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What's the Deal With the $100K Micro Venture Capitalist?

May 27 2013, 19:03   |   By SME Mentor

Several of them have chosen to take the approach of funding angel investment stage businesses, and the ticket sizes may be in the vicinity of $100k. How do we make sense of all this?

I am really old school when it comes to Venture Capital. So for me venture capital means an equity investment of a couple of million dollars. If this is the investment size, the natural consequence is that the valuation of the investee business should be several million dollars at the least. That is why the emergence of the micro-VC is an interesting, though disruptive, development in the past couple of years.

These micro-VCs have two characteristics:
1) Usually their fund size itself is quite small; say $20 million (something like Rs. 100 crores). As a result, they are constrained by  the number of senior people they can have in the fund. Usually, they consist of just one main guy, and a couple of juniors.
2) As a consequence of the small fund size, their investment size also tends to be tiny. Once upon a time it was unheard of, but  today we do hear of investment rounds of $50K (Rs. 25 lakhs) and $100K (Rs. 50 lakhs).
Some names of micro-VCs that come to mind in the Indian context are Kae Capital, Blume Ventures, India Quotient Fund, and the like.

How Does the Emergence of the Micro-VC Change the Start Up Funding Landscape in India?

Small ticket venture funding was thus far the preserve of the Angel investor. As VCs have started encroaching upon the same space, a couple of interesting changes are visible in the early stage landscape:

(i) More Money Is Available at the Early Stage

One problem with angel investors has been that they have are not too reliable in their availability to invest. Extraneous factors such as the stock market index, the specific individual leading a deal, and others, have a significant influence on the angel investor's choice to invest. Not to mention the fact that many angels who genuinely intend to invest, often end up not doing so as they do not find the time to perform due diligence and go through the documentation. Given that micro-VCs are in-effect fill time angels, this segment has turned more robust.

(ii) The Likelihood of Follow-On Investments

Often angel-funded companies do pretty well, but not well enough to reach a multi-million VC round. Angels often do not budget on a follow-on round for their investments. In fact several angels believe that if they "have to" participate in a follow-on, the investment was not a good one. But there may be some genuine start ups that could do well with an intermediate round of funding between their angel-round and series-A. Micro-VCs usually bargain on doubling down on their winners, and hence more follow-on capital is available for deserving candidates.

(iii) A Strong Deal Pipeline for Micro-VCs

Another way to look at follow-on investments is that entering early allows micro-VCs first dibs for larger investment rounds when a company evolves into a series-A candidate. To that extent we may say that the sub $100K rounds by micro-VCs actually are more like a premium being paid by them to retain the option of investing at favorable terms later.

The Outlook for Micro-VCs
When these tiny venture capitalists approach limited partners (LPs), their thesis revolves around the many joys of investing at the very early stage. Though this may be attractive to some LPs, it can come back to bite the micro-VCs when they are seeking to raise their next fund. As with all VCs, micro-VCs too would like to raise ever-increasing sizes of rounds. But they have positioned themselves at the small ticket size end of the spectrum, and hence are not likely to be sound convincing if they wanted to raise funds amounting to a couple of $100 million. So these micro-VCs are likely to remain pretty small. That is actually good news for the early stage start up ecosystem, but might lead to burnout of the micro-VCs themselves.

~ Ajeet Khurana is an angel investor, trainer, author, entrepreneur and digital marketer. He is a member of the screening committee of Mumbai Angels, one of India's oldest angel networks. In addition, he is a trainer for new angel investors with NEN (National Entrepreneurship Network). He is on the boards of Carve Niche Technologies and Rolocule Games, You can reach him on LinkedIn and Twitter.

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