The “big” news in the venture capital business over the last couple of years has mostly been about big and bigger things.  Fund sizes, deal sizes, valuations – they’ve all been setting records.  According to Pitchbook, 2021 saw 63 venture funds close on $500 million or more; the average fund size approached $200 million; and there are now more than 1,000 Unicorns wondering about the private markets.  Any way you cut the data, the (surprising) lesson of the Covid era to venture capital investing seems to be “big is good, and bigger is better.”

Or perhaps not.

It turns out that while big funds and big deals have been getting most of the press, sub-$50 million “micro-funds” have also been proliferating as never before.  In 2021, close to 400 micro-funds closed (a record), with a median size of $10 million and an average size of $15 million (all data from Q2 2022 PitchBook Analyst Note: Micro-Funding Opportunity | PitchBook ), including a record number of micro-funds closed in noncoastal emerging markets. 

On the other hand …

In the aggregate, those 400 or so micro-funds closed on an aggregate of $5 billion.  That may sound like a healthy chunk of change, but in the context of the aggregate venture capital market closing on $129 billion, it looks more like chump change.

So, which is it?  Is the recent proliferation of micro-funds a venture capital storyline, or just a footnote?

Count me in the storyline camp, for several reasons.

  1. The Pitchbook data suggests that micro-funds are playing an outsized role in the nascent (if long-promised) influx of venture capital beyond the big coastal venture capital centers.  These smaller funds (unlike much larger “seed” funds that many more established venture players have set up in the big venture hubs) are well-sized to do the smaller (size and valuation) deals in the emerging markets, providing capital influx to address the deficit in early-stage financing resources available, increasingly prominent given the rise of the seed and pre-seed stage market.
  2. These funds are often geographically focused on regional investment and heavily integrated into their local startup ecosystem. The impact of micro-funds in smaller markets will likely have an exponential downstream effect in noncoastal startup ecosystems, as the cohort of funded startups grows and a network develops.
  3. These smaller funds also offer on-ramps for emerging venture capitalists: compared to their larger peers, micro-funds are much more likely to be staffed by first-time investment teams, or teams with only limited prior fund management experience.
  4. Micro-funds are filling a market gap and accessing the wealth of human capital, talent, and innovation that can be found in noncoastal cities, a previously underutilized investment opportunity.
  5. Similarly, the micro-funds are giving smaller limiteds, and even larger limiteds that are new to the venture investing space, access to a hot venture capital market where larger, established funds are much less likely to welcome new investors into the fold.
  6. My take – more my sense than something I can point to solid data to support – is that micro-fund managers are more willing to get behind less experienced teams compared to larger funds.  That at least partially explains both the smaller bets these funds typically make, and the lower valuations, and is of particular importance outside the major venture hubs, where less experienced teams are more common. 
  7. Again, my take is that micro-fund managers, with their bets on less experienced teams, are (by necessity) taking a more hands-on, down and dirty approach to adding value beyond just capital and connections to their portfolio companies.  That’s critical when working with less experienced founders.

Overall, then, while it’s true that the growth in the number of micro-funds hasn’t made much of a dent in the industry’s total capital under management, these funds are playing a crucial role in finally delivering (ok; it is still early) on the long-rumored advance of the high risk/reward entrepreneurship inland from the coasts.  And giving smaller, less established limited’s an on-ramp to venture investing.  And for both of those reasons, the chump change these funds manage is having an outsized impact on the future of high risk/reward entrepreneurship and investing generally.