Investment goals of micro venture capitalists (MVCs) align perfectly with small businesses. They are flexible and supportive of the new ventures they fund
One cannot emphasise enough that small businesses are the lifeline of any economy in the world. Over the past half-century with the emergence of the knowledge economy, there has been a profound shift from an industrial economy consisting of large corporations to an innovation-driven entrepreneurial economy consisting of small businesses. According to the World Bank, 95% of all enterprises in India are small businesses. Although small in size, their contribution to a country’s overall growth is immense. The importance of small enterprises is well captured in the latest Forbes report, according to which small enterprises contribute as much as 33% to India’s GDP, 40% to India’s overall industrial production and 42% of its exports.
As small businesses are very crucial for a country, an entire ecosystem to encourage them to thrive and survive is essential. Many times for small businesses to take off, the availability of smaller funding options is a boon, because 50% of the enterprises fail to make it beyond the first few years. This has led to a tremendous rise in micro venture capital funding in India. In a start-up ecosystem having other types of investors like angels, incubators and accelerators, family offices, India-focused large funds and large global VC funds, micro-VCs have made their mark and how. As reported by Praxis, their number increased from around 30 in 2014 to 90 in 2020.
A typical micro-VC engages in pre-seed and seed funding rounds with a smaller capital corpus of USD 10-100 Mn. This is in contrast to a large VC with a fund size of USD 50 Mn to USD 1 bn. The currently available statistics show that micro-VCs have infused USD 346 million in 574 Indian start-ups via 741 deals from 2014 to 2020. Micro VCs in India are a mixture of sector-specific and sector-agnostic funds. Some of the prominent sector-agnostic funds are Blume Ventures, gradCapital, Atrium Angels, Better Capital, Capital A and PointOne Capita; whereas Eximius Ventures, Yatra Angel Network, Fluid Ventures and Pentathion Ventures are some of the well-known sector-specific micro-VC funds.
The difference between angels, family offices and micro-VCs is at best blurry as often micro-VC market in India consists of wealthy individuals, HNIs, family offices and angel investors, who want to take advantage of the growing start-up market by pooling their funds and expertise to steer the start-ups efficiently for a potential of high-returns from their high-risk investments.
Due to their low-ticket size funding, micro-VCs find it more probable to expect a 100X return. Let us take an example of a VC and a micro-VC to understand this further. A traditional VC with a fund corpus of Rs. 5000 crores invest Rs. 10 crores in a start-up at the seed stage. To provide the value of 100x, the startup has to create a value of Rs. 1000 cr without dilution. On the other hand, consider a micro-VC with a fund corpus of Rs. 500 crores that invests Rs. 5 crores in a seed stage funding of a start-up. Here it Is easier for the start-up to generate a return of Rs. 500 crores without dilution for the investor. Also, a micro VC has to decide its investment size and invest in a larger number of companies to take full advantage of its investment strategy.
Getting funds from micro-VCs is beneficial for start-ups in several ways. Firstly, micro-VCs show more flexibility than traditional VCs - in their choice of the stage of funding, in their choice of the sector and so on. Secondly, start-ups can benefit from the hands-on approach of micro-VCs and take advantage of their expertise in marketing and strategy. Thirdly, micro-VCs are likely to be more approachable, meeting the entrepreneurs more often and providing them their valuable feedback on various business strategies and decisions. Fourthly, micro-VCs are more likely to be patient and wait longer for the return on their investments. Last but not least, since the funding is smaller, micro-VCs are less likely to have more control over the ownership of the start-ups. So, if entrepreneurs want to hold on to their companies for a little longer, getting funding from micro-VCs can be a great option.
A typical micro-VC may have limited financial and non-financial capital when compared to traditional VCs, but their growth is surely an encouraging development in the Indian start-up ecosystem as they provide options for pre-seed funding which is a crucial initial burst of much-needed support for small entrepreneurs.
(The author is an academician and entrepreneur, views are personal)
