Some quick observations on the micro VC phenomenon, spurred by running into Rob Go this morning at the Andala Café in Central Square…Go is the co-founder of NextView Ventures, a seed-stage tech investment firm (previously he was with Spark Capital). “Micro VC” refers to the emerging segment of venture capital in which investors put small amounts of money into very early-stage startups, mostly in Internet software.
1. Angels and VCs are becoming indistinguishable at the early stage.
To most lay observers, anyway. Seed-stage VC investments have been looking a lot like traditional angel deals in terms of their basic structure. A couple years ago, as the recession was hitting, angel groups were telling me they were seeing lots of startup deals that used to go almost exclusively to VCs. The current micro-VC evolution is the response to that.
2. Follow-on investments are an issue.
Seed-stage VC is all well and good, but someone still has to make bigger investments in companies down the road for them to really take off. As Fred Wilson of Union Square Ventures wrote recently, “There are two places you don’t want to be in this new world. You don’t want to be the VCs who wanted to be in the ‘big round’ and didn’t get to be in it…You also don’t want to be a seed fund that is invested in a company that hasn’t scaled yet but is out of money. Then what do you do?”
And in an informative post from earlier this summer, Rob Go wrote about the pros and cons of micro VC for entrepreneurs, and the unknowns about the whole model. Suffice to say, it’s very early in the game.
3. Micro-VCs seem overly friendly with each other—for now.
Traditional VCs can be pretty open about their love/hate relationship with their syndicate partners and peers. But with micro-VCs, it’s all love-fest, all the time. David Beisel, another co-founder of NextView Ventures (formerly with Venrock), wrote in a recent post that micro-VCs need each other in particular for capital and deal-flow reasons. But as the sector matures and more competitors emerge, “some of the over-enthusiastic puppy-love will be lost,” he writes. (Beisel also discussed some more serious micro-VC strategy issues earlier this week.)
4. Will the seed-stage investment market crash?
Whether you call them super angels, micro-VCs, or seed-stage funds, there’s a looming possibility that it all amounts to a micro bubble that will burst if and when the great majority of these Web startups fail. So is this emerging market headed for a crash? “I don’t think so,” Wilson writes. “Will it evolve and change and look differently in a few years? Absolutely. We are still figuring out to evolve the VC business to reflect the change in financing needs of entrepreneurs and we aren’t done by a long shot.”
Not surprisingly, micro-fund investor Chris Douvos said (in an interview with PE Hub), “I think that the competitive dynamic has changed, but I don’t think there’s a bubble yet…The arithmetic of the micro-VC space is such that you can have outstanding venture returns with extremely modest exits. This translates into giving yourself dozens—maybe even hundreds—of good opportunities per year, rather than just a few.”
What I want to know is, how long will the term “micro VC” really last? Because if they’re successful, they won’t stay micro for long.
