While existing venture capital firms continue to raise larger and larger funds, LPs may have better luck focusing on the small stuff.
Amit Kurz, a general partner at the Israel-based fund of funds Sweetwood Enterprises, thinks so. He told australiabusinessblog.com that last year he started noticing more and more small funds that he didn’t know about getting on the cap tables of competing deals. While these “nano” funds wouldn’t fit Sweetwood’s $140 million flagship fund proposition, he thought it was worth finding a way to support them.
“I got really intrigued about how we can get exposure to that space,” Kurz told australiabusinessblog.com. “They really generate this entry into the most oversubscribed rounds and they invest a small amount of money, which is a classic win-win situation. You don’t compete with the major VCs, yet everyone wants you because you add a lot of value.
So Sweetwood decided to raise a fund for these investors. Now the company is announcing it has raised $20 million for a separate fund to cut checks to $2 million into funds of $15 million or smaller, with a focus on funds based in Israel. Sweetwood has supported seven funds to date.
It also plans to essentially create nanofunds by partnering with angel investors.
For this side of the fund, Sweetwood will work with angels to match their investment in a company while giving them the money the company puts into it. While this would be a blow to the company’s potential returns compared to direct investing alone, they don’t take that kind of commitment to begin with. They have made two such deals to date.
“It’s a no-brainer for these guys,” Kurz said of approaching angel investors. “[They are] do these deals anyway and there’s an outside partner who doesn’t look like a tech scout, but pays like tech scouts.”
The company started raising the nano-focused fund at the peak of the 2021 craze and is now trying to deploy it in very different market conditions where smaller and less established companies are really struggling to raise money. Kurz said that while they were initially apprehensive as market conditions began to deteriorate, they quickly got over that fear as they realized that the funds they back will now write checks to companies at more reasonable valuations and actually have time to pay due diligence .
Kurz, in evaluating these potential investments, said the big question they ask, since neither the angel investor nor nanofunds are big enough to lead any of the rounds they’re in: Why do startups want to take their money? He said the company is looking for funds and individuals who fall under two categories of answers: expertise and access.
For some, especially on the angel investor side, access is king. If you are a notable former tech entrepreneur who is well connected, the thought is that you are only going to hear more notable deals and get invited to join other angels just because of your background. Kurz said these could be angels who were successful or well-known former founders.
On the other hand, Sweetwood is looking for funds and individuals with expertise and specialization that will be sought after by companies to fill rounds as they add excessive value to the table compared to their check size.
“Why do people give you access? Why do people want you on the dressing table? he said. “It’s more focused on the added value and ability to access the deals than your ability to differentiate the deals or make selections on the deal.”
While this nano fund is separate from the company’s flagship series, Kurz expected that some of these funds will become good candidates for the flagship fund down the road. It will also help them get into companies sooner that may end up in flagship fund portfolios as well.
“The very small funds tend to outperform,” he said. “The smaller you are, the more likely you are to generate excessive returns. I thought: this is really interesting, how do we build something for this?”