There are more than 200 “micro VCs” (fund sizes < $100m), a number which has grown significantly over the last decade and even since just 2013 when we started Homebrew. Folks who aren’t in the trenches of early stage investing often assume that this sheer volume makes “competition” my #1 worry. Quite the opposite — I feel near zero competitive pressure from 95% of similarly sized funds. Most have different strategies, focus areas and networks. They tend to fill in rounds around our lead or fund companies that wouldn’t be a good mutual fit for Homebrew. They can be successful (or not) without impacting my business. Availability of capital does not equal commodification of capital.
So what about the other 5% of funds? In my worldview there are ~10 seed funds that focus exclusively on this stage of company, in areas we’re interested in and also credibly seek to lead rounds. Some also have operating experience (since Satya and I believe that’s an important part of our value proposition). Most have been around longer than we have and have proven to be good investors. But yet I still think of them holistically as coopetition, not pure competition. Why?
1. Many seed deals have two leads, which means we are collaborating with them as often as we’re competing
2. You spend a lot of time together in the marketplace and have chance to share notes about what’s changing in the environment, how to help entrepreneurs generally. Seed stage is cordial and relationship driven.
3. Most opportunities we don’t all see/agree on — that is, out of every 100 seed startups, you can expect consensus on very few so it’s not often that we and our peer funds are all looking at the same deal and trying to win it.
So for me the competition at seed stage isn’t about winning deals, it’s about seeing deals. I want to be in that handful of funds that a founder (or their advisors) want to talk with about their NewCo. It’s not enough to be thought of as a generally nice guy; fund returns are made on being able to be among the first to see opportunities. Our Fund I was heavy marketplaces, API/SDK, SaaS and Direct to Consumer. In Fund II besides extending in those competencies we’re spending an increased amount of time on enterprise/industrial hardware and enterprise collaboration (among others). And we think a lot about what we need to do in these areas to be in a founder’s Top Five. And it’s not trying to be all things to all people but rather concentrating on sets of relationships, competencies and companies. For a new VC, this is probably the hardest aspect of building dealflow.