Starting a MicroFund: Why Mini-Funds Will Be the Way of the Future

We get a decent amount of calls from folks looking to start a private equity fund or raise private capital. But unlike the world of the 1980s when large PE groups first starting cropping up (Bain, KKR, Blackstone, et al.), today’s businesses require less capital than ever before and can often reach significant scale with a smaller input.

This creates a win/win for both founders and investors alike. Founders don’t need to give up quite so much equity to make a run at a really good idea. Investors are not in a deal for a massive sum of money and thus they can bear less risk across a much more broad portfolio of private businesses. Here’s where some of today’s capital democratization folks really win.

• Crowdfunding. With crowdfunding platforms you’re able to get paid before you even have to buy raw materials to make whatever it is you plan to sell. On the software or services side, you can now get “paid forward” to perform a meaningful service without incurring the risk of loss because you lack capital. The whole idea is a mind-blowing game changer when you really look at it.
• Technology has been democratized as well. When Jeff Bezos started Amazon in his Seattle-based home in the mid 1990s, the company needed to invest heavily in servers to ensure customers and potential customers could have access to the site on a 24x7 basis. Today, we use pay-as-you-go cloud infrastructure to do the same thing, only thousands cheaper. Whether you’re creating an application to service clients or running an ecommerce site, it’s now cheaper, faster and more efficient than ever.
• Reach the masses with a mouse click. Distribution that once required a physical footprint can now be achieved entirely through digital channels, fundamentally changing the capital requirements for market entry.

In today’s world, it will most likely be a combination of the business idea, the business model and the business team that wins. But with how small things need to be in today’s world, the business model is almost the most important thing to understand from a finance angle. The models have completely changed. We operate in a world where someone with an internet connection can make as much revenue and income as someone with a massive start-up fund. Great ideas and great execution require much less.

We’ve put very little—in comparable historical terms—into many of the projects we’ve personally worked on and funded in the last couple of years and we’ve seen great dividends come back from such projects. As we move forward, job creation will need to come from big ideas, small capital and heady entrepreneurs. Talk to us about microfunding on projects.

What Is a Microfund?

A microfund is a pooled investment vehicle—structured similarly to a traditional private equity or venture fund—but operating with a substantially smaller capital base, typically under $10 million in committed capital. The reduced scale lowers the administrative burden, shortens the fundraising timeline, and allows the general partner to focus on a narrower set of companies where active involvement is practical.

Microfunds are not a new concept, but the convergence of low-cost cloud infrastructure, remote collaboration tools, and digital-first distribution has made the economics viable in a way they were not a generation ago. The pressures facing larger PE firms in a crowded market have pushed some experienced operators toward the microfund structure precisely because it allows them to compete for smaller deals with less competition from institutional capital.

Structuring a Microfund: Key Considerations

Despite their smaller size, microfunds are still investment funds subject to securities laws and regulatory requirements. Practitioners should be aware of the following structural considerations before launching:

• Legal entity and exemptions. Most microfunds rely on exemptions from SEC registration under the Investment Advisers Act and raise capital under Regulation D. Qualified legal counsel should be engaged early.
• LP agreements and economics. Even at a smaller scale, the fund’s limited partnership agreement needs to address carry, preferred return, management fee (if any), and clawback provisions. Skipping this rigor because the fund is small creates disputes later.
• Deal flow and sourcing. A microfund’s advantage is agility and focus. The best deal flow typically comes from a GP’s existing network in a specific sector or geography. Trying to compete broadly against institutional capital is a losing strategy.
• Investor materials. Presenting a microfund to limited partners requires the same quality of investor materials that any institutional fund would prepare—financial projections, a clear investment thesis, a track record, and a diligence process. Professionalism signals credibility.

Microfunds and the Future of Private Capital

The democratization of capital described above is accelerating. Platforms that were previously available only to institutional investors are increasingly accessible to smaller pools of capital. For founders, this means a broader set of potential investors; for GPs, it means competition from a wider universe of capital providers—not just traditional PE firms but also family offices, independent sponsors, and search funds.

Understanding where microfunds fit in the broader private capital ecosystem is increasingly important for anyone deploying or seeking growth capital. Related perspectives worth reviewing include where investment banking is heading and how search fund structures compete in the same lower-middle-market space that microfunds often target.

Preparing to Raise a Microfund

If you are considering launching a microfund, the preparation process closely mirrors any other capital raise. A clear investment thesis, a targeted LP list, and polished materials are table stakes. Consider using a structured capital raise workflow to organize the process. And if you are ready to move forward, speak with an advisor about the specific steps for your structure.

Frequently Asked Questions

How is a microfund different from an angel investor?

An angel investor deploys personal capital directly into companies. A microfund pools capital from multiple limited partners into a formal fund structure, with the general partner managing the portfolio on investors’ behalf. The fund structure provides legal clarity on economics, governance, and exit rights that informal angel arrangements often lack.

What types of companies are best suited for microfund investment?

Microfunds typically target early-stage or lower-middle-market companies that are too small for institutional PE attention but too large or operationally complex for a single angel investor. Capital-efficient software businesses, professional services firms, and niche manufacturing companies are common targets.

Can a microfund generate competitive returns?

Returns depend on deal quality, entry price, and operational value-add—not fund size. A focused GP with genuine industry expertise and disciplined deal selection can generate strong returns from a small capital base. The risk is insufficient diversification if the fund holds only three or four companies.