MICRO VC EXPOSURE TO TOP SERIES A VC FUNDS
This report analyzes exposure of Micro VC funds to Series A rounds led by top VC firms. Understanding the relationship between seed deals invested in by Micro VCs and Series A deals led by top VCs provides insight into whether investing in Micro VCs could potentially provide derivative exposure to top VC funds, which may otherwise be closed to new investors.
Our analysis aggregates Series A deal activity of 9 top VC firms, as well as the seed rounds that preceded those investments. Using the timeframe of 2014 to 2015, we gathered all Series A deals done by these firms (as reported on Crunchbase) and determined (1) whether there were seed rounds; (2) which seed investors participated in the seed rounds; and (3) which seed investors participated in the Series A rounds. 17 seed funds and accelerators appeared most frequently. See a summary of our findings below.
SEED DEALS THAT RECEIVED FOLLOW ON SERIES A FUNDING FROM TOP FIRMS
The 9 top Series A firms invested in 250 Series A companies from 2014 to 2015. Of the 250 Series A deals, 36% did not report a seed round. Curiously, the top firms only participated in ~23% of seed rounds preceding the A rounds. Over 75% of startups studied had seed rounds with no participation from top VCs until Series A.
We chose our top 9 firms, based on the knowledge that VC is a game of exceptionalism. Since returns are fairly concentrated, we decided to use a small but statistically significant set of funds that have demonstrated the ability to influence extraordinary M&A and IPO outcomes, invest in category-defining companies, and repeatedly generate alpha for LPs. Due to their elite returns, these funds are very difficult for new LPs to get into.
Our 645 Voyager software uses modern analytics based on multiple criteria such as follow-on funding velocity, concentration of follow-on funding, and exit ratios. We used our score rankings to distill the following selection:
MICRO VC ACTIVITY IN DEALS THAT REACH TOP SERIES A ROUNDS
There were 160 seed rounds that eventually raised Series A rounds from the 9 top VC firms. There were 17 groups that appeared most frequently in the seed rounds (see chart below). The most active seed firm (SV Angel) participated in 5.6% of the seed deals. This shows low overall exposure to top Series A deals for seed funds. However, top seed funds demonstrate that a meaningfully higher percentage of their portfolio companies reach Series A. As an example, Crosscut Ventures had ~50% of their relevant seed deals from 2011 to 2013 reach top Series A, and multiple funds had 20% to 35%. The top performers are “sharpshooters” who do a small number of seed deals per year but appear to have a high hit rate. These sharpshooters outperform the average, which is only 7% of deals that reach top Series A.
Top Series A funds participate infrequently in seed rounds. Since a meaningful percentage of the seed deals made by certain Micro VCs reach top Series A, investing in a diversified portfolio of sharpshooter Micro VC funds can in fact provide substantial exposure to top Series A deals.