Feb 18, 2022
Micro Funds: The Backbones and Future of Venture Capital?
In the Indian startup ecosystem, conventional venture capital financing has been booming for almost ten years. However, the VC game and funding playbooks have undergone significant changes as a result of the tens of thousands of new companies that enter the ecosystem each year as well as macro disrupters like the pandemic, geopolitical unrest, and a funding winter that have an impact on the business world as a whole. One such development is the emergence of micro VCs, whose small-ticket investments in pre-seed and seed-stage firms have increased significantly over the past two years, sweeping the investment ecosystem. To put things in perspective, more than 20 micro-VC funds announced their launches in 2021 and 2022, bringing the total to more than 80. The increased need for seed funding for startups in the ecosystem is the main driver of this expansion. It can be seen that throughout the course of three years, the deal volume remained concentrated in the $1 million to $5 million region when only seed-stage deals with reported investment were included in the sample set below. While the number of agreements under $200K continues to represent fewer than 10% of all deals. This emphasises how important it is for micro VC funds to fill the growing funding gap in the seed stage.
What are micro venture investments?
Over the past five years, the number of micro ventures capital firms has increased quickly in the United States and has grown to be a significant source of venture capital stages for new businesses
Micro venture capital is funding given to early-stage emerging businesses to help them get off the ground. Its amounts are often lower than those of standard venture capital. Micro venture capital consists of smaller seed investments, often between $25K and $500K, in companies that have not yet gained momentum, as opposed to standard venture capital, which is money used to invest in businesses hoping to fund expansion (also known as a Series A round of funding). Over the past five years, the number of micro ventures capital firms has increased quickly in the United States and has grown to be a significant source of venture capital stages for new businesses. The majority of micro venture capital funds typically have fund sizes of less than $50MM and make their initial investments at the seed stage on behalf of third-party limited partners. Due to their lower starting cost basis, micro venture capital firms tend to focus on seed-stage startups. Micro venture capital finance is willing to make the investment despite the likelihood that the majority of these startups will not last long enough to receive a Series A round of funding. This is because startups typically don't need large sums of money to bring a product to market and because they believe that only a small number of successful businesses are necessary for them to generate a profit.
Typical Traits and Trends
Micro-VCs have given the startup industry much-needed funding and have reaped the benefits. Micro-VCs should concentrate on capital-efficient technology sectors
The Micro-VC investor was created to close an important funding gap for startups, specifically the period before a typical venture capital round. They are far more tolerant of the risk of the unknown that all startups encounter as they try to enter an existing market or develop new technologies. Startups need less money to validate their company ideas because the cost of starting a firm is always declining (thanks to technological advancements and efficiencies like cloud, SaaS, digital distribution channels, etc.). Micro-VCs have given the startup industry much-needed funding (especially in light of the decline in the number of traditional venture capital finance firms over the past several years) and have reaped the benefits.
Nearly 85% of the unique companies that micro VCs have invested in are in the Internet and mobile industries, which dominate micro VC investments at the sector level, and among the sub-industries of the Internet sector, Business Intelligence, Analytics & Performance Mgmt. and Advertising, Sales & Marketing tech experienced the largest percentage of agreements. The top two industries for micro VC investments over the time period were edtech, followed by fashion and accessory companies and online marketplaces. Given the declining cost of technology infrastructure and the capacity of entrepreneurs to validate a business plan with low amounts of money, Micro-VCs should concentrate on capital-efficient technology sectors.
The Rise and Rise of Micro Venture Funds in India
Micro Venture Funds in India support the growth of venture hubs, contribute knowledge and skills to the market, and fill a void in the venture capital ecosystem that larger companies cannot possibly fill
This increase in micro VCs is not an isolated phenomenon, as seen by their notable contributions to seed Stage Company fundraising and, in some cases, follow-on rounds. It has gained widespread acceptance in the West, and approximately 50% of all fund closures in those markets involve micro venture capital funds in India. They have had rapid growth and handle a sizeable portion of AUM. They began to take off in India after 2016, propelled by the rise in youthful founders with little to no prior business expertise. A micro VC fund is typically under $100 Mn, and the strategy stipulates that the fund cannot be too huge, as stated by numerous VCs throughout their encounters with Inc42. Traditional Indian venture capital firm funds focus on fundraising rounds of $10 million to $15 million and have corpus ranges of $0.5 billion to $1 billion. But in India, $10 million seed rounds are uncommon, and sometimes only $5 million or less is raised in a series A round because excess capital generally leads to the failure of early-stage businesses. The VCs emphasised that to write an INR 3 Cr-INR 5 Cr ($350K-$600K) check that can support a firm’s growth from the seed stage to Series A, one needs to right-size the fund for India. A typical micro-VC fund, with a seed stage fund corpus of $30 million, has the capacity to invest in a firm valued at $3 million to $3.6 million (INR 25 million to INR 30 million). To provide 100x returns to the VC, this firm will only need to generate values of $367 Mn (INR 3,000 Cr) without dilution and $735 Mn (INR 6,000 Cr) with dilution.
Whether you consider micro funds to be under $50 million or under $25 million, these are the funds that will drive the industry's future. They support the growth of venture hubs, contribute knowledge and skills to the market, and fill a void in the venture capital ecosystem that larger companies cannot possibly fill.
JC Team is a Canadian based venture capital firm that provide seed funding to early-stage startups to take the businesses to the new heights.
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