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VC Galaxy

The Rise of Microfunds: The Future of Venture Capital?

October 22, 2024
4 min

While megafunds often dominate headlines, attracting attention with multi-billion dollar investments and massive returns, the real story reshaping the venture capital landscape might just be the rise of microfunds. These smaller, more nimble funds are making a significant impact, delivering competitive returns while avoiding some of the challenges faced by their larger counterparts.

This is what the classic microfund VC structure looks like:

Why Microfunds Are Gaining Momentum

🟣 1. Historical Outperformance of Smaller Funds

One of the key reasons for the growing prominence of microfunds is their historical performance. Data from PitchBook shows that microfunds, typically defined as those managing less than $50 million, have consistently outperformed larger funds in terms of return multiples. This is particularly true for funds that focus on early-stage startups, where there is significant room for growth.

Smaller funds can often invest at earlier stages, taking on higher risk for the potential of outsized returns. These early-stage investments are frequently less crowded with competition from megafunds, allowing microfunds to secure more favorable deal terms. According to Harvard Business Review, smaller funds are better positioned to deliver higher internal rates of return (IRR) due to their focused strategies and targeted exits .

🟣 2. Agility and Speed in Decision-Making

Unlike larger venture firms that have bureaucratic decision-making processes, microfunds—often led by solo general partners (GPs)—can move quickly and decisively. The flexibility and speed of these smaller funds give them a competitive edge when it comes to seizing new opportunities, especially in fast-moving sectors like artificial intelligence (AI) and fintech.

This ability to act quickly is crucial when investing in early-stage startups, where timing can be everything. With fewer layers of approval and a more concentrated investment thesis, microfunds can respond to founders and market shifts in real-time. This agility often translates into better deals and stronger partnerships between investors and startups.

🟣 3. Sector-Specific and Geographic Specialization

Microfunds often have a laser focus on specific sectors or geographies, which gives them a deep understanding of the markets in which they invest. This specialization allows fund managers to develop expertise and establish strong networks in their areas of focus, whether that's in AI, healthcare, or a particular region.

For example, as the rise of pre-seed and seed deals continues, microfunds are increasingly backing young companies before they become unicorns. With their targeted approach, microfunds can support startups in achieving sustainable growth, often leading to meaningful exits without the pressure of scaling prematurely.

2024: The Microfund Landscape in a Shifting VC Market

The venture capital ecosystem in 2024 presents a unique landscape for microfunds. While overall VC fundraising has declined due to macroeconomic pressures, there is still more capital flowing to startups than in most of the last 30 years.

One notable trend is the dominance of AI in the startup world. As of 2024, 42% of new unicorns are AI companies, highlighting the significant opportunities in this space. Microfunds are well-positioned to capitalize on this wave of innovation by investing in early-stage AI startups and helping them scale responsibly.

At the same time, an increasing "Series A crunch" is becoming apparent, where seed deals are far outpacing Series A deals at a rate of 3-to-1. This imbalance shows that while early-stage startups are booming, securing growth funding is becoming more challenging. Microfunds can play a pivotal role here by providing the necessary capital to bridge the gap and ensure startups can continue to grow without being stymied by the lack of later-stage investment.

Microfunds' Strategic Focus on Smaller Exits

From the perspective of a $25M fund manager, smaller, more strategic exits can provide meaningful returns to limited partners (LPs). Microfunds excel at identifying opportunities for early exits that might not attract the attention of megafunds, but still offer substantial returns.

For example, instead of pushing for a unicorn-sized exit, microfunds often focus on responsible scaling and finding acquisition opportunities at an earlier stage. This approach helps mitigate risk for both the startup and the investors, while delivering a healthy return on investment.

Are Microfunds the Future of Venture Capital?

As microfunds continue to thrive in the venture ecosystem, many are beginning to wonder whether they represent the future of venture capital or if they are merely filling the gaps left by larger funds. With their ability to act quickly, specialize deeply, and target high-potential early-stage startups, microfunds are proving to be more than just a temporary trend.

While megafunds will always have their place in the venture landscape, particularly for later-stage investments and scaling companies to the next level, microfunds are carving out a unique and valuable role. By focusing on early-stage companies, embracing niche sectors, and delivering meaningful exits, microfunds are poised to continue reshaping the venture capital industry.

In the end, both types of funds serve different purposes, but the rise of microfunds is undeniable. For LPs seeking strong returns with lower risk, microfunds might just be the smarter, more strategic bet.

Key Players in the Global Micro VC Market

Sourced via Eqvista.

Fund Size – $0-25M

212 Capital Partners | Florida | Multi Sector
55 Ventures | SF/NY | Multi-sector
645 Ventures | NY | Multi-sector
Accelerator Ventures | SF | Multi-sector
ACE & Company | Switzerland | Multi Sector
Advancit Capital | Boston | Multi-sector
AF Square | LA | Multi-sector
Allegro Ventures | SF | Multi-sector
Arcus Ventures | Chicago | Multi Sector
Arnold Capital | SF | Multi-sector
Array Ventures | SF | Enterprise
Base Ventures | SF | Multi-sector
Bassin Ventures | SF | Mobile
Bee Partners | SF | Multi-sector
Belle Capital | MI | Multi-sector
Bennu | SF | Multi-sector
Blackbird Ventures | Australia | Multi-sector
BOLDstart Ventures | NY | Enterprise
Bolt | Boston | Hardware
BoostVC | SF | Multi-sector
Bootstrap Labs | SF | Multi-sector
Brooklyn Bridge Ventures | NY | Multi-sector
Canyon Creek | LA | Multi-sector
Center Electric | SF | IoT
Coent Venture Partners | Singapore | Multi-sector
Commerce VC | SF | Commerce
Common Angels | Boston | Multi Sector
Core Ventures | SF | Enterprise
DAN fund | Tx | Multi-sector
Darling Ventures | SF | Multi-Sector
Designer Fund | SF | Multi-sector
Detroit Venture Partners | MI | Multi-sector
Divergent Ventures | WA | Multi-sector
Dorm Room Fund | NY | Multi-sector
Double M Partners | LA | Multi-sector
Drummond Road Capital | OH | Multi-sector
Dundee Venture Capital | Ne | Multi-sector
Female Founders Fund | NY | Multi-sector
Fenox Venture Capital | SF | Multi-sector
Firebolt Ventures | SF | Multi-sector
FireStarter Fund | IL | Multi-sector
First Step Fund | Michigan | Multi-sector
Fortify.vc | DC | Multi-sector
Founder Equity | Chicago | Multi-sector
Founders Co-op | WA | Multi-sector
Fresh VC | NV | Multi-sector
Fuel Capital | SF | Multi-sector
Galvanize Ventures | SF | Multi-sector
Golden Gate Ventures | SF | Multi-sector
GovTech Fund | SF | Government tech
Hackers and Founders | SF | Multi-sector
Healthy Ventures | SF | Digital Health
Indicator Ventures | Boston | Multi-sector
Inner Product | SF | Multi-sector
Inspiration VC | SF | Multi-sector
K Cube Ventures | Korea | Multi-sector
Kae Capital | India | Multi-sector
Kapor Capital | SF | Multi-sector
LaunchCapital | Boston | Multi-sector
Lemnos Labs | SF | Hardware
Lifeline Ventures | Finland | Multi-sector
Lionbird | Il | Enterprise
Ludlow Ventures | MI | Multi-sector
LVenture | Italy | Multi-sector
Matchstick Ventures | Mn | Multi-sector
Maven Ventures | SF | Consumer
mbloom | Hawaii | Multi-sector
MentorTech Ventures | PA | Multi-sector
Mesa Ventures | NY | Multi-sector
Midven | UK | Healthcare
Moneta Ventures | Folsom | Multi-sector
Montage Ventures | SF | Multi-sector
Monte Carlo Capital | Monaco | Multi-sector
MontaVista | SF | Enterprise
Morado Venture Partners | SF | Multi-sector
Moscow Seed Fund | Russia | Multi-sector
Mucker Capital | LA | Multi-sector
Neu Venture Capital | NY | Multi-sector
NewSchools Venture Fund | SF | Multi-sector
Notation Capital | NY | Multi-sector
Novastar Ventures | UK | Multi-sector
Okapi Venture Capital | LA | Multi-sector
Pipeline Capital Partners | SF | Multi-sector
Plug and Play Ventures | SF | Multi-sector
Practica Capital | Lithuania | Multi-sector
Precursor Ventures | SF | Multi-sector
Primary Ventures | NY | Multi-sector
Progress Ventures | Boston | Multi-sector
Quest Venture Partners | SF | Multi-sector
Red Swan Ventures | NY | Multi-sector
Riverfront Ventures | Pittsburgh | Multi-sector
Rothenberg Ventures | SF | Multi-sector
Rubicon VC | SF | Multi-sector
Scout Ventures | NY | Multi-sector
Scrum Ventures | SF | Multi-sector
Social Leverage | LA | Multi-sector
Starta Capital | Russia | Multi-sector
Subtraction Capital | SF | Multi-sector
Susa | SF | Multi-sector
Sustainable Conversion Ventures | Arizona | Renewable energy
SXE Ventures | Hong Kong | Multi-sector
TEEC Angel Fund | SF | Multi-sector
TenOneTen | LA | Multi-sector
The Launch Fund | LA | Multi-sector
The Valley Fund | SF | Multi-sector
Thesis Ventures | Florida | Multi-sector
Three Bridges | SF | Multi-sector
Tomorrow Ventures | SF | Multi-sector
Unitus Seed Fund | Seattle | Multi-sector
Unshackled | SF | Multi-sector
Uprising VC | SF | Multi-sector
Utthishta Management Advisors | India | Multi-sector
Vast Ventures | NY | Multi-sector
Vayner/RSE | NY | Multi-sector
Velos Capital | LA | Multi-sector
Venture51 | NYC | Multi-sector
Winklevoss Ventures (Capital) | NY | Multi-sector
WISC Partners | SF | Multi-sector
Work-Bench Ventures | NY | Multi-sector
ZenShin Capital | SF | Multi-sector
Ginossar Ventures | NY | B2B SaaS

Fund size: $25M-$50M

112.VC | SF | Enterprise
212 Capital | Turkey | Multi-sector
Aligned Partners | SF | Enterprise
Amplify Partners | SF | Enterprise
Aperture Ventures | NY | Healthcare
Arafura Ventures | sf | Multi-Sector
Arena Ventures | LA | Multi-Sector
Birchmere Ventures | PA | Multi-sector
Bluepointe Ventures | SF | Multi Sector
Blume Ventures | India | Multi-sector
Bowery Capital | NY | Multi-sector
Bullpen Capital | SF | Multi-sector
Caffeineited Capital | SF | Multi-sector
Cervin Ventures | SF | Enterprise
Chicago Ventures | IL | Multi-sector
Clear Venture Partners | SF | Enterprise
Cloud Apps Capital Partners | SF | Enterprise
Collaborative Fund | LA | Multi-sector
Contour Venture Partners | NY | Multi-sector
Core Innnovation Capital | LA | Multi-sector
CrunchFund | SF | Multi-sector
Crystal Tech Fund | VA | Multi-sector
Cultivation Capital | MO | Multi-sector
Dace Ventures | Boston | Multi-sector
Data Point Capital | Boston | Multi-sector
Deep Fork Capital | SF/NY | Multi-sector
Draper Associates | SF | Multi-sector
Ecosystem Integrity | SF | Cleantech
Engineering Capital | SF | Enterprise
Expansive Ventures | SF | Multi-sector
FF Venture Capital | NY | Multi-sector
Flywheel Ventures | NM | Multi-sector
Freestyle Capital | SF | Multi-sector
Frost Data Capital | LA | Big Data
Frost Venture Partners | LA | Multi-sector
High Line Venture Partners | NY | Multi-sector
Hoxton Ventures | UK | Multi-sector
Illuminate Ventures | SF | Enterprise
Initialized Capital | NY | Multi-sector
Inversur | Chile | Multi-sector
K9 Ventures | SF | Multi-sector

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