How Fund Sizes Impact Vc Performance

Conventional wisdom assumes the bigger the VC fund, the bigger the returns. But does the data agree? On the contrary, investing in smaller, disciplined venture funds has consistently demonstrated superior performance compared to larger funds. Data shows that funds under $350 million are ~50% more likely to return more than 2.5x the invested capital than those exceeding $750 million. Why is smaller better in VC? -Smaller funds maintain strong incentive alignment between GPs and LPs. They rely more on performance (carry) rather than management fees, keeping the focus on strong returns rather than scaling for AUM. -Smaller funds are more agile and able to take on smaller, high-potential seed deals, which large funds might overlook due to the need to deploy larger sums of capital. -This agility not only allows for a more hands-on approach with portfolio companies but also enables higher returns through early exits, often achieved via M&A rather than waiting for IPOs. -The mechanics of smaller funds are also more favorable. With smaller fund sizes, the required exit values to generate meaningful returns are lower, allowing funds to achieve strong multiples even from companies that do not reach "unicorn" status. Sources: Energy Transition Ventures, Institutional Investor, RBCx #VentureCapital #VC #Investing #privatemarkets

𝐒𝐦𝐚𝐥𝐥 𝐕𝐂 𝐅𝐮𝐧𝐝𝐬 𝐚𝐧𝐝 𝐋𝐚𝐫𝐠𝐞 𝐕𝐂 𝐅𝐮𝐧𝐝𝐬 𝐬𝐡𝐨𝐮𝐥𝐝𝐧'𝐭 𝐛𝐞 𝐜𝐨𝐦𝐩𝐚𝐫𝐞𝐝 𝐬𝐢𝐝𝐞 𝐛𝐲 𝐬𝐢𝐝𝐞 Most LPs know that small VC funds can potentially drive higher top-end returns compared to their larger counterparts. However, what deserves a bit more analysis is the why from the lens of portfolio exposure and risk. The truth is that these small and large funds are different products that operate under different business models within the massively broadening category of "Venture Capital". Let's illustrate. Fund A - $100M Seed Fund (30 investments, 40% reserves) The business model for this fund is to maximize initial ownership at seed and follow on to maintain or increase ownership in one more round. Data from Primary Ventures shows that about 30%-40% of seed-funded companies progress to Series A, but only around 15% reach Series C. • Average seed check: $1.5M for 10% ownership. • Follow-on: 10-15 companies at Series A. • By Series C: 5-6 companies may still be active (others have either exited or failed) • With minimal dilution (ideally less than 50% from inception to exit), a $1B exit for a VC with a 5% ownership position at exit (initial $1.5M seed + $2M Series A with 50% dilution) yields $50M, or ~15x on investment, 0.5x of the fund. Fund B - $800M Early Stage Fund (30 investments, 65% reserves) For larger funds, core positions typically start at Series A, with ongoing investment to maintain or increase ownership through multiple rounds of each company. The theory is that follow-ons at the mid-growth stage should come with less risk and shorter times to liquidity for LPs but also bring lower return multiples. • Average Series A check: $12M for 15% ownership. • Follow-on: Multiple rounds to maintain ownership. • By Series C: 10-12 companies still active • In a $1B exit where the VC maintains 15% ownership (initial $12M Series A + $17M total in B/C rounds to maintain ownership), the return is $150M (~5x on investment, 0.2x of the fund). Thus, larger funds must aim for very large outcomes given cost-dollar averaging up, and typically require $5B+ exits to return the fund. This is why many larger funds have started to be more active in seed (larger return on initial check + more shots at goal). In summary, the products are very different, with different business models. Our data supports that smaller fund come with more risk/volatility, but can produce higher end returns when successful, while larger funds present a tighter band of returns, with less range on the upside/downside.

😕 The Smaller the Fund, the Higher the Performance? 😕 Pattern Ventures is a fund of funds focusing exclusively on identifying, accessing and empowering exceptional small funds, $5-50M in size. Why is Pattern attracted to Small Funds? “Our data suggests that small funds have the most attractive combination of a low required “win rate” combined with a high probability of finding an outperforming fund. In our opinion, this sets the stage for significant outperformance at the portfolio level.” Kyle Thorpe (GP at Pattern Ventures) unpacked the fund data I'm going to reference across ~2,500 funds from 1980 onwards. I’ve linked the full article in the comments, but for this post, we’ll explore some of their common metric for evaluating fund size attractiveness. Common Metrics for Evaluating Fund Size Attractiveness: There seem to be three primary metrics used to infer the relative attractiveness of a particular part of the venture ecosystem. These are: - Expected return (i.e. The average return of a fund within a particular fund size range.) - Probability of an “outperforming fund” (i.e. 9% of funds sized $0-50M deliver a 5x+ return which is 4x greater than funds sized $200M and above.) - The relative distribution of “outperforming funds” (i.e. 44% of funds with a 5x+ return are sized $0-50M.) Let's dive in! 1. Expected Return From 1980-2018, the average return of funds sized $0-50M was 2.3x. This compares to ~2.1x for funds sized $50-200M, ~1.8x for funds sized $200-500M, 1.6x for funds $500M-$1BN, and 1.6x for funds larger than $1BN. This suggests that funds sized $0-50M outperform their larger counterparts by 12%, 30%, 42% and 42% respectively. 2. Probability of an “outperforming” (in their definition, 5x+) fund From 1980-2018, ~9% of funds sized $0-50M generated a return of equal to or greater than 5x. That compares to ~6% for funds sized $50-200M, 3% for funds sized $200-500M, 1% for funds $500M-1BN and there were no 5x+ funds among funds sized greater than $1BN. That suggests that funds sized $0-50M are 1.4x, 3.0x and 12.0x more likely to generate a 5x+ outcome than funds sized $50-200M, $200-500M and $500M-$1BN respectively. 3. The relative distribution of “outperforming” (in their definition, 5x+) funds From 1980-2018, ~44% of all 5x+ funds were funds sized $0-50M. That means that there are almost as many 5x+ funds sized $0-50M as they are in any other fund size category combined.

8 years in: are small VC funds or big(ger) VC funds performing better? Drum roll...it's smaller funds. But there's so much to discuss beyond the headline TVPI (Total Value to Paid-In Capital) multiples. Let's dig into to data first then implications. 𝗗𝗮𝘁𝗮 𝗘𝘅𝗽𝗹𝗮𝗶𝗻𝗲𝗿 • Net TVPI figures laid out in percentiles (25th, 50th, 75th, 90th, and 95th). • Data is a snapshot of performance as of Q1 2025. 𝗗𝗮𝘁𝗮 𝗧𝗮𝗸𝗲𝗮𝘄𝗮𝘆𝘀 𝗳𝗼𝗿 𝗡𝗲𝘁 𝗧𝗩𝗣𝗜 • Funds with $1M-$10M to invest have higher marks at the 90th and 95th percentiles than any other fund size group.    • Between $10M-$25M and $25M-$100M, performance varies. Top decile marks are actually higher at the bigger tier between the two, but it's competitive.    • Funds with over $100M typically have lower top decile marks. The obvious question is "why don't LPs fund more tiny funds, they outperform". Well, it's pretty tough to invest $100M into 10 funds of $10M each (not least because no one would want to be the ONLY LP in a fund). And of course there are many more $10M funds, so choosing a top decile manager is maybe even harder here! Beyond that, I think it's under-discussed that emerging manager funds are often in competition with one another. If an LP has $5M to give to the emerging manager space, choosing between a $25M fund and a $50M fund is tricky - and may have very little to do with fund size. The classic dilemma on fundraising: do we spend time trying to convince an LP to focus on emerging managers AND THEN pick us, or do we narrowly target LPs who are already bought into the emerging manager thesis? Two final notes: 1) TVPI is not DPI and 8 years is not 12 years. More life to live in this analysis. 2) 75th percentile (aka top quartile) being below 3x across fund sizes after 8 years is...not great. Share with your favorite GP 🙏 #TVPI #venturefunds #venturecapital #smallfunds  

In recent years, at least, there's a clear correlation in venture capital between fund size and fund performance. Smaller funds tend to perform better. In the 2017 vintage, for instance, the median fund with between $1 million and $10 million in AUM had an IRR of 13.8% at the end of 2024. The median fund with more than $100 million in AUM, meanwhile, had an IRR of 9.8%. In the 2018 vintage, the 90th percentile of performance for funds ranging from $1 million to $10 million was a 32% IRR. For funds larger than $100 million, a 90th percentile IRR was 25.4%. The same holds true across most percentile thresholds and across most recent fund vintages—at least those that are old enough to start generating significant returns. Why do smaller VC funds tend to generate higher IRRs? And if smaller funds produce better performance, then why aren't they the only thing that LPs invest in? I dug into some more of the data and the details in my latest story for Carta—link to the full piece is down in the comments.