Micro-funds introduce smart funding to seed ventures
More democratic model benefits entrepreneurs, investors and the public at large.
Tel Aviv Stock Exchange Photo: Gil Cohen Magen / Reuters
Near-zero yields of the past few years have been driving the traditional venture
capital (VC) funds to change course and streamline, transforming the venture
capital model as we have come to know it in more than one way.
traditional VC funds consolidate into massive investment entities to invest in
mega-projects such as the next generations of web, applications and mobile
security solutions. Others merge, disappear or continue managing their current
portfolio without further investing at all or while investing in start-up
companies in later stages. Ventures’ prices at these stages may be higher but
they offer lower risk, leaving the VC fund room to make profit.
vacuum which the traditional funds leave behind them has been filling up in the
past few years with micro-funds and professional “angels” that invest in
ventures in seed and early stages. These ventures are mostly involved in the
areas of consumer, end-user and software for the Internet and mobile worlds.
Examples include Lool Ventures and The Time, both of which have completed a
Prominent angels and micro-funds in this space
include Zohar Gilon, Rhodium, Partam, Tal Bar – Noah, The Time of Ilan Shiloach
and Nir Tarlovsky and YL ventures of Yoav Leitersdorf.
And yes, there are
also the traditional funds which partially adopt the new micro-fund model.
Examples include Index Ventures, an international fund, Genesis Partners with it
“The Junction” and Jerusalem Venture Partners and their “Media Quarter”
Micro-funds invest in ventures with relatively low value, in the
range of $1 million-$2m. up to $14m.- $16m. Until recently, ventures of this
size had no professional and methodical funding solution available to them on
the market and were forced to rely on related parties or unprofessional angels.
Short of the right connections or capital-raising expertise, some tried to make
it without funding altogether. The micro-funds are now moving in to fill the
space with smart funding.
High risk was the main reason the VC industry
shied away from small start-ups in these fields. Additional reasons include the
strong involvement and the prohibitive management costs required in this early
Micro-funds and professional angels, however, can afford to invest
in early-stage start-ups because their investments are small and more widely
dispersed across a broader range of ventures.
Companies’ prices are
considerably lower at this early stage and the micro-funds enter them with
positions of five percent to 15%, unlike the VC funds which enter as controlling
shareholders or large minority shareholders to justify the management fee they
collect from their investors and to obtain a return on their
THE ENTRANCE of micro-funds and angels into the market has
far-reaching implications for the entrepreneurs, the investors and the public at
Firstly, the board of directors of the start-up company is run in
a more democratic manner from the outset since it includes a significant number
of professional investors. The investors appoint a consensual “the-bestamong-
us” chairperson to represent them and take the company forward in collaboration
with its founding team.
This is very different from the hierarchic,
“monarchic” management style which characterizes investors with controlling
shareholder or large minority position.
The democratic management model
offers several important benefits: It preserves the entrepreneur’s independence
and authority to take the best decisions from the start-up’s perspective, and
allows investors to determine the quality of management by the actual
The distribution of the burden between five to 10
professional investors makes it easier for everyone in terms of the time they
need to dedicate and also in terms of funding the venture through to maturity if
Smaller burden translates into saving the precious time
consumed by additional capital-raising rounds, and into the ability to ensure
continuous development without getting stuck because of insufficient
Since the micro-funds and the angels see the companies through
to the exit, either by selling it to a traditional fund, corporate M&A or
through an IPO, the professional board accumulates knowledge and experience with
the company throughout its early years.
Consequently, it is more capable
of assessing the pace at which the company progresses, the quality of its
management and its suitability for the next stage of funding.
advantage is that failing ventures, which previously obtained funding based on
connections alone, are no longer nurtured at all. In other words, having an
angel or micro-fund look after the venture provides it with a “quality stamp”
for the more traditional funds that move in at a later stage.
say, the traditional venture funds benefit from a deal flow of better quality as
a result of the close, professional attention the start-up has been
Theoretically, the broad investment distribution of the
micro-funds, which manage up to $20m.-$50m., could result in a portfolio
identical to that of an ETF or mutual fund, which can be issued in stock
exchanges around the world. Hopefully, as this area develops, we will see
micro-funds issuing an entire portfolio, obtaining yields as well as exercising
flexibility, in the negotiable capital market.
If this happens, the
non-professional public will become exposed for the first time to investments
across the fund’s portfolio. It will stand to gain from the entire profit
potential without having to try and understand the nature of each
This is very different from the current situation, in which
“laypersons” can invest only in ventures the professional investors have opted
out of, namely the companies that have the lowest prospects of success, and
without tools to assess their potential gain. However, once the micro-funds are
issued on the stock exchange, their results will become visible to the public
and ranked by fund indices.
In conclusion, the micro-funds provide smart
funding to start-up companies, enabling them to work methodically and
professionally with the capital market throughout their evolution: starting a
venture with a truly promising potential; monitoring and analyzing its
performance to increase the investment in the more successful ventures of the
portfolio, thus creating a high-quality, managed deal flow all the way to the
traditional VC funds, and hopefully in the future to the public too, to enable
everyone to benefit from the fund’s full gain potential.
The writer is
CEO of Darya Venture Capital.