Venture capital funding is on a tear so far in 2014 – hitting a U.S. quarterly high in Q1 of this year that has not been seen since Q3 2000. And it’s not just high-profile, well-established venture firms wheeling and dealing.
Over the past several years, one of the most significant trends in venture has been the rise of smaller, micro VCs. And they’re being spawned at a rapid rate with almost half of the VC funds raised in the last 6 months being those with < $50M AUM. Of course, there are some elder statesmen in the micro VC game and some of them have already notched some impressive exits. The AUM level that defines a micro-VC is open for debate with some drawing the line at $75 or even a $100 million. In addition with some firms having raised multiple funds, there are micro VCs that, in aggregate, have more than the threshholds one might set. AUM levels aside, micro VCs are focused on the earliest stage opportunities generally investing first at the Seed stage.
This analysis puts the rise of micro VCs in context – breaking down both macro-level funding trends and firm-level insights. The full list of micro VCs used in this analysis are listed at the bottom of this brief. The report is broken down into sections as below:
- Early-stage financing trends among micro VCs
- Micro VC deal size trends
- The sub-industries micro VCs invest in most
- The most active micro VCs
- Analyzing the follow-on rates of micro VCs
- Which micro VCs have the strongest network?
Early-stage financing trends among micro VCs
With more micro VCs investing, early-stage deal and dollars involving micro VC firms in Q1 2014 hit $627M across 242 deals globally. Of note, 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%.
Micro VC deal sizes tick up
Interestingly, the average and median early-stage deal sizes with participation from micro VCs have risen since 2011 (in line with the uptick in seed VC deal sizes overall). In Q1 2014, average early-stage micro VC deal size hit its highest level in three years, bumping up to $3.4M. Median micro VC deal sizes have trended above $1.5M in each of the last three quarters.
At the sector level, Internet and mobile dominate micro VC investments – capturing 85% of unique company investments by micro VCs since 2011. And within the Internet sector, Advertising, Sales & Marketing tech and Business Intelligence, Analytics & Performance Mgmt saw the highest percentage of deals among sub-industries. eCommerce marketplaces and apparel & accessories firms also ranked highly, with ed tech rounding out the top 5 most popular markets for micro VC investments over the period. 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 (aka traction). It, of course, doesn’t translate as well to more capital intensive areas such as life sciences (pharma, biotech) and clean tech (renewable energy, batteries, etc).
Of note, while enterprise-facing sub-industries were the top places for internet bets by micro VCs, Gaming and Social ranked highest among micro VC investments into the mobile sector. The top 10 sub-industries by unique company investment for the Internet and mobile sectors are highlighted in the chart below.
The most active micro VCs – 500 Startups, SV Angel lead
Which firms are the most active investors in the micro VC landscape? Since the start of 2011, 500 Startups tops the list of most active micro VCs by unique company deals – followed by SV Angel. Interestingly, two New York-based investors – Lerer Ventures and Founder Collecitve – ranked third and fourth on the list, respectively.
The chart below shows the 20 most active micro VC investors by unique company deals between Q1’11 and Q1’14 (multiple investments into the same company count as a single investment). Other top 10-ranked funds by activity include Aydin Senkut’s Felicis Ventures, Mike Maples Jr.’s Floodgate Fund and Michael Arrington’s CrunchFund.
Of the most active micro VCs in the period, ff Venture Capital tops the list of investors by follow-on rate of first investments. Baseline Ventures and Floodgate Fund ranked just behind with Felicis Ventures and Founder Collective rounding out the top 5. It’s worth mentioning that the discrepancy between the 1st and 10th micro VC by follow-on rate was <10% – as all 10 of the firms have shepherded their investments to follow-on capital quite well (over 70%). Note: the ranking does not take into account micro VC investments made in the last 13 months as those were not mature enough to be included in these calculations. The 13 month figure comes from the Series A Crunch report.
Which micro VCs have the strongest network?
Can micro VC go the distance? Yes, but not by itself. It needs larger partners to help support growth further along the investment life cycle. It doesn’t need to be a we/they relationship between Micro VCs and larger VCs. It can, and should, be a collaborative and mutually beneficial relationship that ultimately inures to the benefit of the entrepreneur and the company.
The above quote comes from a post by Roger Ehrenberg of IA Ventures. And while his point rings true, it speaks to a broader point in venture capital which academics have shown – stronger networks drive better VC returns. In the case of micro VCs, this means those with stronger networks to high-quality VCs (both large and small) give them a leg up by virtue of access to stronger dealflow and information, syndicate partners and, perhaps most importantly for micro VCs, follow-on investors.
So using CB Insights Investor Mosaic algorithms, we calculated a ‘network centrality’ score to identify the top decile micro VCs (out of 135) that have the strongest investment networks. And based on the data, SV Angel ranks highest, followed by Lerer Ventures, 500 Startups, CrunchFund and Founder Collective.
It should be noted that all of the firms listed below are ranked in the top decile of firms and so the differences between their network centrality scores are relatively small.
The table below highlights the top 14 micro VCs (top decile) by network centrality and their top 3 VC co-investors by total companies.
List of all micro VCs in this analysis
The following 135micro VCs were used in this analysis. By definition, micro VCs in this analysis generally met the following three criteria: 1) fund size ≤$100M 2) 80%+ of investments were at the early-stage (seed/Series A) and 3) 10 or more investments since 2011.
212 Capital Partners
AIB Seed Capital Fund
Boston Seed Capital
Caixa Capital Risc
Contour Venture Partners
Costanoa Venture Capital
Cue Ball Capital
Data Point Capital
Deep Fork Capital
Detroit Venture Partners
Dorm Room Fund
Double M Partners
Dundee Venture Capital
Earlybird Venture Capital
Fenox Venture Capital
ff Venture Capital
First Step Fund
Golden Gate Ventures
Golden Venture Partners
Great Oaks Venture Capital
High Line Venture Partners
High Peaks Venture Partners
Hyde Park Venture Partners
Inventus Capital Partners
Morado Venture Partners
Moscow Seed Fund
Neu Venture Capital
NewSchools Venture Fund
Okapi Venture Capital
O’Reilly AlphaTech Ventures
Plug and Play Ventures
Point Judith Capital
Point Nine Capital
Quest Venture Partners
Red Dot Ventures
Red Swan Ventures
Rincon Venture Partners
Signia Venture Partners
TEEC Angel Fund
Tribeca Venture Partners
Unitus Seed Fund
Version One Ventures