Micro VC Funds?

Thoughts on joining a micro VC firm? Wondering more about long-term opps and comp. Looking at a small micro VC firm that is about 1 year old with fund I at $6M. Would be joining as an associate. Any ideas on comp? Experience for bschool? Exit opps?

Comments (9)

Jan 31, 2019


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Jan 31, 2019

VC funds look for 12%+ IRR with an expected term of 10 years....so that's about a 3x return. The Fund manager gets 20% of the gain. So...a 6mm fund that hits these "avg" numbers will return 18mm over 10 years....and the manager gets 3.6mm (for 10 years of work...or 360k/year) and that's BEFORE they pay you...so they get even less.

Unless the fund can raise more $$...its doubtful you'll ever make meaningful money there (although, it would be good experience to see and try to value all the idea stage companies that will come to you trying to pitch their idea).

Its rare to see successful VC funds this small. Investing 200k 30 times = 6mm. So, out of 30 micro-investments, if one of them hits, and lets assume they exit for 100mm.
Assume your Micro fund invests 200k and gets 20% of a startup (1mm valuation).

Your micro VC will get diluted in the A (10mm), B (25mm) and C (50mm) valuations rounds because its such a small fund, you can't keep up pro-rata with the future investors.

imagine your 20% 200k stake, gets diluted in the Series A (3mm at 10mm post money valuation)
If you are not putting up more cash, than you are "selling" 30% of your 20% ownership at the 10mm valuation, but you don't get any cash...you become another founder, and you own a smaller % of a bigger company

After that 3mm series A investment, your 200k for 20% becomes worth 14% of 10mm (or 1.4mm). Assume that happens 2 more times
5mm at 25mm valuation (20% equity) (14% --> 11.2% of 25mm)
10mm at 50mm valuation (20% equity) (11.2% --> 9% of 50mm)

Finally, exit at 100mm where you own 9% of 100mm =9mm

So, yes, your 200k investment exiting at 9mm is a great job for that 200k....but chances are, the other 29 fund investments are worth zero...and so this 6mm fund is worth 9mm after 7-10 years. Lets assume that a 50% return in 7 years = or a 7% IRR which sucks for a VC fund. Taking all that risk for a 7% return...you are better off owning a REIT that pays 6-8% (of which there are many)

investing in this kind of fund assumes that the investing partner can find MULTIPLE wins...in a sea where most VC investments end up worth zero.

Then we must wonder...where is the money to pay the associate employee 100k/year for 5-7 years??

just google it...you're welcome

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Jan 31, 2019

The math for microfunds does not compute.

Jan 31, 2019

If you have the time/are willing, could you break it down/explain further?

Jan 31, 2019

a microfund only works if they truly find a diamond in the rough...such as being the first investor in facebook when all they had was mark coding in his dormroom.

just google it...you're welcome

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Jan 31, 2019

Not that complicated. Set up a rudimentary spreadsheet with AUM at the top, followed by a 2% management fee, and 20% of all gains. Now backsolve the required IRR on the fund, assuming a time to realization horizon of 5 or 6 years, that will pay the investment team and cover the overhead. Since the AUM fees are going to be miniscule, your base salary will probably be low, and to make any money on your carry (and you're last in line, after the founders) the fund will need an extraordinary number of big hits.

On the other hand, if you're just looking to do this for a year or two then go to business school, you may not care that much about the total comp, and the experience could be great/differentiating.

Jan 31, 2019

Tried to find the spreadsheet I put together when I looked @ doing my own microfund but I can't seem to find it. What @FellowTraveler" said is correct. The other issue too is that most of these microfunds can't stay solvent long enough to even capitalize meaningfully on their winners.

A $6M pre-seed VC fund honestly seems so dumb that I wouldn't imagine you'd learn much there and it's so small that the founders probably aren't very impressive.

Feb 2, 2019

Microfunds are pretty tough and truthfully, they don't really have any need for more than the one partner, so I'd be suspect of the fund trying to bring on an Associate.

2% on $6M is only 120k to cover overhead expenses, so not sure what you're going to get paid unless the guy is not taking any salary and working out of his house.

So basically on $6M you're probably writing 30-50 checks, a few hundred grand each? Probably not much room for follow on, so even if you do get lucky on a few, the best you're probably going to do is maybe 10x on your 100k investment before you either take liquidity in the next round or get diluted down. The fund is so small, you won't have enough to follow on even if you do have pro-rate rights.

Sounds like a pretty mediocre opportunity to be honest unless the founder is a great investor or a successful entrepreneur. Give that the fund is only $6M its unlikely he/she is either. Any half decent operator/investor should be able to raise more for a first venture fund.

I'd only take it if you have nothing else and want write that you worked in VC.

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Feb 2, 2019