As the cost of starting a tech company has gone down, VCs have moved upstream, funding bigger and bigger deals while angels and angel groups have taken up the sub-five million funding space. Meanwhile, accelerators and platforms have also taken a place with funds to jump start companies going through their programs. MicroVCs are venture capital firms with assets under management of less than $100,000,000. That sounds like a pretty big fund to angel investors, but in the big picture venture capital world, these truly are micro venture capital funds.
MicroVCs have taken on a huge role in filling the gap between seed and angel funding and big scale unicorn-track venture funding. If you think about basic fund structure, a $100 million fund will invest about half of committed capital, or $50 million into its first round investments. The fund will want to diversify to twenty or more investments, so you might see an average of $2 million for a first round. Then they’ll have the remaining $50 million to continue investing in the top winners from the portfolio. $2 million is a great amount for a post-angel round, but is far less than the $10 million that an average VC deal is doing today.
The MicroVC area is more understandable if we look at what kind of entities fill this space. There are sub $25 million funds, also known as NanoVC Funds which operate very differently than $100 million funds. Then there are the accelerators which are actually MicroVCs. Also, more and more angel groups are creating funds (Like the Rockies Venture Fund) and are moving upstream a bit to do larger deals. Finally, angel groups are syndicating actively, so they can move into larger and larger deals. Some examples of the power of angel groups leveraging their investments by working in syndicates include Richard Sudek’s work at Tech Coast Angels who syndicated a $10 million raise via syndication and similarly Rockies Venture Club Participated in a Series F syndicate for PharmaJet locally. These are not deals that we would typically expect to see angels playing in. This means that angels, when working together can start filling the space occupied by the MicroVCs. Rather than competing, we’re seeing angels investing alongside MicroVCs at an increasing pace.
There are other considerations, however. MicroVCs will typically hold back half of their fund for follow-ons, while angels are less predictable and many still use a “one and done” approach to their investments. Even with MicroVC follow-on investment of up to $10 million, this is still not enough to propel some companies to the scale they’re shooting for, so they’ll still need to engage with traditional VC once they get big enough.
Angel investors should help startups to figure out their financial strategies so that they can work on building relationships with the right kinds of investors from the beginning so that they don’t paint themselves into a financial corner by working with the wrong investors. Similarly, startups need to understand the goals of any type of VC so that they don’t waste their time barking up the wrong tree.
To learn more about the evolving role of MicroVCs, consider attending the RVC Colorado Capital Conference. It’s coming up November 6-7th in Denver, CO. Visit www.coloradocapitalconference.org for more information on speakers and presenters. This event is on of Colorado’s largest angel and vc investment conferences of the year and there are great networking opportunities. We hope that the audience will come away with an idea about how all these types of capital are evolving and the different strategies that companies can take in choosing who they want to pursue for their capital needs.