US micro-funds play to their strengths in 2021

On Apr 28, 2022

Micro-funds—venture investment vehicles that raise $50 million or less—collected nearly $5 billion across a record 339 US funds in 2021, according to PitchBook data.

These funds offer unique benefits to the VC industry that cannot be easily replicated by larger funds—such as enabling firms to take risks on young companies operating pre-product and diversify their portfolios on both a geographic and sector basis.

“Micro-funds have really adapted to the changing market while also changing the market,” said Kyle Stanford, a senior analyst at PitchBook.

On the LPs’ side, micro-funds provide an opportunity for firms that are either too small to access large funds or are looking to simply get a foot in the door of venture and test out the strategy alongside other investment theses, according to PitchBook’s latest analyst note on the topic.

The rise in the number of micro-funds correlates strongly with the rise in seed deal count in the US.

“There is definitely a correlation because pre-seed and seed are where micro-funds can effectively deploy their strategy and get the best return,” said Stanford.

With a median size of $2.6 million recorded in 2021, seed deals still enable micro-funds to participate and even lead these financings when desired.

The median seed deal size has shown strong growth over the prior decade, but if the number continues to increase, it is going to get much more expensive for micro-funds to participate and put together a small check, said Stanford.