs given the plummeting cost of technology infrastructure and the ability for startups to prove out a business concept with modest amounts of funding.

ff Venture Capital tops the list of investors by follow-on rate of first investments, closely followed by Baseline Ventures and Floodgate Fund. These top 3 micro VCs have shown exceptional ability to shepherd their investments to follow-on capital.

Felicis Ventures and Founder Collective round out the top 5, demonstrating a strong track record of supporting their portfolio companies. The 1st and 10th micro VCs by follow-on rate have a surprisingly small discrepancy of less than 10%. This shows that even the less successful micro VCs have still managed to secure follow-on capital for over 70% of their investments.

There are 135 micro VCs in the analysis, with a median fund size of $25 million, compared to $81 million for traditional VC funds.

Micro VCs typically invest in early-stage startups, with 80% or more of their investments being at the seed or Series A stage.

The top 5 sub-industries for micro VC investments in the internet sector are Advertising, Sales & Marketing tech, Business Intelligence, Analytics & Performance Mgmt, eCommerce marketplaces, and apparel & accessories firms.

Of the most active micro VCs, ff Venture Capital has the highest follow-on rate of first investments, with Baseline Ventures and Floodgate Fund ranking just behind.

The top 10 sub-industries for micro VC investments in the internet and mobile sectors are dominated by enterprise-facing sub-industries, with Gaming and Social ranking highest among mobile sector investments.

Micro VCs tend to invest in capital-efficient technology sectors, such as Ad, sales & marketing tech, and BI & analytics, due to the plummeting cost of technology infrastructure and the ability for startups to prove out a business concept with modest amounts of funding.

Several factors have fueled the growth of micro VCs, including the proliferation of technology, globalization of markets, and the rise of the entrepreneurial economy.

Technology has lowered the barriers to entry for starting a business, giving entrepreneurs more opportunities to bring new ideas to market.

Globalization has created a more level playing field, making it possible for businesses to scale quickly and reach new markets.

The number of micro-funds closed annually has grown from an average of 75 each year between 2006 and 2011, to an average of 320 each year between 2018 and 2021.

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The AUM of micro VC firms has increased from just over $10 billion in 2011 to over $60 billion in 2021.

This growth is driven by several factors, including an increase in LP interest, the rise of new micro VC firms, and the launch of funds focused on early-stage companies.

As more capital flows into the space, we can expect to see even more growth in the coming years.

The rise of micro VC is highly correlated with the rise of seed deals, which have become increasingly attractive to investors due to the opportunity for spectacular returns.

Micro venture capital firms have consistently outperformed their larger counterparts, with return multiples significantly higher for smaller funds. Cambridge Associates data shows this outperformance over 20 years.

Smaller VC firms tend to invest in companies earlier in their development cycle, leaving room for growth. This is a key advantage that larger firms often don't have.

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New and emerging funds are consistently among the top performers, according to the net TVPI of new and developing funds by vintage year. This data suggests that micro VCs are well-positioned for success.

Eight of the ten top-performing venture capital funds have fund sizes of $100 million or less, according to Preqin data. This is a remarkable statistic that highlights the potential of micro VCs.

Smaller firms often have a different focus and strategy than larger firms, which can be a major advantage. They tend to be sector-specific and deeply understand the companies in their domain.

Micro VCs are also more founder-friendly, providing not just capital but also mentorship and resources. This approach can be a major draw for entrepreneurs looking for support.

Speed is another advantage that micro VCs have over larger firms. They can move quickly to support companies that are gaining traction and need capital to scale.

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