Last week, my colleague Aria Alamalhodaei wrote an exclusive on defense and space tech venture firm Countdown Capital’s plan to shut down. Jai Malik, the founder of Countdown, said in a letter to his LPs that due to how competitive the industrial tech sector has become, he is no longer confident about smaller venture firms’ ability to secure the meaningful stakes in startups they’d need to produce worthwhile returns.
As Aria wrote, the letter reads like a cold glass of water to the face. While winding down the fund is a mature move — GPs have a fiduciary duty to their LPs, after all — the news doesn’t help the growing scuttlebutt in the VC world that most micro funds can’t survive outside of a bull market like 2021’s.
But Countdown shutting down is likely more of an isolated event than a sign of what’s to come for micro funds this year.
When I spoke with Malik back in 2022 about the launch of this very fund, he said that Countdown was created to fill a void in the defense sector. His logic was that while larger firms like Andreessen Horowitz and Lux were interested in backing startups at the Series A stage and later, no one wanted to write the first small checks startups need to get going.
That’s changed today, and it isn’t surprising given the sheer amount of capital it takes to get defense startups off the ground; the costs are incomparable to a category like SaaS.
This is also why Countdown’s fate doesn’t portend cloudy skies for micro funds in other categories. A micro fund manager in the AI space, for example, told me that despite how active AI has gotten over the last year, the increased interest actually hasn’t made a material difference in pricing at the pre-seed stage where their fund invests. So despite the category heating up, a $500,000 check can still net a firm meaningful ownership at the pre-seed stage, they said.
In VC, size does matter
Getting a meaningful stake is everything for micro funds, according to Michael Kim, the founder of Cendana Capital. A fund of funds that backs micro funds, Cendana has invested in more than 60 fund managers, and Kim said they’ve largely avoided capital-intensive sectors because of how difficult it can be to land a decent-sized stake. He added that in such sectors, the rounds that micro funds participate in are inherently riskier because they aren’t usually large enough to be able to tell if a company’s product could work or if a startup could find product-market fit.
“We have always looked for fund managers that got relatively high ownership with their first check,” Kim said. “We look for fund managers that are leading rounds [despite their size].”
Paige Doherty, the founding partner of Behind Genius Ventures, told me her firm has been priced out of rounds because their firm’s check size is $250,000 on average. Still, her firm has been able to avoid that scenario a lot by virtue of being “fiercely generalist,” she added.
Doherty said that while being generalist had made it harder for the firm to fundraise in the beginning, the strategy has since helped them move more flexibly with the market. If a category gets too expensive to get meaningful ownership, the firm can spend more time elsewhere, as it doesn’t have a mandate to back a specific sector.
It’s about more than the money
There are many things micro funds can do to ensure startups will make space for them on their cap tables regardless of how much money they bring.
Doherty runs an annual survey asking her portfolio company founders what they like about working with her fund. She’s found that her network and ability to introduce companies to potential lead investors helps, but how she interacts with founders is likely what makes the biggest difference.
“Having early conviction in a founder is really meaningful,” Doherty said. “[I ask myself] if I would invest 3x the amount of this check in this founder, in this company. Each investment, I want to be at that ‘hell yes’ level of conviction. The feedback I’ve gotten is, that is one of the things that really sticks out.”
Of course, founders can build such intimate relationships with larger funds, too, but it’s less likely to happen due to the sheer size of the portfolios some larger funds have. There’s also the fact that each VC only has so much time to spend with each company. Micro funds may very well need to go above and beyond to show that they can fill that crucial gap.
According to Kim, a micro fund manager can stand out if they have a deep knowledge base and are already considered to be a thought leader in the sector they are targeting. Having a background as an entrepreneur can also be a big help, he said.
None of this is to say Countdown Capital did not do or have these things. Sometimes there just isn’t a solution to being in an inopportune situation at a bad time. Instead, I simply want to point out that many micro funds shouldn’t be too worried about what has unfolded so far this year.
As long as a fund manager can position themselves as a must-have investor, and not a nice-to-have backer, and can land deals with meaningful stakes, the size of their funds won’t hold them back.