11 Things I’ve Learned from Running a Micro VC in the Last Year: Insights and Actionable Advice

11 Things I’ve Learned from Running a Micro VC in the Last Year: Insights and Actionable Advice

Starting a micro VC fund may seem like an exciting venture, but it's important to understand the challenges and realities that come with it. In this article, we will explore 11 key lessons learned from running a micro VC fund and provide actionable advice for those considering entering this space.

1. Most VC Funds Are Failures: Just like startups, the majority of VC funds do not achieve significant returns. In fact, it's been estimated that 9 out of 10 VCs will not even reach 1x returns. This highlights the importance of thoroughly assessing the potential risks and rewards before diving into the world of VC.

2. Do Your Homework: Before starting a micro VC fund, it is crucial to conduct thorough research and due diligence. Engage in conversations with at least 10 micro VCs to gain insights into their experiences and challenges. This will help you better understand the realities of the industry and make an informed decision.

3. Financial Considerations: Running a micro VC fund requires a solid financial foundation. If you are not in a stable financial situation, it can have a detrimental impact on both your personal life and the success of your fund. Keep in mind that most of the fund's capital needs to be used for investing, rather than for personal expenses. Be prepared to live on a budget and make sacrifices in the initial stages.

4. Bootstrapping Challenges: Bootstrapping a micro VC fund can be extremely challenging. While you may not receive a substantial salary, you are also restricted from earning money outside of your work. This can put a strain on your financial stability and personal life. Consider alternative sources of income or carefully plan your finances before embarking on this journey.

5. Personal Investment: In most cases, fund managers invest a portion of their own capital into the fund. This demonstrates a commitment to the success of the fund and aligns the interests of the manager with the investors. Be prepared to invest 1-5% of the fund size and plan for capital calls over a span of three years.

6. Aim for a 3x Return: The "gold standard" for profitable VCs is achieving a 3x return benchmark. If you surpass this benchmark, you are considered excellent in the industry. However, it's important to note that the risk involved in running a micro VC fund is significant, similar to that of a startup. The potential upside can be equivalent to working a steady job at Google for a decade.

7. Time to Raise a Fund: On average, it takes approximately two years for a microfund manager to raise a fund. This timeline highlights the challenges and complexities involved in securing capital from investors. Patience and persistence are key qualities to possess during this process.

8. Accredited Investor Limitations: According to SEC rules, micro VC funds can only accept up to 99 accredited investors. This regulation prevents fund managers from accepting small investments from friends and acquaintances, making it necessary to secure larger commitments from a limited number of investors. It's crucial to build a strong network of potential investors who meet the accreditation requirements.

9. Communication and Storytelling: As a micro VC fund manager, the ability to effectively communicate is paramount. Founders who can effectively articulate their ideas and vision have a higher chance of success. Storytelling plays a crucial role in convincing users to download an app, rallying a team behind a launch, or raising the next round of funding. Don't overlook the importance of this skill when evaluating potential founders.

10. The Future of Funding: It's essential to challenge the notion that early-stage fundraising is solely a meritocracy. The focus should shift towards the speed of execution rather than superficial factors like appearance or speech. Embracing a more inclusive and efficient funding landscape will foster innovation and empower a diverse range of founders.

11. Passion and Enjoyment: Finally, it's important to remember that running a micro VC fund should be something you genuinely enjoy. If it feels like work, it may not be the right path for you. Passion and commitment are essential for navigating the challenges and uncertainties of the industry.

In conclusion, running a micro VC fund comes with its own set of challenges and rewards. By understanding the realities and following the actionable advice provided in this article, you can better prepare yourself for success in this dynamic and ever-evolving industry.

Actionable Advice:

1. Conduct thorough research and engage in conversations with experienced micro VCs before starting your own fund.
2. Ensure you have a solid financial foundation before diving into the world of VC.
3. Focus on effective communication and storytelling skills when evaluating potential founders and investments.