Although older venture capital firms continue to raise bigger and bigger funds, LPs may have more luck focusing on smaller things.
Amit Kurz, general partner of Israel-based Sweetwood Ventures Fund, thinks so. He told TechCrunch that last year he started seeing more and more small funds that he had never seen at the main tables of the tournament. While these “nano” funds weren’t the main funding for Sweetwood’s $70 million thesis, he thought it was worth finding a way to support them.
“I was really excited about how we could get exposure to that space,” Kurz told TechCrunch. “You actually generate this access to the most subscribed rounds and invest a small amount, which is a known win-win. You’re not competing with the mainstream VCs, but everyone wants you because you bring so much value.”
So Sweetwood decided to raise a fund dedicated to these investors. Now, the firm is announcing that it has raised $20 million for a separate fund to focus on Israel-based money, cutting checks of up to $2 million to amounts of $15 million or less. Sweetwood has supported seven funds so far.
He is also looking to create nano funds by working with angel investors.
For this side of the fund, Sweetwood works with angels to match their investment in a company and have them shoulder the money the company raises. They don’t take that kind of stake to begin with. So far they have closed on two deals.
“It’s a no-brainer for these guys,” Kurz says of approaching angel investors. “[They are] Anyway, there’s this external partner that does these deals and pays them like a tech scout, which doesn’t look like a tech scout.
The firm started raising a nano-focused fund at the peak of the 2021 frenzy, and is now looking to deploy into different market conditions where smaller, less established companies are struggling to scale. Kurz said they were initially apprehensive when the market began to deteriorate, but they quickly got over that fear because they realized that their paybacks were now writing checks to companies at affordable prices and that they actually had time to spend. Diligence.
Kurz addressed the big question they ask when evaluating these potential investments, since neither angel investors nor nano funds are big enough to lead any rounds, why would startups want to take their money? He said the organization is looking for funds and individuals that fall under two categories of answers: knowledge and access.
For some, access is king, especially through the angel investor. If you’re a well-connected, well-known ex-tech entrepreneur, the idea is to hear about more prestigious deals and get invited to join other angels because of your background. According to Kurz, this may include angels who were successful or well-known predecessors.
Sweetwood, on the other hand, is looking for professional and highly skilled funds and individuals sought by companies to fill rounds because they bring a significant amount of value to the table relative to their check size.
“Why do people give you access? Why do people want it at the cap table?” he said. “It’s more about the ability to add value and get the deal than your ability to identify the deal or make choices on the deal.”
While this nano fund is separate from the firm’s main series, Kurz envisions some funds being good candidates for the main fund online. It also helps them get into companies that might otherwise end up in mainstream fund portfolios.
“The smaller the funds the better,” he said. “The smaller you are, the more likely you are to generate disproportionate returns. I thought, this is really interesting, how do we build something for this?”