The tide of Micro Venture Capital

The tide of Micro Venture Capital

The tide of Micro Venture Capital

There is a tide towards Micro Venture Capital (MVC) within Venture Capital in the past few years. Despite of the fact that this is a not-so-new sub-segment still a few people knows about it as an opportunity to get funded his start-up. Let’s see some infos about this in the early-stage financing eco-system.

As I have mentioned in my previous blog post the overall growth of software has decreased technical risk, declining average cost of company creation is driving declining average cost of capex (capital expenditures).

Most early stage VC’s tend to search for an investment with a working MVP and a proven market, not to mention revenue and a proven team. Realistically there is a low probability that all of these outcomes will be achieved.

What is a micro venture capital?

MVC is money invested to seed early-stage emerging companies with amounts of finance that is typically less than that of traditional venture capital. In contrast to traditional venture capital which is money used to invest in companies looking to fund growth (also referred to as a Series A round of funding), micro venture capital consists of smaller seed investments, typically between $25K to $500K, in companies that have yet to gain traction.

MVCs are rather looking for micro start-ups which haven’t been funded yet but they don’t expect the start-up to make money either. Of course it’s a great thing and the start-up needs to have another kind of traction at least. Obviously some startups need a VC investment to start off at all e.g. hardware based start-ups with manufacturing requirements. However if you can operate as a micro start-up out of an MVC investment then you have a longer road to run which allows you to learn and improve your product more.

Another important thing is that MVCs allow start-ups to exit at a much more modest scale, assuming the company is not over-capitalized.  They are not looking for IPO winners which means they can’t produce returns justifying their size.

What other advantages do you have with a Micro VC?

  • You can die faster, what means that it takes 10 years to kill a VC fund, while Micro VCs let you evolve and die faster, which is a good thing.
  • Since the startup value equation has changed there are more Micro VCs what means more companies getting funded, and an inflection point in competition for the “best” low-capex deals.
  • Not only that with Micro VCs capex increasingly becoming opex but the plumbing of micro start-up businesses allows for much easier distribution, monetization, and product development.
  • Micro VC investment is a dominant strategy in the current market characterized by low capex startups and consumer-centricity.
  • More than ever before the value created in a seed round by Micro VCs is increasingly being rewarded because companies can launch products, gain traction, and prove micro-level metrics.
  • Founders backed up by Micro VCs can now get greater credit for this value creation from the funding marketplace.
  • The scale and strategy of Micro VCs’ funds provide the potential for much better alignment between the interests of the investors and entrepreneurs and also between the investors and their LPs’.

Summary:

So as you can see there are a lot of movements in the area of early stage investment ecosystem and more opportunities to find the best fit between the investors and start-ups. Although best practices haven’t yet emerged there is an initiative to monetize these options for later rounds before falling into the very same signaling problems of larger VC’s.  Let’s see what happens next.

Find out more about Start-up Investment!

 

Sources:

 

DBH Seedstar