The Nitty Gritty of Starting a Micro-VC Fund | Frank Mastronuzzi, CPA
So, you’ve made a name for yourself working in venture capital or a tech startup and are considering starting a micro-VC fund. You’re far from alone. First Republic Bank reports that they are currently tracking 900 active micro-VC firms in the United States, with approximately 100 being funded every year since 2015.
Launching a micro-VC allows you to help foster brand new technologies that work to improve the quality of life for people all around the globe. Of course, it’s also a venue to make savvy investments for you and your LPs — though it’s not easy. An Israeli startup investor told TechCrunch that “Ninety-five percent of VCs aren’t returning enough money to justify the risk, fees, and illiquidity their investors (LPs) are taking on by investing in their funds.”
You can support yourself, and your team on the management fees paid by your LPs to the management company even if your fund breaks also — but the “gold standard” for a micro-VC is to generate at least a 3x return. The journey to true profitability is an uphill battle. If you’re not in it for the passion of fundraising and helping businesses succeed, it makes the slog all the more difficult as there is no shortage of exuberant VCs out there.
We recently discovered and enjoyed a blog by Elizbeth Yin , a General Partner of Hustle Fund, that exemplifies both that entrepreneurial enthusiasm and the realities of running a micro-VC. She pulls no punches on the difficulties in the early stages of running a micro-VC — including the fact that you’ll be bootstrapping for 5–10 years, and likely not make a lot of money on your first fund. A micro fund owner needs to have a 20 to 30-year mindset.
Here are just a few of the many challenges a fledgling venture capitalist will run up against.
In a crowded landscape, you need to emphasize what sets you apart from the competition to attract both LPs and prospective growth companies. By default, you will need to lean on your track record working in venture capital or the startup landscape as a selling point, but as a first-time fund manager, the deck will be stacked against you. Determining your USP will be crucial to landing investors.
Your differentiating factor could be in your team’s collective resume or a vision for a better (and lucrative) future that involves investing in seed-stage startups in specific growth areas. For example, some funds are making names for themselves by focusing on investing in specific promising technologies such as RegTech or blockchain. In contrast, others focus on social responsibility initiatives such as climate change or a focus on emerging markets in developing countries.
Without an existing track record as a General Partner (GP), it is unrealistic to expect your LPs to part with multiple hundreds of thousands of dollars. Aiming at raising a fund of $50m+ on your first fund is overly ambitious and highly unlikely. You’re far more likely to achieve a smaller fund size of $10m-$25m.
As previously mentioned, a fund will be bootstrapping in its initial years. Most funds draw their ops budget from 2% of the lifetime budget of the fund. This leaves little wiggle room for salaries, travel, events, swag, etc.
Not Enough Time For Operations!
Elizabeth Yin breaks down her weekly priorities such:
- 50% fundraising-related (preparation of materials, meeting potential future investors, networking, etc.)
- 20% marketing-related (content, speaking, etc.)
- 5% ops (legal, audit, accounting, deal docs, etc.)
- 15% looking at deals (talking with co-investors and referrers, emailing with founders, looking at decks, talking with founders)
- 10% working with portfolio companies
If you feel like 5% spent on operations is a bit conservative, you’re probably right. The main check boxes to be ticked through venture capital accounting alone include:
- Maintaining portfolio valuation based on several moving parts
- Projecting the value of non-liquid, multi-year private company holdings
- Tracking of limited partner ownership while managing ongoing capital calls
- Allocating investments for limited partners who were onboarded at different times
- Calculating and deducting management fees
- Calculating profit share based on the value of holdings, exit proceeds, lock-ups, etc.
- Managing due diligence of complex tax structure and preparation of tax records
- Preparation of audits and quarterly/annual financial statements
- Regular and transparent communication to all stakeholders
Many fledgling venture firms don’t consider the operational requirements of running a fund when they’re first getting started. Your overhead may be limited, but a seasoned part-time accountant is worth their weight in gold when they help you maximize the impact of every liquid dollar and every investment made.
Those who bring in financial expertise early on who can optimize profitability for you and your seed companies, so you have a head start over other funds working in your niche. It helps to have experts in place who’ve helped propel additional micro-VC funds towards successful growth.
Californian Micro-VCs Look to Greenough Group
At GCG, we’re in the business of helping fledgling businesses succeed through strategic financial and back-end management.
Greenough Consulting Group helps its micro-VC clients overcome their unique challenges in ways other outsourced financial and accounting firms do not. More than 200 Venture Capital and Top Private Equity Firms have found that our back-end financial and administrative services save them time and money by providing the high-level executive insight they demand but don’t need as a full-time employee.
VC firm, 500 Startups, offers seed investments and a new micro-fund model along with design, data, and distribution expertise via its network of mentors with strong ties to prominent Silicon Valley companies. Founder Dave McClure engaged GCG early , even before his fund’s first close, recognizing the significant assistance a trusted advisor and colleague could make at that stage. “As a startup ourselves, we needed a partner who could both help with our complex fund issues as well as with our portfolio companies. GCG’s guidance and counsel began when 500 Startups was just an idea, and it continues to this day. In a fast-paced environment like ours, I need to know that I have reliable and professional support. We couldn’t operate without that.”
Originally published at https://www.greenoughgroup.com on August 14, 2020.