When I look through my LinkedIn network these days it appears every fifth contact is a venture capitalist of one kind or another. When I started in the early stage funding world 20 years ago, the VC was a rare breed since they had access to venture funding. Most of them were in a handful of tech clusters in the US- Silicon Valley, New York, and Boston to be exact and they were few and far between.
Types of VCs
At that time, a typical VC had a $100M fund or greater which they raised from LPs or limited partners – primarily the pension funds. They operated in ten year funding cycles which means they could run a long ways off one good return. They charged 2% management fees and a 20% carry.
In the 2000s, angels grew to prominence because the cost of starting a business came down so much, startups no longer needed $5M to start a web business but could now do the same thing for $500K. Angels became attractive financiers because they were more numerous and easier to access. Today, MicroVC, NanoVC, Venture Studios and Corporate VCs are coming onto the startup scene with new fund sizes and funding models.
MicroVCs raise $25M to $50M fund while NanoVCs raise $10M to $15M funds. Aside from the size of fund, the main difference is that Micro and Nano VCs typically target a narrower criteria – either a specific geography or type of deal. Many use the pledge-fund model which means each deal the MicroVC wants to fund has to go through a screening process by the limited partners.
Because the fund size is small most MicroVCs are taking 3% in management fees and a 20% carry. Given the size of the fund, they can only invest in 5-10 deals. The fund lasts only a few years before it’s time to raise the next one. They raise primarily from family offices and high net-worth individuals.
NanoVCs also raise funding from family offices and typically use a pledge fund model. They use a narrow criteria and can run for a year or two before the fund is deployed. They focus on an even more narrow range of deals since the fund size is small and there’s no room in the management fee for a large staff to help with deal flow and diligence.
Then there is the Venture Studio model. This type of VC essentially builds a team from which the team then launches a startup usually with an ecosystem of providers as support. This works well for one stripe zebra startups that provide niche products or services as they can tie into a bigger team and share resources.
Finally, there is the strategic or corporate VC which seems to be popping up everywhere. Amazon recently announced their fund. A venture fund provides a competitive advantage for burnishing the company’s brand and selling its product. They invest for strategic reasons rather than financial ones in most cases.
Since there are so many funding options available the primary question today is “where do you start your fundraise?”
Hall T. Martin is the founder of TEN Capital and a builder of entrepreneur ecosystems by startup funding through angel networks, funding portals, syndicates, and more. Connect with him about fundraising, business growth, and emerging technologies
