Micro VC Economics

Someone I know has launched a small VC fund, they're on their second fund now and looking at EDGAR have raised ~8MM in aggregate. I read the article on "This Is Going To Be Big" about small VC economics. But honestly I still don't get how someone can make a decent living.

Even assuming a 2.5%/20% structure that's only 200k in management fees. After expenses at most they're taking home 100k, especially given it's over 2 funds. I find the whole idea fascinating, but don't see a way for it to be lucrative unless you raise a number of funds.

It looks like the barrier to entry is substantially less than traditional VC especially if you're acting more like an angel. Is the traditional entry point to be an individual angel for a few years then transition to founding a firm and launching an initial fund and then trying to repeat on a regular cadence until you're a few years in and start to have exits?

Comments (9)

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Nov 7, 2021 - 5:38pm
acardboardmonkey, what's your opinion? Comment below:

I'm curious how much is people who have had successful exits investing their own capital and raising some money on the side.

But if it is external capital, you're relying purely on the idea that one of these seed cheques will hit it out of the park. The firm I'm at we had a seed investment go to a unicorn, so the carry on that is pretty nifty. If you're running a shop on your lonesome, not looking too bad. Though the counter point is if you think you can actually get those kinds of deals, it is weird you only raised ~8M

Nov 7, 2021 - 8:35pm
guyfromct, what's your opinion? Comment below:

That's the funny thing they've got a finance background, not an entrepreneur with a successful exit under their belt. The fund is in a niche think geographic/demographic focus. My suspicion is that they are probably writing relatively small checks especially if they're going to have money left for later rounds.

My assumption is that they are trying to be entrepreneurial themselves, I imagine at ~20MM in AUM you can probably draw a 200k salary plus carry once you're a few years in, which while not amazing by WSO standards is still a decent living and the carry is a huge bonus. It's honestly pretty appealing to me.

Nov 8, 2021 - 2:04pm
m_1, what's your opinion? Comment below:

You are correct, the economics suck in most cases and the majority of the EMs running them are not impressive or qualified. Many buoyed by the current market. From an EM in a micro fund I would want to see IRR of 40%+ if it's just bullshit markups and not realized exits. When I went shopping for EMs a few months ago, many were far under that even just going off markups.

There are some legit EMs. Usually have a previous exit and solid advantage over larger funds by niching down. Economics are still not great but it's just fund 1 for these guys and they can afford to float it + deliver ridiculous IRR b/c they know the space really really well. 

Nov 8, 2021 - 4:04pm
guyfromct, what's your opinion? Comment below:

This one has pursued a demographic niche. Which honestly has never made much sense to me, I can see the value in choosing a geography (network effect) or a vertical (network effect plus domain knowledge). 

I figured that for a founder who had a decent exit these small funds offer decent pay, interesting work and the potential to make decent money on carry.

  • Analyst 1 in IB - Gen
Nov 8, 2021 - 4:31pm

Lol this is like Pico VC.. micro is more than $25M to less than $100M per fund.

No way is this person funding their salary with the mgmt fees from that small a fund. They're probably dipping into savings big time. 

Nov 8, 2021 - 5:08pm
guyfromct, what's your opinion? Comment below:

Probably, quick math is $200k in fees (assuming 2.5% as opposed to the standard 2%), costs are probably $100k/year between legal, fund accounting and administration, conferences and travel. That's $100k at best left over for salary. So it's either live frugally (especially since health insurance, payroll taxes and the like are coming out of that number), live on savings or have a spouse supplement those earnings.

Jan 21, 2022 - 2:44pm
loosechange83, what's your opinion? Comment below:

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