Is Micro VC The New Macro Trend? by Preqin
Is Micro VC the New Macro Trend?
Justin Hall and Doug Paolillo take a closer look at the micro venture capital industry, including fundraising, funds in market, investors and more.
With the boom in fundraising activity and investor appetite for micro VC, several fund managers which could choose to raise larger funds are opting to keep their fund sizes in this sub-$100mn range. In this month’s feature article, we focus on the micro VC market, its position within the overall industry, investor sentiment and future outlook.
As of 6 June 2016, there are 501 micro VC funds* in market globally looking to raise upwards of $23bn in aggregate capital. These funds account for 69% of the total number of venture capital funds in market (Fig. 1) and a quarter of aggregate target capital.
Over the past decade, micro VC funds have consistently accounted for over half of all venture capital funds closed in a given year (Fig. 2). The proportion of micro VC funds in market reached its highest point in 2009, when 74% of venture capital funds closed on $100mn or less. While the total number of micro VC funds closed per year has continued on a general upward trend, the proportion that micro VC has accounted for in overall venture capital fundraising has fl uctuated. In 2015, 61% of total funds closed were micro VC funds – a decrease of 13 percentage points from the high of 2009. As shown in Fig. 3, the total aggregate capital raised by micro VC funds has risen steadily year-onyear, reaching $8.5bn in 2015 – a 31% increase on 2009 ($6.5bn).
Notably, 2009 also saw the decade’s largest proportion of micro VC funds closing below target size, with 54% of micro VC funds closing shy of their goals (Fig. 4). Since 2006, the largest proportion of micro VC funds closing on or above their target size was observed in 2015. Sixty-two percent of funds reached a fi nal close equal to or greater than their target size last year.
Sixty-eight percent of micro VC funds in market are targeting $50mn or less, with the remaining 32% seeking $50-100mn. North America has historically been home to the majority of micro VC activity (Fig. 5 & 6), and remains the primary geographic focus for the majority (58%) of funds currently seeking capital, followed by Asia (19%) and Europe (11%) as shown in Fig. 7. The remaining 11% is comprised of funds targeting Middle East & Israel, Africa, Australasia, Latin America, and those pursuing diversifi ed multi-regional opportunities (Fig. 4).
For half of venture capital funds in market targeting more than $100mn, North America remains the primary focus, too. Asia and Europe are targeted slightly more frequently by larger funds, with 19% and 22% of funds targeting these regions respectively. Just 9% of non-micro VC funds in market will target investments in Rest of World.
The 10 smallest venture capital funds in market (Fig. 8) are each targeting $1-$3mn, of which nine are focused on investment in North America. The two smallest funds are both managed by Angel Capital Group, a fully syndicated ‘angel’ capital private equity network operating across nine US states. Both funds, Phoenix Fund and Kansas City Fund, will focus on local science and technology start-up investments in their respective cities. On the other side of the micro VC spectrum, 74 funds are each looking to raise $100mn, collectively accounting for 32% of aggregate targeted capital by micro VC funds. Sixty-three percent of funds targeting $100mn are focused on North America, and all but three of these funds are managed in the US.
When looking specifically at the US, the vast majority (88%) of funds in market seek investment throughout the country, with no specific regional preference. Four percent of US-focused funds have a primary geographic focus on the North East or Midwest respectively, and 3% will each target the Southeast and Western states. The US is home to 279 of the 292 fund managers currently raising a North America-focused micro VC fund, and half of these fund managers are located in the San Francisco Bay Area (Fig. 9). San Francisco leads the way with 14% of fund managers, followed by Palo Alto (6%), Menlo Park (4%), San Mateo (2%), Oakland (1%) and Mountain View (1%).
Thirty-one first-time venture capital fund managers based in the Bay Area are currently raising capital, seeking an aggregate $2.6bn. The majority (65%) of these funds are focused on the technology sector; however, this is a significantly smaller proportion than the average (82%) for experienced fund managers in the area. First-time fund managers in the Bay Area are more receptive to investment opportunities outside the technology sector than their more established peers. Several micro VC fund managers also plan to utilize a diversified opportunistic approach to investing in the US, typically giving greater notice to sectors such as healthcare, retail, media and marketing.
The northeast corridor of Boston, New York and Washington, D.C. is also home to a high concentration of micro VC fund managers: 16% of fund managers with funds currently in market are located in this region. Sixty-seven percent of fund managers in this region are based in New York City, while 22% are in Boston, followed by 11% in the Washington, D.C. area. There are currently 26 first-time funds being raised in the northeast corridor, targeting an aggregate $1.4bn.
Chicago-based fund managers are seeking the majority of capital within the Midwest. There are currently 11 micro VC fund managers located in Chicago with at least one fund in market (as of 6 June 2016), seeking an aggregate $500mn. Illinois Ventures, a Chicago-based seed and early stage venture capital firm focused on innovative technologies – particularly those derived from research conducted at Midwest universities and federal laboratories – is currently raising Illinois Emerging Technologies Fund III.
Despite the smaller average investment size associated with micro VC funds, a wide range of investor types are seeking exposure to the segment. Similar to how venture capital fund managers often invest in companies that are located in close proximity to their headquarters, investors also look to commit to funds managed locally. In March 2016, Contour Venture Partners reached a final close on two of its funds, Contour Venture Partners III (CVP III) ($56mn) and Contour Opportunity Fund ($25mn). CVP III focuses primarily on early stage financial services, digital media and internet start-ups based in New York. Two local investors made commitments to the fund: New York Life Insurance Company along with New York State Common Retirement Fund, which committed $15mn. New York State Common Retirement Fund also committed an additional $15mn to Contour Opportunity Fund, which makes expansion and late stage investments in the same sectors as CVP III.
The trend of committing to funds in close proximity applies to investors based outside North America as well. Verso Spin-off Fund II invests in underperforming European companies with a primary focus