though she is little, she is FIERCE

and other meditations on being just the right size in life and VC

Yahel Halamish

Published in

nina capital

8 min readSep 28, 2021

SEPTEMBER 2021

by Yahel Halamish

“The best things in life come in small packages.” These were my mom’s encouraging words of wisdom while raising three daughters, her way to help me and my sisters be ready for the challenges of a life lived without the gift of height. Under her strong will and guide, I learned how to use the shelves in the grocery stores as stools without knocking down entire racks, and reach the last cup in the cupboard without needing a step-ladder. My mom’s efforts to nurture strength despite my genetic shortcoming have made me who I am today — someone able to stand tall in the only way that truly matters.

small but mighty applies to not just people

As I powered through life, stress-testing my mom’s thesis, I found myself joining the team of Nina Capital, a highly specialized health tech, early-stage, micro-VC in Europe. For the uninitiated student of venture capital, some definitions are necessary:

micro-VC : venture capital (VC) firm whose fund under management is, most commonly, smaller than 50M euros in size (though the definition has been challenging, and some sources put this number today to 100M);
early-stage: for Nina Capital, this means first entry checks at the pre-seed or seed-stage;
specialized health tech: focused on startups in the healthcare industry, leveraging digital and deep tech solutions in their business models.

I joined the firm from the perspective of someone who’s spent years with a leading Israeli firm in the field of asset management, evaluating venture capital firms for the opportunity to invest in their funds. I have seen a fair share of firms throughout my career, but Nina Capital was a different, skilled, and dedicated elite unit.

a preamble: the Macro of Micro funds

From a simple Google search, you can find a fair share of articles giving pros and cons to investing in micro-VCs.

Most cons you will find in your search will focus on RISK or the probability of loss. As with any probability, to have an applicable outcome requires a comparable. Micro funds are designed with such a small fund size because in many cases they invest in the pre-seed and seed stages. Investing at these stages does mean a longer time to exit and a higher level of uncertainty on outcomes, on average.

However, much of this excess risk can be mitigated with a clear strategy and a solid knowledge base. Being a micro-VC enables the structure of a specialized fund, investing efficiently in a sizable portfolio. A single early-stage micro-VC fund will typically have about 20–25 portfolio companies. A micro-VC firm with a few funds already underway could have as many as 100+ underlying portfolio companies, alleviating much of the diversifiable, company-specific risk, while maintaining the potential for outperformance.

Also and on the flip side, from an unbiased mathematical perspective, the path to return investors their money is shorter — a consequence of the simple fact that there is no need for a unicorn exit to have a “fund returner” (i.e. a company whose exit generates for the fund returns equal to the size of the fund itself). In a recent report, Kingsbridge Alternative Strategies explains well why small funds consistently outperform large ones, citing previous research showing that small funds consistently outperform large funds after the first year. Perhaps the strongest case for small venture capital funds was written, however, by Invesco: “unsurprisingly, given the risk profile of the underlying companies, early-stage funds outperformed later-stage funds by a fairly wide margin, roughly 800 basis points per year dating back to 1969.”

“The opportunity with small and early stage managers is evident, yet many LPs continue pouring money into large, late stage focused vehicles, compounding the problem, or withdrawing from the asset class entirely.” The Invesco White Paper Series — The case for venture capital.

the Micro of being a specialized fund — in healthcare

To be small coupled with a clear strategy and solid knowledge base is, therefore, a great combo. But why HEALTHCARE? And, does an industry worth on average ~10% of developed countries GDP count as specialization?

First off — with a multitude of sub-segments, specializing in all of healthcare is almost impossible. By mapping the sector, one can quickly grasp the magnitude of knowledge required to understand the full spectrum of opportunities for innovation (hence, new investable businesses) in the sector.

With such a broad spectrum of opportunities, specializing in a sub-segment is crucial. But how much specialization is too little? And how much is just enough?

Many funds in the sector differentiate themselves between:

AgriTech — Pharma/Biotech — Others

In my view, to be a truly specialized investor, one ought to go deeper. Especially when opening the black box of ‘others’. In it, we find technology-based businesses that also attract generalist investors, who see the opportunity as a match, for example, for their ‘software’ or AI-based fund theses. However, a company developing SaaS that meets healthcare needs is first and foremost a healthcare business and only second a SaaS company. Thinking in terms of technology just doesn’t cut it. Investors ought to have a thesis so that investment decisions trickle down from the north star that charts their path into this vast territory.

Why is this so important? Generalized examples are often the best way to illustrate points, so here it is:

Imagine you developed an AI-based technology to analyze some type of medical test result. In a simplified way, it is about data processing, but the root is more complex. When intended to diagnose, treat, prevent, cure, or mitigate a disease or health condition, formal approval from the regulators is necessary before a technology can truly become a product in the market. Even more critically, understanding the stakeholders’ map is key. Will the product be used in… laboratories? Primary care providers? Who decides to pay, and on the basis of evidence of what? Who pays, and why would they? Once this is part of a clinical pathway, who is to gain? And who is to lose? The alignment of value* between all the different stakeholders who often have misaligned incentives is so difficult to find, it is a wonder innovation even happens.

(*value = the importance, worth, or usefulness of something, whether it be clinical, economic, ethical, and so forth.)

Not only that, but fully understanding the stakeholders’ map is even harder when applied to different countries. The technology may very well be the same. But how do the product and the business model change, when the company is marketing in a fee-for-service healthcare system versus a value-based healthcare system? And there are many variations of both as each country with one type of healthcare system incorporates elements of the other.

Specialization based on first principles of value-based healthcare investing in a specific segment of the industry is key for the investment decision process. And as it turns out, also to support entrepreneurs who are trying to navigate this complex environment — which further adds to the aforementioned de-risking of early-stage investing. Once the flywheel is in motion, it builds strength at every turn.

I’ll add that we have all seen the headlines prizing the sector in the pandemic days. Healthcare remained RESILIENT during the COVID-19 crisis. It is outperforming the market, infusing more cash, and strengthening the industry. What was previously important has become a timely imperative.

the importance of the intersection

Not only micro-VC enables the structure of a specialized fund, picking companies from a smaller pool of deals and with less pressure to deploy large amounts of capital. Having a focused strategy also helps when building a custom-built team with all the necessary dimensions. With one thesis in mind, the needs of the fund are clearer, enabling the fund manager to build the elite unit that will tackle the challenge.

Investing at the earliest stages requires going back to the first principles — there’s no EBITDA, and very often, no product at all. Binary risks set by regulatory and reimbursement challenges may still be looming at the horizon. Having the experience and tools to see past that hurdle is key for successfully mitigating this risk. This is especially true when dealing with complex, multi-stakeholder environments such as healthcare.

Specialized funds are designed in a way that positions them to make better-informed decisions, and therefore have a higher probability of being great seed stage investors.

no fund is an island

The saying “no man is an island” also holds true for funds. There is an entire ecosystem to be considered. Funds mutually feed on each other’s deal flow. Entrepreneurs and funds mutually feed on each other. And then there are corporations, private equity, large institutions, social and impact causes, and many other stakeholders.

*Venture Pulse, 2020 Global Analysis of Venture Funding, KPMG Private Enterprise.

Money is a commodity; as dry powder increases, the number of micro funds is actually decreasing. The YOY change in seed-stage valuations is modest compared to the later stages, especially in Europe.

There is a need for seed funding. Moreover, there is a need for disciplined seed funding. One that can empower entrepreneurs and support them as they develop their products. Entrepreneurs need specialized VCs who can provide them better support when scaling. And truth be told, later-stage VCs need micro-VCs to give them good quality, pre-vetted deal flow.

In essence, venture capital firms are no different from the startups they invest in. Operating in a multi-stakeholder, competitive environment requires specialization, differentiation, and a very clear strategy — especially, at the earliest stages of company formation.

If you are thinking about investing in the venture capital asset class, ultimately, there may not be an easy way to determine the “ideal fund size” for you. With all the variables to consider, including the chosen markets, the investing strategy, the purported skill of the team, choosing the right fund is seldom easy. But if you think a fund is too small to invest in, perhaps it is worth asking yourself what specifically makes that fund “too small.” Given the specific, pronounced qualities that smaller funds offer vis-à-vis their bigger peers, small funds are absolutely worth the risk. As the evidence shows, their performance is likely to outshine bigger funds, which means that they should ordinarily be preferable to investors.