Lessons from Running a Micro VC and Prioritizing Product Love Before Growth

Lessons from Running a Micro VC and Prioritizing Product Love Before Growth

Running a micro VC fund has taught me numerous valuable lessons and insights about the world of venture capital. From understanding the high failure rates of VC funds to the importance of prioritizing product love before focusing on growth, these lessons have shaped my approach and perspective in this industry. In this article, I will share the top 11 lessons I've learned from my experience as a micro VC, along with actionable advice for aspiring fund managers and startup founders.

1. Most VC Funds are Failures:
   The reality is that the majority of VC funds fail to achieve even 1x returns. Similar to startups, the success rate is relatively low. This highlights the importance of doing thorough research and due diligence before deciding to start a fund. Speaking with at least 10 micro VCs can provide valuable insights and help you make an informed decision.

2. Financial Considerations:
   Starting a micro VC fund requires a solid financial situation. If a significant portion of the fund needs to be used for personal expenses, it can negatively impact your personal life. Even with a $10 million fund, the majority of the funds should be allocated for investments, not personal livelihood. It's crucial to have a clear understanding of your budget to effectively run your company.

3. Sacrifices and Bootstrapping:
   Running a micro VC often involves making sacrifices, especially in terms of personal income. Bootstrapping can be challenging since making money outside of your work is generally prohibited. It's important to be prepared for the financial sacrifices that come with the job and have a long-term perspective on potential rewards.

4. Manager Investments:
   In most cases, fund managers invest a portion of their own capital in the fund, typically ranging from 1% to 5% of the fund's size. This aligns the fund manager's interests with the success of the investments and demonstrates commitment to potential LPs (limited partners).

5. Time and Patience:
   Raising a micro VC fund takes time, with an average duration of around two years. Patience is key during this process, as it involves building relationships, demonstrating track record, and effectively communicating your investment thesis. Understanding the timeline and being prepared for the long haul is crucial for success.

6. Accredited Investor Limitations:
   SEC rules restrict micro VC funds from accepting more than 99 accredited investors. This limitation means that fundraising cannot solely rely on small contributions from friends and acquaintances. It highlights the need for strategic and targeted fundraising efforts to attract the right investors.

7. Meritocracy in Early Stage Fundraising:
   The early stage fundraising landscape is not always a meritocracy. It's important to challenge the existing norms and biases that can influence investment decisions. The future of funding should focus on the speed of execution and the potential of the idea, rather than external factors like appearance or communication style.

Before Growth: Prioritizing Product Love

8. Building a Strong Foundation:
   Founders must first understand what they are doing and why before focusing on growth. This involves developing a clear vision and mission for the company. Without a product that users genuinely love, startups often lack the sense of purpose and mission that drives the best companies.

9. The Metric of Product Love:
   A crucial metric for startups in their early stages is whether users love the product enough to spontaneously recommend it to others. Until this metric is a resounding "yes," founders should prioritize improving the product and ensuring user satisfaction instead of fixating on growth targets. This approach aligns with building a product that resonates with users and sets the stage for sustainable growth.

10. Sense of Mission:
    Founders who prioritize building a product that users love tend to develop a strong sense of mission. This mission-driven approach not only attracts passionate employees but also resonates with potential investors. Building a company with a clear sense of purpose can be a significant advantage in the competitive startup landscape.

11. Actionable Advice:

a) Conduct thorough research and speak with multiple micro VCs before deciding to start your own fund.
b) Be prepared for financial sacrifices and understand the budget needed to effectively run your company.
c) Prioritize building a product that users genuinely love before focusing on rapid growth.

In conclusion, running a micro VC fund comes with its own set of challenges and rewards. By understanding the industry's realities and prioritizing product love over growth, fund managers and founders can navigate the complex landscape of venture capital with greater success. The lessons learned from my experience can serve as a guide for aspiring micro VCs and startup founders, helping them make informed decisions and build strong foundations for their ventures.