Are Micro VC’s A Worthwhile Investment

Micro VC is something that is newish in VC circles.  It’s small funds.  WLV is a micro.  We just did our final close.  So far so good.

I saw this article yesterday and haven’t had the time to go through it deeply but will try tomorrow.  Busy day today.There seem to be a lot of good stats in it as I perused it.  Of course, the main thing is return.

The article admits it’s bias there.  It restricted its sample size

They compared Europe versus the US as well.  That’s interesting.  From the article.

Micro-VC Landscape

• The US has seen accelerated Micro-VC fundraising trend in the past 10 years and some of the key drivers are: 1) the improved capital efficiency for start-ups has made small size checks more meaningful; 2) some traditional funds have moved upmarket and left more opportunities in investing in seed stages; 3) The VC industry was underperforming in the past 10 years. Without enough sizable exits, the smaller funds tend to outpace larger funds.
• Many micro-VCs in the US have generated a lot of buzz and have good brands but often the good performances are driven by unrealised marks, stale prices, and market exuberance.
• In Europe, the story is different. Seed stage investing is less competitive and the demand is bigger than supply.

Stay Micro VS Grow Fund Size

• Some high-performing funds have chosen to stay at the same level. Those funds found their niche and want to stay in the space and write small checks. They are not interested in raising a bigger size fund. There are also investors who consider this more of a ‘lifestyle business’ and are not interested in growing the fund size.
• On the other hand, some funds aim to demonstrate repeatable success, build a track record and have the ambition to raise larger funds down the road. Micro-VCs have to be very disciplined with respect to check size. They’ll get good ownership stakes early on, but as investments mature and raise follow-on capital, the Micro-VCs can’t keep up. They will either impacted by sizable dilution or end up in unfavourable share classes. To confront this issue some firms have moved up in fund size to have more capital for follow-on investments.
• There’s a limit for fund size to go up by stretching on different dimensions without changing the investment dynamics. As fund size goes up, incentives shift. Firms end up competing against larger VCs and risk to be the “short-stacked at the poker table”.

It will be interesting to see how this all plays out.  In Chicago where we have a lot of micro VC and not big traditional funds, our returns are far better than average.