The Truth About Running a Micro VC and the Future of Value Capture

The Truth About Running a Micro VC and the Future of Value Capture

Running a micro VC fund can be a challenging yet rewarding endeavor. As someone who has been in this industry for the past year, I've learned several valuable lessons that have shaped my perspective. In this article, I'll share these insights with you, along with a discussion on the future of value capture in the digital age.

Starting with the reality check, it's important to acknowledge that most VC funds fail. Just like startups, only 1 in 10 VCs achieve 1x returns or more. This statistic highlights the importance of thorough homework before venturing into this field. To gain a comprehensive understanding, it's advisable to have conversations with at least 10 micro VCs. Additionally, it's crucial to be in a stable financial situation as this business can have a significant impact on your personal life.

Financial stability is especially important when considering that a large portion of the fund's capital needs to be used for investing rather than personal expenses. For example, if you have a $10 million fund, your yearly budget would be around $200,000. This budget is not your salary but rather what you have available to run your company. It's essential to be prepared for the sacrifices and financial constraints that come with running a micro VC.

One of the challenges of bootstrapping a micro VC is the limited salary and restrictions on making money outside of your work. Unlike traditional jobs, micro VCs often receive minimal to no salary, making it crucial to have alternative means of financial support. This constraint can make the journey even more challenging.

Additionally, most fund managers invest a portion of their own capital into the fund, typically around 1-5% of the fund size. These investments are usually made over a three-year period. This practice aligns the interests of the manager with those of the fund's investors, creating a sense of shared responsibility.

While profitability is a key goal for any VC, the benchmark for success is often a "3x return." Achieving this benchmark is considered excellent in the industry. It's important to remember that just like with startups, there is a significant amount of risk involved in running a micro VC. However, the potential upside can be equivalent to working a steady job at a tech giant like Google for a decade.

Moving on to the future of value capture, the concept of "whoever generates the demand captures the value" has become increasingly prominent. The internet has had a profound impact on markets, leading to both consolidation and fragmentation. This phenomenon can be observed as aggregation and specialization.

Previously, controlling supply was the key to capturing profits. However, in the post-internet era, success lies in aggregating demand. The best companies are those that provide the best experience, attracting consumers, users, and suppliers in a virtuous cycle. This shift in value capture will result in the best players earning significantly more than they do now.

Moreover, the internet has the potential to commoditize middlemen, as markets become more efficient. Middlemen are being squeezed out as value capture aligns more closely with value creation. Venture studios, for example, are emerging as potential replacements for traditional VCs, illustrating the power that star players have over middlemen. A mindset shift is necessary for players to exercise this power and reshape the funding landscape.

In conclusion, running a micro VC requires careful consideration and preparation. It's essential to do thorough homework, be financially stable, and understand the sacrifices involved. Moreover, the future of value capture lies in aggregating demand and reshaping the role of middlemen. To thrive in this evolving landscape, it's crucial to focus on providing the best experience and embracing the power of digital platforms.

Actionable Advice:

• 1. Conduct thorough research and have conversations with multiple micro VCs before starting your own fund. Learn from their experiences and gain a comprehensive understanding of the industry.

• 2. Ensure you are in a stable financial situation before venturing into the world of micro VCs. Understand that the majority of the fund's capital will be used for investing rather than personal expenses.

• 3. Embrace the concept of value capture through aggregating demand. Focus on providing the best experience to attract consumers, users, and suppliers, and stay ahead in the changing landscape.

By implementing these actionable advice and adapting to the evolving dynamics of the industry, you can position yourself for success in the world of micro VCs and value capture.