Micro VC: Small is beautiful

The path from entrepreneurship to investment is well-trodden in the technology sphere. It starts when the founders of successful start-ups invest some of the proceeds in other start-ups, enabling a new generation of founders. Once they start seeing sufficient deal flow, friends and family pile contribute to the pool, and after that it is a natural progression to managing third-party capital on a formal basis, with traditional fund structures and clear delineations between GP and LP.

The transition from angel investor to venture capital fund manager became apparent in Asia - and by that we are primarily talking about China - around 2008 but only really gathered momentum in the last three or four years. As explored in an AVCJ feature story last month, there is now increasing interest in and activity from micro VC funds as well.

The data in this area are notoriously fuzzy, and it is often hard to distinguish between seed and micro VC vehicles, for example. This is why a recent piece of analysis from Preqin makes for interesting reading.

After dropping off in the wake of the global financial crisis, global micro VC fundraising has seen six straight years of growth, reaching $8.5 billion in 2015 from 208 final closes. As one might expect, North America is the primary actor, accounting for close to half of the total raised in each of the past three years, and for the roughly the same proportion of funds. Meanwhile, Asia was responsible for 49 micro VC funds and $2.3 billion in capital raised last year, up on 2014 but short of the 2010-2012 peak years.

When AVCJ asked industry participants in China how many US dollar-denominated micro VC funds were active in the market, the consensus was approximately 15. Once again, this raises the question of how one defines a micro VC fund. The generally accepted qualifying characteristic is a fund size below $100 million, which is problematic in China because that was the approximate size of a standard renminbi VC fund in 2010-2012, which was also the period in which local currency fundraising peaked.

In short, it is difficult to say with certainty that these managers were consciously limiting their fund size to pursue a very early-stage strategy that they felt was underserved in the market. Rather, micro VC is getting more traction in China now because traditional funds are becoming larger and so there is space for greater differentiation. The fact that traditional venture players such as Sequoia Capital and GGV Capital are participating as LPs in micro VC funds - as a means of broadening their coverage and getting to know more start-ups - could be seen as testament to this.

Then the question becomes whether these micro VCs will remain in their current sweet spot or raise additional funds to participate in later-stage deals for existing portfolio companies. It is a function of discipline and demand, both of which can be volatile in emerging markets.

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• Topics
• Greater China
• Venture
• Early-stage
• Fundraising
• GPs
• Asia
• seed