Micro VC For Investment In Early Stage Small Businesses

Micro VC For Investment In Early Stage Small Businesses

The dot com bubble back in the year 2000 really changed the face of venture capital. At that time, anyone with even a small iota of an idea ? especially if it had a dot com behind it ? could walk into any Venture Capital (VC) firm and walk out an hour later with a check for millions.

But, one of the problems was that these VCs were trying to put their old tried and true model on new companies. Example: Prior to the dot com bubble, most VC invested in large scale manufacturing companies ? companies that made high dollar computer equipment or durable goods or were tied to very large industries like aerospace and the like.

However, when the first few dot com companies in the middle to late 1990s went public on a huge scale ? VCs by the truck load changed their course and stated funding any type of Internet company they could get their hands on. But, these Internet companies were a different breed ? especially when compared to the type of firms that these VCs were funding prior. But, while the companies were different ? with different needs, different requirements and different expectations - most VC keep their old funding model.

Combine this with the fact that many of those companies ? even the vast majority that went all the way to the public markets ? should have never received any private equity at all and it is no wonder the bubble burst.

Big Funds and Big Investment ? The Old Model

After the bust, VCs tried to change their models ? some were successful and some were not. However, new players entered the market with a better model on helping these so called internet businesses. They better understood these new companies and the new way in which Internet firms operate in the market place ? since many of the new players came from this space.

But, they did keep one aspect of the old model ? big funds and big investments. It just made since to these VCs that, with the big funds they were raising, they only needed to make big investment ? it was a proper deployment of their capital ? or they would have a lot of money sitting around not doing anything. Thus, their minimum investment levels were $10 million, $20 million or more ? they just had some much money to put out there. Given that only 1 in 10 would actually payoff ? they focused on large investments in small companies (which ultimately lead them to only invest in big companies because big companies could only sustain such large amounts of invested capital).

Thus, VCs were looking for large investment opportunities but the companies needing financing (their potential customers) were not.

Funding Gap

What resulted was a huge funding gap ? especially for small Internet companies that only needed a small or modest amount of investment (around $1 million to $2.5 million) ? companies that fit the private equity model but could not get debt financing (business loans).

Over the last 12 years or so, what has happen is that Angel investors have stepped up in hopes of funding some of those small firms that were getting left out of the mix. Again, the problem with angel investors is their limitations of capital and their unwillingness to invest larger sums in one company (just the opposite of VCs).

Thus, angel capitalist were targeting the lower end of the spectrum ($50,000 to $100,000 per investment) and VCs were targeting the upper end ($10 million or more). But, what about those great small businesses in the middle ? they were just being left out.

Small Funds and Small Investment ? The New Model

Today, we see a new shift in the market. It started with angel investors getting together to form investment groups. Thus, if each individual angel was willing to invest $50,000 in a company, 5 or more angels in the group could push that investment level up to $250,000 or more. Not back ? helping to shrink the funding gap.

In time, over the last few years, they have even development Super Angel Groups that could invest up to $1 million in a single deal. Moving in the right direction to get the supply of money to meet the demand.

The New Breed ? Micro VC

Now, there is a new breed of VCs ? these Micro VCs ? that are stepping up to fill the rest of this funding gap. How they are doing it is by only raising small funds and only making small investments ? in the $1 million to $2.5 million range ? exactly what these small companies were looking for.

How these funds work is they tend to make small initial or seed investment ? either alone or in syndicate (something that was very hard to do with angel investors ? even through these super angel groups). These investments are designed to take the business to that next stage of development. Then, at that point, the Micro VC could either follow on their investment or hand the business off to the more traditional VC firms (when it actually fits that bigger model).

Other benefits of Micro VCs include:

• Smaller investment means smaller equity stakes of the investee firm (the small business) ? thus your business would give up less in equity for that investment,
• Micro VCs invests in 10s or 100s of businesses per year where traditional VCs only invest in one or two a year ? more opportunity for your company to get funded,
• They bring more to the table, are more willing to help grow the company and better understand the need and requirements for these small companies to grow and prosper.

Conclusion

If you feel that your business has been left out of the funding mix ? unable to finance your growth with debt but to small for traditional venture capital, now is your time. A quick Internet search for "Micro VC Firms" may just be the first step to getting your company the seed money it needs today.

Source: http://www.businessmoneytoday.com/blog/finance-blog.php?num=185

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