<article><a style="color: #0000ff; text-decoration: underline;" href="https://www.cbinsights.com/blog/revisiting-micro-vc-market/?utm_source=CB+Insights+Newsletter&amp;utm_campaign=fc0eeb7138-Guest_Posts01_02_2015&amp;utm_medium=email&amp;utm_term=0_9dc0513989-fc0eeb7138-86457177" target="_blank">Micro VC</a>s, firms with smaller fund sizes, are getting active on the Asian startup scene. While they have been active in the US,  the Asian presence is growing both in velocity and volume, as the cost of innovation decreases.</article>

<a style="color: #0000ff; text-decoration: underline;" href="https://www.cbinsights.com/blog/revisiting-micro-vc-market/?utm_source=CB+Insights+Newsletter&amp;utm_campaign=fc0eeb7138-Guest_Posts01_02_2015&amp;utm_medium=email&amp;utm_term=0_9dc0513989-fc0eeb7138-86457177" target="_blank">Micro VC</a>s, firms with smaller fund sizes, are getting active on the Asian startup scene. While they have been active in the US,  the Asian presence is growing both in velocity and volume, as the cost of innovation decreases.
According to New York-based analytics firm &amp; intelligence platform <a style="color: #0000ff; text-decoration: underline;" href="http://www.cbinsights.com/" target="_blank">CB Insights</a>, $16 billion was raised by VCs in 1H 2014, (1.25x of the sum raised for 2010) along with actively, as of December 2014.
Micro VCs are venture firms that typically invest at the seed stage, on behalf of third party Limited Partners, possessing fund size below $50 million in value.
Small fund sizes are increasingly viable, given the current capital efficiency of startup ventures, especially in the Asia-Pacific. This also lowers the barriers of entry for Micro VC funds entering the market.
Unlike many larger funds (e.g. <a href="http://www.dealstreetasia.com/?s=Vertex+Ventures" target="_blank">Vertex Ventures</a> in Singapore), who rely on institutional capital, micro VC funds can be raised, if an investment manager or managing partner has significant social capital, connectivity and credibility with high net worth (HNW) individuals and family offices.
Micro VC funds have also emerged as a reaction to the funding gap that exists between angel investor funding and traditional venture capital. In the aftermath of the many successful IPOs and acquisitions in the technology sector, (primarily Google’s acquisition of <a href="https://nest.com/" target="_blank">Nest Labs</a> and Facebook’s acquisition of Whatsapp), has renewed Limited Partner interest in venture capital.
The micro VC trend
Some of the trends happening in the micro VC segment are the continued maturation of entities in the industry, with many successful first generation micro VC’s raising significantly larger fund vehicles and growing in size.
The challenge for many seed stage funds is in managing fund sizes that typically are not sufficiently large to capitalise on the <a style="color: #0000ff;" href="http://www.apple.com">pro-rata follow on rights</a>, a critical element when optimising for fund performance.
Many top first generation micro VC’s have significantly increased fund sizes over the past two fund cycles, in order to enable full pro-rata participation with appropriate opportunities. <a href="http://www.felicis.com/" target="_blank">Felicis</a> ($96 million), <a href="http://softtechvc.com/" target="_blank">SoftTech</a> ($85 million), <a href="http://floodgate.com/" target="_blank">Floodgate</a> ($76 million) and <a href="http://dcvc.com/" target="_blank">Data Collective</a> ($125 million) are recent examples, with other micro VC managers increasing toward $75 million &#8211; $100 million funds.
Fundraising grey areas
Seed rounds and Series A rounds used to be clearly demarcated, though this is increasingly not the case, especially in mature ecosystems like the US. seed financing can now have many dimensions and stages.
<a href="http://bullpen-capital.com/" target="_blank">Bullpen Capital</a> is a US early-stage venture fund that makes follow-on investments in post-seed round startups in the mobile, advertising and enterprise software space. It maintains the thesis that <a style="color: #0000ff;" href="http://bullpen-capital.com/thoughts/the-supersized-series-a/">seed funding is a process rather than singular event</a>.
Some companies may raise multiple seed rounds prior to funding from traditional VC source, while some seed rounds may hit $4 million without including traditional venture investors by virtue of crowdfunding.
In fact, late stage seed rounds can resemble a smaller Series A round, from the perspective of the company’s development, valuation and investment committed to it. Institutional seed investors are often investing later in the seed process, a trend easily attributable to the continued democratisation of the seed financing market; startups achieving more traction with less capital; more non-institutional sources of capital at the early/mid seed level (i.e. crowdfunding, angel investors and government-linked grants).
For micro VC’s, investing at a later stage in the seed level also serves mitigate against follow-on financing risks, as well as allowing the VC to better gauge the traction, business fundamentals of the startup and risks arising from the market.
Competitive fundraising markets
As entrepreneurial ecosystem mature, the market for micro VC and traditional VC funds expands. However, this expansion can create significant confusion for Limited Partners (LP) of all types, who now have to face heave signal-to-noise issues.
Investment managers may appear identical, with LP’s unable to discern any tangible differentiation among them. Early adopter institutional LP’s (e.g.small endowments, family offices and foundations) would also be reticent to on-board additional names to those they already have. Of course, investment managers, associates and partners coming from well-regarded traditional venture firms with verified track records are another matter entirely
But a positive byproduct of such competitive operating terrain is that the importance of demonstrated value add is emphasised, especially when venture investors advertise themselves to be value creators for their portfolio firms &#8211; which is good PR.
For seed-stage managers to consistently gain curated deal-flow access &#8211; seeing the most promising deals within the investment thesis &#8211; and winning them without writing premium valuations, they must demonstrate clear and quantifiable value add within their portfolio and targeted sectors.
This includes recruiting, potential customer introductions, mastery of business sector and models, and trusted relationships with top-tier traditional VC firms for follow on investment.
Additionally, micro VC’s who are able to lead a round have a huge competitive advantage over Micro-VC’s requiring funding syndicates.
Examples of differentiation include firms like <a href="http://rothenbergventures.com/" target="_blank">Rothenberg Ventures</a>, which employs a distinct community-based millennial demographic approach to the market, utilising youthful founders. Upside partnership employs a structure that provides carry to portfolio companies, by making company founders partners with the fund
Future of micro-VCs
What does the future hold for the micro VC market? Would such a model work in the Asia-Pacific and in Southeast Asia? The concentrated return profile of venture capital makes it difficult to imagine a scenario where multiple firms can produce the necessary returns to earn alpha returns.
When market cycle shifts &#8211; which are inevitable &#8211; are factored in, combined with the highly competitive startup ecosystem weeding out unsustainable entrepreneurial ventures, with a <a style="color: #0000ff;" href="http://www.jstor.org/discover/10.2307/40229456?sid=21105616639143&amp;uid=2&amp;uid=4&amp;uid=3738992">failure rate of 75 per cent</a> within two to five years, this scenario becomes unlikely.
Most traditional venture funds have LP bases with institutional investors that have extensive reserve. However, many smaller micro VC firms have LP bases that are composed mainly of high net worth individuals and small family offices, who tend to be bull market investors and unpredictable with regard to follow-on fund allocations.
There is a subset of micro VC firms that enjoy strong, stable, institutional LP bases. However, many of the top-tier micro-VCs, as well as theirlater generations of leadership and partners, will look and feel more like the smaller traditional venture funds, in terms of investment model, firm infrastructure, and fund size.
There’s a reason for why the traditional venture fund model is still around &#8211; because it works. But no one is saying a daring investor or investment manager can’t experiment with it and improve it. And the growth markets of Southeast Asia, especially Indonesia, Philippines and Myanmar may just be the places to test it.

Micro VCs increase presence in Asia

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