Sequoia. Andressen Horowitz. Accel.
These names need no introduction to any founder trying to raise capital in the SF Bay Area (Even if they’re giving out less than usual). The thought of getting in a room with them, and taking them through your pitch deck must give you goosebumps.
While the big funds and bigger deals go on to make news, Micro Funds are giving hundreds of entrepreneurs a jump start.
According to Pitchbook data (via Lexocology), “In 2021, close to 400 micro-funds closed (a record), with a median size of $10 million and an average size of $15 million.”
Micro means Micro
How much do Micro VCs invest? That answer varies, depending on whom you ask. But it could range from $25,000 to $500,000. And as Funds grow, so will the amount the Micro VC invests.
For instance, Chingona Ventures, a Chicago-based Micro VC, recently closed 52 million in capital commitments. Chingona started off as a $6 Million Fund and wrote checks ranging from $100,000 to $250,000, and after the recent influx is committed to investing larger amounts.
Speaking to TechCrunch, Samara Hernandez, founder of Chingona, said her investments may now range from $250,000 to $1 million, and she wants to “be the first and largest check into a round.”
Those figures are still small and Chingona would continue to function as a Micro VC.
Because the funds are smaller, Micro VCs tend to have a narrow focus — a lot of times this focus comes from deeply informed knowledge or experience in a very specific field.
According to the Early Growth Financial Services’ blog, “Micro venture capital specialists want to lean on their areas of expertise; many of them being successful entrepreneurs and startup founders or partners themselves…
“The Micro VCs that we’ve gotten to know at Early Growth Financial Services are all very niche and narrow.”
As the Micro VC revolution continues, firms are fighting to stay relevant and strive to have a differentiated strategy. And this could be an advantage to founders raising funds for specific niches.
Jim Marshal, in his blog for Silicon Valley Bank (SVB), writes, “…there were very few seed funds in Silicon Valley when we started Selby, and our differentiation and reason for existing was the gap in the seed market. However, after raising and investing three funds, the market changed dramatically, and the micro VC revolution was well underway. In contemplating our next fund we asked ourselves some basic but tough questions. Is there still a good reason for us to exist? Do we have a differentiated strategy? What’s our real competitive advantage?”
While raising funds, it helps founders to look at the differentiated strategy of the Micro VCs. Not only does this increase your chances of getting that check but also aligns visions and a close working relationship. It also tends to be much more of an equitable relationship. Consider, for example, that Micro VCs are trying to build their reputation too, and your impression matters to them.
“In an emerging micro VC, the partners are building their own board service track record and so they’re worried about your reference checks as much as you’re worried about theirs; adding value is imperative and top of mind for them,” writes Micro VC Noramay Cadena.
And mutual fit is an important part of the equation, writes Cadena.
“In the venture capital space, we erroneously believe that power lies solely in the hands of investors who are either in or out ala Shark Tank. But really, the founders with an affinity to do things on their terms can find the investors who roll up their sleeves and focus on outbound reach: a mutual fit that extends fund returns, gross multiples, and brand recognition,” says the founder and partner at MiLA Capital.
Micro VCs strive to be more accessible
Eric Bahn, co-founder and general partner at Hustle Fund, has shared his experience with Forbes how they underestimated their differentiation as beginners in managing funds. “To stand out with its new $30 million-plus second fund Hustle’s partners are highly active on Twitter — a social media service Bahn had quit before the need to self-market became clear — penning threads on ownership stakes and company-building, and generally mixing it up with their peers. And some flavor of that strategy is increasingly table stakes for micro-fund investors looking to compete in a VC market awash with new entrants with capital.”
Now, clearly Bahn’s comments were made before VC investments began to dip. Before all that talk of recalibration and pullbacks, and yet, Micro VCs may still continue to invest and grow in number.