"11 Things I've Learned from Running a Micro VC in the Last Year: Insights from the SECI Model of Knowledge Dimensions"

"11 Things I've Learned from Running a Micro VC in the Last Year: Insights from the SECI Model of Knowledge Dimensions"

Running a micro VC fund is no easy feat. It requires dedication, hard work, and a deep understanding of the intricacies of the venture capital landscape. As someone who has been in the trenches for the past year, I've learned a lot about the challenges and rewards of this industry. In this article, I will share 11 key takeaways from my experience, while also incorporating insights from the SECI model of knowledge dimensions.

1. Most VC funds are failures: Just like startups, the majority of VC funds do not achieve significant returns. In fact, it's been said that 9 out of 10 VCs will not even reach 1x returns. This highlights the importance of thorough research and due diligence before embarking on this venture. According to the SECI model, this failure can be attributed to the lack of effective externalization, the process of publishing and articulating knowledge.

2. Find joy in the work: Despite the challenges, if you find joy in the work of running a micro VC, it won't feel like work at all. However, it's crucial to note that this business can be detrimental to your personal life if you're not in a solid financial situation. The SECI model emphasizes the importance of internalization, which involves learning by doing and applying explicit knowledge to become an asset for the organization.

3. Financial considerations: When running a micro VC, a significant portion of the funds should be allocated for investing, rather than personal expenses. For example, if you have a $10 million fund, your yearly budget for running the company would be around $200,000. This means that your salary might be significantly lower than what you earned in previous jobs. The SECI model highlights the challenges of combining explicit knowledge, such as organizing and integrating knowledge effectively.

4. The struggle of bootstrapping: Bootstrapping a micro VC is incredibly challenging. Not only do you receive little to no salary, but you're also restricted from making money outside of your work. This puts immense pressure on the success of your fund. The SECI model suggests that the process of externalization, combination, and internalization can be hindered when resources and support are limited.

5. Personal investment in the fund: In most cases, fund managers invest a percentage of the fund size into their own fund. This aligns their interests with the success of the fund. The SECI model emphasizes the importance of socialization, the process of sharing knowledge, which can be seen in the collaboration and investment made by fund managers.

6. The "gold standard" for profitable VCs: A "3x return" benchmark is considered the gold standard for profitable VCs. If you're able to achieve returns above this benchmark, you're considered excellent in the industry. This highlights the importance of effective externalization, combination, and internalization of knowledge within the fund.

7. The time it takes to raise a fund: On average, it takes microfund managers around 2 years to raise a fund. This lengthy process can be attributed to the challenges of externalization and socialization in the fundraising landscape. Building relationships and establishing trust with potential investors takes time and effort.

8. Limitations on the number of investors: According to SEC rules, micro VCs can only accept 99 accredited investors into their fund. This means that you cannot accept small investments from friends and rely on momentum to build your fund. The SECI model suggests that this limitation hinders the socialization process, which often involves meeting new knowledge and discovering new opportunities.

9. The need for a more inclusive funding landscape: Despite the industry's claims of being a meritocracy, the early-stage fundraising landscape is far from it. The future of funding should prioritize the speed of execution rather than superficial factors like appearance or communication style. The SECI model supports this notion by emphasizing the importance of externalization, combination, and internalization of knowledge based on its value, rather than external factors.

10. Connecting the dots: As we delve deeper into the insights from running a micro VC and the SECI model, we can see a common thread. The success of a micro VC fund relies heavily on the effective conversion and application of knowledge. Externalization, combination, internalization, and socialization play crucial roles in the growth and profitability of a fund.

11. Actionable advice: Based on my experience and the insights from the SECI model, here are three actionable pieces of advice for aspiring micro VC fund managers:
    a. Conduct thorough research and due diligence before starting your fund. Talk to at least 10 micro VCs to gain insights into the challenges and rewards of the industry.
    b. Ensure that you are in a solid financial situation before embarking on this venture. Understand that your salary might be significantly lower than what you earned in previous jobs.
    c. Focus on building strong relationships with potential investors. The fundraising process takes time, so be patient and persistent in your efforts.

In conclusion, running a micro VC fund is a challenging yet rewarding endeavor. By incorporating the insights from the SECI model of knowledge dimensions, we can gain a deeper understanding of the factors that contribute to the success or failure of a fund. Thorough research, financial preparedness, and effective relationship-building are key to navigating the complex landscape of micro VC.