Lessons and Insights from Running a Micro VC

Lessons and Insights from Running a Micro VC

Introduction:
Running a micro VC fund is not for the faint-hearted. It requires dedication, perseverance, and a deep understanding of the investment landscape. In this article, we will explore the lessons and insights gained from running a micro VC fund, along with some actionable advice for aspiring fund managers.

Lesson 1: Most VC Funds Are Failures
Similar to startups, the majority of VC funds do not achieve significant returns. In fact, it is estimated that 9 out of 10 VCs fail to even reach 1x returns. This highlights the importance of thoroughly researching and understanding the industry before venturing into the world of micro VC. It is advisable to speak with at least 10 micro VCs to gain insights and learn from their experiences.

Lesson 2: Financial Stability is Crucial
Starting a micro VC fund requires solid financial stability. The majority of the fund's capital needs to be allocated for investments, leaving a limited budget for running the company. Even with a $10 million fund, the yearly budget typically amounts to $200,000. This means that fund managers often earn less than their initial salary out of college. It is essential to be financially prepared for this reality and understand the sacrifices involved.

Lesson 3: Bootstrapping Challenges
Bootstrapping a micro VC fund can be extremely challenging. Fund managers often receive minimal salaries and face restrictions on earning income outside of their work. Additionally, most fund managers invest a percentage of the fund size into their own fund. This further adds to the financial strain. Despite these challenges, the potential upside of running a successful micro VC fund is comparable to working a steady job at Google for a decade.

Insight: The Long Road to Fundraising
On average, it takes approximately two years for a microfund manager to raise a fund. This lengthy process involves building relationships, showcasing track records, and gaining the trust of potential investors. It is essential to be patient and persistent throughout this journey, as fundraising success is not achieved overnight.

Insight: SEC Regulations and Accredited Investors
One significant regulatory hurdle is the limitation on accepting investors into a micro VC fund. Per SEC rules, only 99 accredited investors can be accepted. This means that fund managers cannot accept small investments from friends and must focus on attracting larger, accredited investors. This restriction emphasizes the need for strategic networking and building connections within the investor community.

Insight: Meritocracy and the Future of Funding
The early stage fundraising landscape is not necessarily a meritocracy. It is important to shift the focus from appearances and eloquence to the speed of execution. The future of funding should prioritize the ability to execute ideas efficiently rather than relying on superficial qualities. By embracing this shift, the industry can become more inclusive and diverse.

Actionable Advice:

1. Conduct thorough research and seek advice from experienced micro VCs before starting a fund.
2. Prepare yourself financially for the challenges and sacrifices that come with running a micro VC fund.
3. Focus on building strong relationships and showcasing your track record to attract accredited investors.

Conclusion:
Running a micro VC fund is a rewarding yet demanding endeavor. The lessons and insights gained from running such a fund shed light on the challenges and opportunities within the industry. By understanding the realities of micro VC, aspiring fund managers can navigate the landscape more effectively and increase their chances of success.