Lessons from Running a Micro VC and the Persistence of the Network Effect in Electronic Banking

Lessons from Running a Micro VC and the Persistence of the Network Effect in Electronic Banking

Introduction:
Running a micro VC fund can be a challenging endeavor, and understanding the nuances of the industry is crucial for success. On the other hand, the network effect continues to play a significant role in the world of electronic banking, impacting the strategies and growth of financial institutions. In this article, we will explore the lessons learned from running a micro VC and delve into the persistence of the network effect in the age of electronic banking.

Lesson 1: VC Fund Realities
1.1 Most VC funds are failures.
Starting a VC fund may seem like an exciting venture, but the statistics reveal a harsh reality. Similar to startups, the majority of VC funds fail to achieve even 1x returns. It is crucial to do thorough homework and speak with multiple micro VCs before deciding to embark on this journey.

1.2 Financial considerations are essential.
Before starting a micro VC fund, it is vital to be in a solid financial situation. The funds allocated for investing should not be used for personal livelihood or other expenses. Understanding the budget constraints and financial commitments is crucial to avoid personal hardships.

1.3 Bootstrapping challenges.
Bootstrapping a micro VC fund can be incredibly difficult. With minimal to no salary and limited opportunities to make money outside of the fund, fund managers face significant challenges. Balancing financial stability with the demands of running the fund requires careful planning and dedication.

Lesson 2: Investing in Your Fund
2.1 Personal investment in the fund.
In most cases, fund managers invest a percentage of the fund size into their own fund. This commitment showcases belief in the fund's potential and aligns the interests of the manager with the investors. Investing in the fund can also help attract other investors.

2.2 Capital calls and fundraising timeline.
Capital calls, the process of requesting funds from investors, typically occur over a three-year period. The average time for a microfund manager to raise a fund is approximately two years. Understanding the fundraising process and timeline is crucial for successfully managing a micro VC.

2.3 The "3x return" benchmark.
The "gold standard" for profitable VCs is achieving a 3x return on investments. Exceeding this benchmark is considered excellent. While the risks involved in running a micro VC are high, the potential upside can be comparable to working a steady job at a tech giant like Google for ten years.

Lesson 3: The Persistence of the Network Effect in Electronic Banking
3.1 The significance of the network effect.
The network effect continues to play a substantial role in the growth and success of financial institutions. Larger branch networks capture a disproportionate share of market deposits, increasing average deposit size per branch. This effect explains why financial institutions have historically pursued concentrated deployment strategies.

3.2 Correlation between network size and average branch size.
Studies have shown a positive relationship between network size and average branch size in most major metropolitan areas. This correlation indicates that financial institutions with a broader representation in a market benefit from the network effect. However, the strength of the effect varies across different markets.

3.3 Leveraging the network effect.
For smaller banks operating in a single market, focusing on building a cohesive network in one or two corridors can yield increased per-branch deposits. Scattering branches across an entire metro area may dilute the benefits of the network effect. It is important to consider the strength of the effect and adapt strategies accordingly.

Actionable Advice:

1. Conduct thorough research and speak with multiple micro VCs before starting a fund.
2. Ensure your financial situation is stable and separate personal expenses from fund investments.
3. Understand the network effect within your specific market and leverage it strategically to maximize per-branch deposits.

Conclusion:
Running a micro VC fund comes with its own set of challenges, but with careful planning and dedication, it can be a rewarding endeavor. Additionally, the persistence of the network effect in electronic banking highlights the importance of strategic deployment strategies for financial institutions. By understanding these lessons and leveraging the network effect, entrepreneurs and financial institutions can navigate the complexities of their respective industries and increase their chances of success.