TL:DR Micro-VCs have been springing up across Silicon Valley like mushrooms. However, they are still a rarity in the UK. This creates challenges for early stage tech founders looking for capital.
Founders often under-estimate how difficult raising their first seed round will be. They understandably assume that this is what VCs are there for. After sending their decks out to VC firms that they have identified on the internet they are greeted with a stony silence. Once they realise that VCs are not going to bite they are forced to start from scratch with a lengthy and painful angel round.
The problem is that UK based VCs are rarely looking for early stage deal-flow.
In the US, venture capital now spans nearly every stage of the funding cycle. I recently heard the term nano-VC has been coined and micro-VCs are now well established, particularly in The Valley. This is probably because later stage VC is over-subscribed and therefore competition at that level is going tough for new players without track record. There is a constant flow of promising startups offering compelling returns for investors willing to take the early stage risk.
In the UK the VC sector is less mature. There are far fewer firms overall and those that do exist are tending to move to later stage with each new fund they raise. VCs that have raised a £100m fund with a team of 10 you are not going to want to deploy capital over too many investments because the transaction costs will increase as each new startup takes considerable effort to manage. Therefore, VCs will seek to manage a portfolio with smallest number of investments that will allow them to adequately diversify risk. New micro-VCs, usually move to series A once they have established credibility with their first fund. This leaves a gap at early stage which can currently only be filled by angels and SEIS funds.
Seed funds tend to move up to series A the next time they raise.
This represents a challenge for high potential startups as angel rounds are lengthy to build and small SEIS funds are often very unfriendly to founders and investors alike. Founders find themselves taking their eyes off the game as they enter protracted fund raising processes.
Seed rounds are so difficult to build because angels investors are hard to identify, investing through a fragmented network of both formal and informal groups.
We believe that technology will ultimately offer a solution to this conundrum. Platforms such as Dreamstake are able reduce the cost of managing several syndicates in parallel. They provide an effective way to deploy capital directly into portfolios of sector specific startups, providing effectively managed angel micro-funds.
Blog by Paul Dowling — Co-Founder of Dreamstake the world’s first tech accelerator platform focusing entirely on taking startups from inception to Series A. Dreamstake identifies promising startups from universities and other accelerators and provides them with access to the resources they need to achieve later stage success. This is achieved through a large programme run out of Google Campus in London and our own network of experts and investors.