What do LP’s think about Micro-VC?

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A little over a year ago, we participated in the inaugural RAISE summit, an event conceived by Akkadian Ventures, Top Tier Capital, Weathergage Capital, and Core Ventures Group and primarily developed to help foster venture fund entrepreneurship.

With over 100 venture capital fund managers and 50 venture allocating Limited Partners (LP’s) in attendance, the following became clear during the conference:

1) An extraordinary amount of managers were raising first time funds and an overwhelming number of them without prior institutional venture investing experience.

2) Most faced the same issues around the fundraising (long/painful) and firm building process.

3) The LP’s in attendance expressed intrigue into the Micro-VC category, but very few had taken an active role in allocating to Micro-VC funds.

A year later, the Micro-VC market has distinctly evolved as I’ve covered in my recent writings. As we near closer to the 2nd annual RAISE summit on May 10th, we decided to preemptively gauge the temperature of LP’s today toward Micro-VC through a quick survey of venture allocators.

The sample size here was ~50 LP’s.

(Note — Clearly my skill set is not graph design, so apologies for the rough illustrations)

The breakdown of the LP’s in the study was the following:

Below are a few of the questions that were posed in the survey:

Takeaway: It was bit surprising to see the high % of LP’s that indicated they have an active mandate. This may be a result of the large concentration of Fund of Funds in the sample. Also, I believe the term mandate may have left some room for interpretation. Interestingly, <40% of Endowments responded they had an active mandate for new Micro-VC allocations.

Takeaway: 2016 was not an aggressive year for institutional allocations to first time funds. Only 4% of respondents indicated they had done at least 3 Fund I Micro-VC allocations in 2016 and 40% said they didn’t do any. There a few reasons that likely drove this:

- Driven by fear of a possible long and protracted winter, many large venture fund managers contracted their fundraising cycles and came back to market earlier than anticipated. This flood of brand firms coming to market in the first half of 2016 exhausted many venture allocation buckets, and many new funds were pushed far down the priority stack.

- The respondents in this study were primarily institutional investors, which generally tend to have reduced appetites for first time funds (many of which are raised by first time managers).

The LP’s in the data set appear to be poised to be far more aggressive in 2017, with less than 10% indicating they’d do no first time fund investment during the year.

Takeaway: Historically, institutional LP’s haven’t been incredibly excited about first time manager allocations as questions around both institutional investing acumen and operational firm management represent just too great of a risk. That being said, I have had several conversations over the last few months with LP’s that are willing to make bets on first time managers if true differentiation exists. Still, I’m not overly sanguine that many institutional LP’s will invest in true first time manager Fund I’s in 2017.

Takeaway: Historically, LP’s generally were fairly split on whether to invest in solo GP’s funds, an opinion that has clearly shifted. While the number is a bit eye-opening it’s not entirely astonishing given the success of many solo GP’s (i.e. Chris Sacca, Steve Anderson, Manu Kumar) and the ability of many solo GP’s to later attract talent with firm scale (Aydin Senkut, Jeff Clavier, Mike Maples, etc.).

Takeaway: The big takeaway here is the great interest in funds that have a distinct sector focus. While most first generation Micro-VC’s were generalist tech investors, it’s clear that the abundance of seed funds in the market today requires clear differentiation of some type, with domain expertise being the leading desire differentiator.

Additionally, the survey expressed that LA and non-core markets are substantially more attractive to LP’s than they were just 18–24 months ago.

While it’s too early to tell how the Micro-VC fundraising market will end up in 2017, it appears to be shaping up as another busy new fund formation year.