The Melting Pot of Venture Capital Funds Through Their Investment Phase
“Many people in the venture capital business are sheep who just want to follow the herd. They are momentum investors who buy very illiquid investments. That’s a recipe for disaster.” Fred Wilson (co-founder, Union Square Ventures)
In 2020 a trend in capital raising was mega funds with a total raised of USD$69bn in the US alone. However, this type of fund is only one part of the Venture Capital ecosystem worldwide. There are other types of funds that can be categorized according to the stage at which they invest either in Mexico or in other emerging countries:
- Micro equity: Micro equity funds are micro funds that usually invest very small tickets in early stage ventures (business planning or product development), which are usually less than USD$500k. They usually promote issues of equity, inclusion, diversity and social responsibility. Given the nature of their investments, these funds have a smaller size compared to others, are smaller than USD$10mm and are identified by having simpler due diligence processes, as well as investing in instruments such as convertible notes, SAFEs, among others. Some micro equity funds in the market are KCQ Equity and Seed Invest.
Sometimes micro equity funds are created by first-time investors starting their careers in the VC world. Investors in this type of funds can be multilaterals (e.g. IFC and IDB), governments, foundations, etc. These funds also support the startups in their portfolios by providing them with tools to improve traction, find product-market-fit and help strengthen the team.
- Early stage: these funds usually invest when the startup already has a product development and is in operational development with a view to grow. Investment rounds are usually Pre-Series A, Series A and Series B with a range of USD$5mm to USD$30mm. These funds typically have assets under management of at least USD$50mm with the average being USD$150mm. There is a thorough approach to the investment process with full due diligence. The funds typically invest using convertible notes, SAFEs and equity. Some emblematic funds are Monashees, Kaszek, SOSV, Lightspeed, New Enterprise Associates, Sequoia, Andreessen Horowitz, General Catalyst, among others.
An important feature is the professional experience and track record of the managers of these funds. This allows them to raise larger funds with sophisticated investors (LPs) such as pension funds, endowments, corporations, family offices, among others. Early stage funds help their portfolio companies to develop their expansion processes, provide advice in the formation of the organizational structure and facilitate future capital raising.
- Late stage: These funds are characterized by investing capital in more advanced and growth stages where startups have already reached a relevant traction in the market. They participate in investment rounds of more than USD$30mm that are related to Series C and later. The size of these funds is usually larger than USD$500mm, even the most relevant are mega funds with more than USD$1bn. The investment process is detailed, thorough and in some cases can take several months. The preferred investment instrument is usually preferred equity. The most representative funds are Softbank, Norwest Venture Partners, Bessemer, Accel, Tiger Global, Insight Partners, ICONIQ Capital, Batery Ventures, among others.
The managers of these funds have strong teams with specialists in each of the relevant areas. They usually have multiple funds that invest throughout the life cycle of a startup. Their investors are similar to early stage funds. These funds undertake the transformation of a startup to a formal company, which can be acquired or listed on public stock markets, support in the process of expansion into multiple geographies and new business segments as well as pursue potential M&A transactions.
Throughout the different stages of a startup’s life, there will be multiple investment funds that will invest in the development of the company. If you are in the process of raising a fund, keep in mind your experience, capabilities and networks to determine which stage to focus on. If you are an investor consider which fund is ideal for your investment thesis.
Venture capital funds are strategic players in the innovation and entrepreneurship ecosystem. As in everything, some just live off their marketing, others really have robust teams and processes. Venture capital is not for all investors.
“All markets have boom and bust cycles, and I think the venture capital market has even more exaggerated boom and bust cycles.” Fred Wilson (co-founder, Union Square Ventures)
Note: Please refer to the original publication at EL CEO: https://elceo.com/opinion/el-crisol-de-fondos-de-venture-capital-por-medio-de-su-etapa-de-inversion/
ACV is an international Corporate Venture Capital (CVC) fund investing globally in Startups & VC funds.
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