As the cost of setting up and managing venture funds continues to decline, I expect 'micro funds' to emerge that enable a community to cost-effectively pool and deploy risk capital at a smaller total aggregate value into a more diversified portfolio of investments.

For example, a closed-end fund of $2,500,000 that 100 individual Accredited Investors each invest $25,000 into, and which then makes 25, ~$75,000 investments at the pre-seed, or "pre-pre-seed" (more on this later).

No pro-rata reserves, all capital deployed within 4 years, meaning an average of 1-2 new investments per quarter.

For now, I'm calling this a Community Microfund.

After much exploration - including discussions with fintech entrepreneurs and fund lawyers - it's simply impossible today.

Why?

Because of current administrative reporting requirements for closed-end fund vehicles, the legal fees and management overhead required to stay adherent to regulations, would materially drag down returns potentials.

Angel List's rolling-fund vehicle is the closest analog. Even assuming a modest 0.5% management fee rather than the full typical 2.0%, which would be impossible to cover operating expenses, the numbers don't work. Below are my calculations.

But what if we took a different approach?

What if the operational complexity were reduced significantly by only deploying capital into one ecosystem v across all industries as a generalist VC would?

The result: increasing concentration risk, but materially reducing sourcing costs.

What if the diligence process was 90% automated? Fill out the template we have, its processed by our new AI-bot that supports our investment analysis, and an answer is provided. With the last 10% being community feedback (not voting)?

Furthermore, what if rather than being the only revenue generating part of the business - this type of capital deployment were merely one of many revenue streams for the organization?

Could a Community Microfund then work?

Perhaps...

As the cost of setting up and managing venture funds continues to decline, I expect 'micro funds' to emerge that enable a community to cost-effectively pool and deploy risk capital at a smaller total aggregate value into a more diversified portfolio of investments.

For example, a closed-end fund of $2,500,000 that 100 individual Accredited Investors each invest $25,000 into, and which then makes 25, ~$75,000 investments at the pre-seed, or "pre-pre-seed" (more on this later).

No pro-rata reserves, all capital deployed within 4 years, meaning an average of 1-2 new investments per quarter.

For now, I'm calling this a Community Microfund.

After much exploration - including discussions with fintech entrepreneurs and fund lawyers - it's simply impossible today.

Why?

Because of current administrative reporting requirements for closed-end fund vehicles, the legal fees and management overhead required to stay adherent to regulations, would materially drag down returns potentials.

Angel List's rolling-fund vehicle is the closest analog. Even assuming a modest 0.5% management fee rather than the full typical 2.0%, which would be impossible to cover operating expenses, the numbers don't work. Below are my calculations.

But what if we took a different approach?

What if the operational complexity were reduced significantly by only deploying capital into one ecosystem v across all industries as a generalist VC would?

The result: increasing concentration risk, but materially reducing sourcing costs.

What if the diligence process was 90% automated? Fill out the template we have, its processed by our new AI-bot that supports our investment analysis, and an answer is provided. With the last 10% being community feedback (not voting)?

Furthermore, what if rather than being the only revenue generating part of the business - this type of capital deployment were merely one of many revenue streams for the organization?

Could a Community Microfund then work?

Perhaps...