Random Vcs Application – More than 20 micro VC funds announced their launch in 2021 and 2022, bringing the total number to over 80.
Between 2020 and 2022, the volume of early-stage deals under $200k is still less than 10% of total deals; This is a major gap that micro VC funds seek to address
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Traditional venture capital funding in India’s startup ecosystem has been deteriorating for nearly a decade. But with thousands of new companies entering the ecosystem every year and macro disruptions like the pandemic, geopolitical conflict and winter weather affecting the business world at large, venture capital gains and funding strategies have seen important changes.
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One of these phenomena is the rise of micro-VCs, whose small ticket funding for seed-based startups has grown significantly in the past few years, taking the investment ecosystem by storm.
For context, more than 20 micro VC funds have announced launches in 2021 and 2022, bringing the total to over 80. This growth is primarily driven by increasing demand for seed funding in the ecosystem.
According to Datalabs, up to $5 billion was invested in startups in India between 2014 and September 2022. In fact, seed funding has almost doubled in 2021; it is about 1.14 billion dollars, which is less than 409.8 million dollars in the previous year. However, this accounts for only 3% of the total $42 billion raised in 2021; and about 4% of the total $12 billion raised in 2020.
Considering the example below, which includes only early-stage deals for announced funding, the deal volume over three years appears to be concentrated in the $1 million to $5 million range. The number of transactions below 200 thousand dollars is still less than 10% of the total transactions. This highlights the growing seed stage funding gap that micro VC funds are seeking to address.
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This rise of micro VCs is not a trend in itself, due to their impressive participation in the initial stages of initial funding and, in some cases, subsequent rounds. It has become mainstream in the west, and almost 50% of the end-end funds in the western markets include micro VC funds. They control a significant portion of AUM and are growing very fast.
They started gaining traction in India after 2016, as the number of young founders with little or no business experience increased.
“On the supply side, the number of startups is increasing and they need capital as well as guidance. Traditionally, these companies will not receive capital from growth stage capitalists, because the latter is always after Series B. So how can a startup (and many companies like it) get to this stage without capital? This forms the whole basis of micro VC investment in India,” said VC Shashank Randev, founder of 100Ks.VC.
At that time, VC funds had been in the country for 10-15 years and people who were part of this ecosystem wanted to do something themselves.
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“The spirit of entrepreneurship has also emerged here and small funds have been established, which has led to the growth of micro VC funds,” said Pearl Agarwal, founder and CEO of Ekimius Ventures.
But before we delve deeper into the culture and its impact, let’s see what makes microventure capital funds popular among startups and investors (limited partners) and beyond the venture capital ecosystem.
As noted during interactions with various VCs, micro VC funding is typically under $100 million and the strategy states that the funding cannot be too large.
The range of traditional VC funding pools is $0.5B to $1B+, looking at funding rounds between $10M and $15M. But in India, $10 million rounds are rare, and even a Series A round often doesn’t reach $10 million because too much capital tends to kill companies early.
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Venture capitalists also emphasized the need to right-size the fund to build a check of INR 3 Cr-INR 5 Cr ($350,000 to $600,000), which can help startups grow from seed stage to Series A in India . The series raising of a company can be around INR 8 Cr-INR 10 Cr ($978K-1.2M), excluding deep technology and basic R&D departments. If a large fund writes the first check, the cost of the investment will be higher than the return on that transaction. Also, a 100k return from a Series A will always be a long shot.
Here is a more detailed example. A typical VC with a funding pool of 1000 Cr ($122 million) will seek a minimum funding round of $10 million, preferably at the seed stage. To recoup 100 times the initial VC investment, the startup would need to generate $1 billion in value without dilution, and $3 billion to $4 billion with dilution.
At the same time, a typical micro VC fund with a seed fund cap of $30M has the potential to invest in a startup worth $3M-$3.6M (INR 25 Cr-INR 30 Cr). The business will only need to raise a valuation of $367 million (INR 3,000 crore) undiluted and $735 million (INR 6,000 crore) diluted to provide a 100x return to the VC.
Imagine you have Rs 1,500 Cr and you write a check for Rs 3 Cr. Even if this gives you 100k return, you get INR 300 Cr, but the rest of the fund (INR 1,200 Cr) is still available for distribution. Venture capitalists with budgets over $150 million often prefer to write checks for less than $1 million. But this is a big number in Indian context. We want our founders to be unconventional and innovative,” said Anirudh Damani, Managing Partner and CEO of Artha Venture Fund.
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VCs also show that a large corpus can kill returns. If a fund worth INR 200 million is required to generate 10k worth for your LPs, it will be INR 2,000. On the other hand, when INR 2,000 of capital is needed to generate 10k worth, it would require INR 20,000 of worth across portfolio companies and the math would be completely different.
Again, a micro VC can have a 14-15% equity stake in a startup when it invests at multiple levels – from pre-seed above Series A to subsequent funding rounds, providing significant pro-rata rights and high return in the future. cycle
“If I write random checks worth ₹20 in a Series B round led by a big VC, I can only get 1%-2% ownership. “This is not a serious ownership stake and I will not be able to work with the founder,” added Damani.
Unlike traditional pension funds and university endowments, domestic LPs also include family offices and HNI checks worth $1 million to $2 million. On the other hand, a large fund will include many LPs, but it can be difficult for general partners (GPs) to manage this many. Most importantly, many of these LPs are looking for more information and greater involvement to have better control over their capital. However, such adaptations are not possible when investing in a large sum. For this reason, many LPs are now turning to micro VC funds.
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In addition, more growth opportunities will arise if LPs invest their money in more micro VC funds in different sectors. The beauty of small funds is that they allow LPs to have diversified investments and create a portfolio of investments for high value returns.
For example, to raise an income of ₹3,000-₹4,000, LPs have to write checks of ₹50-₹100. But not many people in India can write such huge cheques
Let’s show you the numbers for us. An LP investment of INR 10 in a micro VC fund of INR 450 earns more than 2% ownership and makes huge returns in seven or eight years. An LP who invests INR 10 Cr in capital fund of INR 2,000 Cr gets a small equity (0.5%) and the return is expected after 15 years minimum.
“The biggest competitor here is the Indian stock market, which returns 18 percent annually and doubles its money every four years,” Damani added.
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Other factors leading to the rise of micro VC funds in India Angels may lose importance as investors and advisors
According to our recent conversations with venture capitalists working in India, the country’s ecosystem may not see any angel investments in five years. Unless we are talking about famous angel investors who can write checks worth INR 50 lakh for an investment, existing “angel funds” can avoid this label as an investment of INR 2 lakh- 3 lakh will not generate much value.
Also, as noted, sometimes there were 43 investors in the startup table who raised only INR 95 Lakhs. Founders are getting paid, but there is nothing to guide them. In the first stage, the color of the coin is the same, but its weight is different. However, when a micro VC fund comes with committed seed capital,
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