Some of the most successful companies in the world today started from the bottom, but have skyrocketed their sales and popularity thanks to many venture capital (VC) investors. Today’s VC industry is changing in bold ways, with its markets reporting various accounts of growth especially in 2017 and onward. Startups and their investor VCs revealed increases not just in money invested, but also growth in public interest. However, the most impressive change is how micro VCs are taking over.
Famous brands like Uber, Snapchat, and SpaceX have put their names on the map thanks to generous investments from various VCs of all sizes. While there are giant names like Sequoia, Andreessen Horowitz, and Lowercase Capital leading the ranks, micro VCs– venture capital investors with assets of less than $100,000,000 – are disrupting the industry in a big way. While the amount seems like a big fund, micro VCs often fund between $500,000 to $2 million, and the money is usually spread through time instead of funding in just one go. They primarily focus on pre-seed and seed stages, often participating alongside other angel funds and VCs. At times, they also invest on behalf of third party limited partnerships as well.
American VCs on Record Highs
The 2017 PitchBook-NVCA Venture Monitor report revealed many positive aspects regarding today’s VC climate. For one, they found that VC deals get bigger and bigger each year. For example, they noticed that in 2017, the early stage deal has a median of $6.1 million, a rate that surpasses the median late-stage deal of $6 million from back in 2010.
In addition, the report also showed there are massive VC investments in unicorn deals. A notable one is when popular home renting service Airbnb raised a billion dollar round in the second quarter of 2017. Even more impressive was the $4.4 billion WeWork raised in the last quarter.
Bigger VCs are also moving on to bigger deals and investing more money, especially towards later stage investments, moving them into a realm similar to how private equities work. It was a strong 2017 for late-stage deals with over $36 billion invested in late-stage companies backed by VCs. With these remarkable numbers, it then comes as no surprise that valuations have increased especially in late-stage rounds.
Because of this, micro VCs are becoming the norm. In the United States alone, there are already about 236 micro VCs present, and about half of them are located in the world-famous Silicon Valley area of California. This rise of micro VCs may be attributed to the fact that former micro VCs have grown both in team size and in funding amounts.
Experts predict that newer micro VCs are most likely to succeed, and a recent study by Cambridge Associates supports findings from the 2012 Kauffman Foundation report on VC investing: new or emerging funds account for 40-70% of created value in the top 100 deals from the past decade.
In the US, the most popular industry VC investors capitalize on is software, a trend that has been around for years. Other industries are on the same maintained path as revealed in the same report. While software took over about 38% of overall US VC activity, pharma & biotechnology follows with about 10%. Other sectors with steady figures include information technology (IT) hardware, media, energy, commercial services, consumer goods and recreation, HC devices & supplies, and HC services & systems.
Interestingly, US venture-backed exit activity have been in all-time lows as well. The same report showed there were only 530 exits completed in the first three quarters of 2017 amounting to $24.4 billion, with only 144 in the third quarter – the lowest quarterly total since 2009.
Bold Impacts from Bold Major and Micro VCs
Today, in addition to many angel and micro VC firms, the market has a wealth of “retail” sources – ones that VCs will have to compete with eventually. Russell Siegelman, a Stanford Graduate School of Business professor and angel investor, says the VC industry has changed plenty compared to when he first came into it around two decades ago.
“The VC industry is more international,” Siegelman said. “The growth of VC investing in China and other regions was almost unheard of twenty years ago. I think that this will continue and VC investing will continue to globalize.” However, he also further explained that due to globalization as well as other factors, VC firms have become more decentralized when it comes to decision-making. He explained how VC firms now have more professionals making investment decisions, often based on hierarchy.
Samir Kaji, First Republic Bank’s Managing Director, observed that micro VCs are around to “fill gaps” in startup funding – the time prior to the traditional VC round. This is especially true considering micro VCs are braver or more tolerant when it comes to taking risks, similar to how startups are compared to big corporate names. Micro VCs provide the much needed capital for these startups, especially because bigger VCs have focused more on final phase funding.
“Many micro VCs have continued to migrate toward Seed and post-Seed investing,” Kaji explained. “This trend has resulted in a challenging environment for pre-seed companies seeking institutional capital, and perhaps not as intuitive, has created a higher bar for follow-on financing for companies that have raised large post-Seed rounds.”
Where will VCs of all sizes invest in this 2018? Analysts believe funds will focus on four main things: blockchain, artificial intelligence (AI), voice, and (surprise!) pets. There are also names that keep investing in several different bold ideas, making names for themselves as some of the top VC firms.
SV Angel, for example, is a San Francisco-based firm invested in popular cloud file hosting service Dropbox. Lowercase Capital, one of the most successful micro VC firms, helped fund Uber, one of the biggest names in transportation today.
It is a given that big names like Accel Partners, Andreesen Horowitz, and even Sumeru Equity Partners, GothamVC, Luminate Capital Partners, and Technology Crossover Ventures have all contributed to a number of startup ideas. Bigger VC companies more or less already know how to strategize, more easily identifying which bold ideas they want to invest in. Micro VCs have several considerations, and often would hold back about half of their initial funding for follow-ons, but are there filling the gap between big scale funding and seed/angel funding.
Today’s other top micro VC investors with at least 15 seed-stage investments include:
- Forerunner Ventures (Reachify, Rockets of Awesome, Prose)
- Chicago Ventures (HealthJoy, Havenly)
- Cowboy Ventures (LumaTax, Brandless)
- O’Reilly AlphaTech Ventures (Fetch Robotics, Signal Sciences)
- Baseline Ventures (PacketZoom, Sendwithus)
As with the above, other names like CrunchFund (Manticore Games, Lightform, Overclock Labs) and Founder Collective (SelfMade, Embark Veterinary), have made names for themselves as some of the top micro VCs that follow on with a subsequent round of less than $2.5 million in funding.
Regardless the size of a VC firm, one thing is for sure: people and investing companies want to invest in what they believe in. As long as there are brilliant minds unafraid of creating action to bring their bold ideas to life, there will always be a backer willing to help make it happen.