Lessons from Running a Micro VC: Navigating Challenges and Maximizing Learning

Lessons from Running a Micro VC: Navigating Challenges and Maximizing Learning

Introduction:

Running a micro venture capital (VC) fund can be both rewarding and challenging. As I reflect on my experiences over the past year, I have come to realize that there are valuable lessons to be learned from the world of startups and the importance of repetition in the learning process. In this article, we will explore the common points between these two realms and provide actionable advice for aspiring micro VCs.

1. Understanding the Harsh Reality of VC Funds:

It is crucial to acknowledge that most VC funds fail to generate significant returns. Just like startups, statistics show that roughly 9 in 10 VCs will not even reach 1x returns. This highlights the need for thorough research and due diligence before deciding to venture into the world of micro VCs. It is advisable to consult with at least 10 micro VC professionals to gain insights into the challenges and opportunities that lie ahead.

2. Financial Considerations and Bootstrapping Challenges:

Running a micro VC fund requires a solid financial foundation. The majority of the fund's capital should be allocated towards investments rather than personal expenses or other ventures. For example, if your fund is $10 million, your annual budget for running the company would be $200,000. This means that personal salaries may be significantly lower than expected, especially during the early stages. It is essential to understand the financial constraints and be prepared to bootstrap your micro VC, as external income sources may be limited due to industry regulations.

3. Investing in Your Own Fund:

In many cases, fund managers also invest a portion of their own capital into the fund. This practice demonstrates commitment and aligns the interests of the manager with those of the investors. Typically, fund managers invest between 1% to 5% of the fund size. However, it is important to manage expectations and be aware that personal investments may not yield immediate returns. Capital calls, the process of requesting investors to contribute their committed capital, are often spread over three years, further emphasizing the need for financial stability and careful planning.

4. The Pursuit of Profitability:

A "3x return" benchmark is often considered the gold standard for profitable VCs. Achieving returns higher than this benchmark is a testament to exceptional performance. Similar to startups, micro VCs face significant risks, but their upside potential can rival that of a stable job at a tech giant like Google over a decade. It is crucial to maintain a long-term perspective, be patient, and focus on generating substantial returns for your investors.

5. The Art of Raising Funds:

Raising a micro VC fund takes time, with an average duration of around two years. This process involves building relationships, establishing credibility, and showcasing your investment thesis. It is essential to develop a compelling narrative and hone your pitching skills to attract potential investors. Additionally, it is important to note that according to SEC regulations, micro VCs can only accept up to 99 accredited investors, which further emphasizes the need for strategic planning and targeted outreach.

6. Democratizing the Funding Landscape:

The early-stage fundraising landscape is not always a meritocracy. However, it is important to strive for a future where funding decisions are based on execution speed rather than external factors such as appearance or communication style. By fostering a more inclusive and diverse ecosystem, micro VCs can contribute to a more equitable playing field for entrepreneurs.

The Importance of Repetition in Learning:

Moving beyond the world of VC, repetition emerges as a fundamental principle in the learning process. The act of encountering an idea and then returning to it repeatedly helps solidify understanding and retention. By consciously incorporating repetitive engagement into courses and teaching practices, educators can enhance the quality of learning and accelerate the acquisition of knowledge.

Actionable Advice:

• 1. Thoroughly research the VC landscape and seek advice from industry professionals before starting a micro VC fund.

• 2. Create a financial plan that prioritizes investment capital over personal expenses to ensure the long-term sustainability of your fund.

• 3. Cultivate a diverse network of potential investors and focus on building credibility and showcasing your investment thesis to raise funds effectively.

Conclusion:

Running a micro VC fund offers unique challenges and opportunities. By understanding the realities of the industry, embracing repetition in learning, and implementing the actionable advice provided, aspiring micro VCs can navigate the complexities of this space and maximize their potential for success. Remember, the journey may be arduous, but the rewards can be significant for those who persevere.