"The Journey of a Micro VC: Lessons in Slow Growth and Authenticity"

"The Journey of a Micro VC: Lessons in Slow Growth and Authenticity"

Running a micro VC fund is no easy feat. It requires dedication, financial stability, and a deep understanding of the startup landscape. In my experience, there are several key lessons I've learned over the past year that have shaped my approach to this challenging industry. These lessons not only apply to micro VCs but also to startups and entrepreneurs looking to make their mark. In this article, I will share some of these lessons and provide actionable advice for those embarking on their own journey.

Lesson 1: Most VC funds are failures

Contrary to popular belief, the majority of VC funds fail to generate significant returns. Just like startups, the failure rate is high, with some estimates suggesting that 9 out of 10 VCs will not even reach 1x returns. This highlights the importance of thorough research and due diligence before deciding to start a fund. It is crucial to speak with multiple micro VCs and gain insights into their experiences before diving into this business.

Lesson 2: Financial stability is key

Running a micro VC fund requires financial stability. If you do not have a solid financial situation, this business can take a toll on your personal life. It's essential to remember that most of the fund's money needs to be used for investing, not for personal expenses or other ventures. Even with a $10 million fund, the yearly budget for running the company would be around $200,000. This budget should not be mistaken for your salary but rather the funds allocated for the fund's operations.

Lesson 3: The challenges of bootstrapping

Bootstrapping a micro VC fund can be incredibly challenging. On one hand, you may receive little to no salary, and on the other hand, you are mostly prohibited from making money outside of your work. The initial stages of establishing a fund may require personal investments from fund managers, typically ranging from 1-5% of the fund size. Additionally, capital calls are usually spread out over three years, making it a long and arduous process.

Lesson 4: The "3x return" benchmark

The "gold standard" for profitable VCs is achieving a "3x return" benchmark. If a VC fund surpasses this benchmark, it is considered excellent. However, it is important to note that the risk associated with running a micro VC fund is comparable to that of a startup. The potential upside can be significant, similar to working a steady job at Google for ten years. It requires a willingness to take calculated risks and a long-term mindset.

Lesson 5: The time it takes to raise a fund

On average, it takes around two years for a microfund manager to raise a fund. This timeframe emphasizes the importance of patience and persistence in navigating the fundraising landscape. Building relationships, proving track records, and demonstrating value to potential investors are all crucial elements in successfully raising a fund.

Lesson 6: The limitations of accepting investors

According to SEC rules, micro VCs can only accept 99 accredited investors into their fund. This limitation prevents micro VCs from accepting small investments from friends and acquaintances. To build momentum, it is essential to focus on attracting accredited investors who can contribute significant capital to the fund.

Lesson 7: The need for a meritocratic fundraising landscape

In the early-stage fundraising landscape, meritocracy is often overshadowed by external factors such as appearance or communication skills. However, moving forward, it is crucial to shift the focus towards the speed of execution and the potential of the venture, rather than superficial qualities. This will create a more inclusive and fair environment for startups and entrepreneurs.

Lesson 8: Standing out from the competition

In a hack-assed world, it is essential to build something that stands out. Parity is not enough; you need to offer a unique value proposition. This lesson applies not only to micro VCs but also to startups and entrepreneurs. Differentiation is key to capturing the attention of investors and customers alike.

Lesson 9: Perpetual benchmarking

The concept of competition extends beyond direct competitors. Consider the broader implications of your venture and how it can influence people's behaviors and choices. In the case of Yelp, it was about encouraging people to explore new neighborhoods and realize the value of their opinions. Continuously benchmarking against these broader goals can help drive growth and success.

Lesson 10: The importance of team dynamics

Building a strong team is crucial to the success of any venture. In real life (IRL), the chemistry between team members can make or break a business. It is essential to invest time and effort into fostering a positive and collaborative work environment.

Lesson 11: Taking calculated risks

Growth hacking may seem appealing, but long-term success often comes from taking calculated risks and avoiding shortcuts. Yelp's slow growth path, one review at a time, exemplifies the importance of authenticity and organic growth. Brands that are built to last prioritize sustainable growth over quick fixes.

In conclusion, running a micro VC fund is a challenging yet rewarding endeavor. By learning from the experiences of others and incorporating these lessons into your own journey, you can increase your chances of success. Here are three actionable pieces of advice to keep in mind:

1. Conduct thorough research and due diligence before starting a fund. Speak with multiple micro VCs to gain insights into the industry and determine if it is the right path for you.

2. Focus on financial stability and ensure that you have a solid personal financial situation before diving into this business. Understand that most of the fund's money will be used for investing, not personal expenses.

3. Embrace a patient and long-term mindset. Building a successful micro VC fund takes time, persistence, and the ability to take calculated risks. Avoid shortcuts and prioritize sustainable growth.

By applying these pieces of advice and learning from the lessons shared in this article, you can navigate the world of micro VC funds with greater confidence and increase your chances of success.