How Micro Vcs Outperform Larger Funds

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

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  

When I interviewed Sebastian Mallaby about his book the Power Law, we discussed what it takes to be successful in VC (link below to our conversation). I love this framing: the VC Fund Trap by James Heath, which articulates an opinion I've shared over many dinners with Kauffman Fellows friends. "Venture capital success often follows two distinct trajectories: small, nimble funds that leverage quantitative discipline and qualitative alignments and access-driven giants, which dominate with networks and resources." The reason is partially math. "Smaller funds can derive an edge from meticulous portfolio construction. For instance, a $100 million fund targeting 10% ownership in early-stage ventures can achieve great returns with sub-$10 billion exits... Larger funds often overpay to meet ownership thresholds, locking themselves into exit requirements that are quantitatively more challenging to achieve." I also believe it is positioning. Smaller firms can fit into rounds more easily with their business models. Larger ones can take the full round. The challenge is in between, eloquently put: "the precarious middle ground, where funds neither secure the best access nor optimise for ownership and entry price." Link to James' piece: https://lnkd.in/gMTtUt2Y Link to my conversation with Sebastian Mallaby: https://lnkd.in/gihKAyfC

𝗘𝗺𝗲𝗿𝗴𝗶𝗻𝗴 𝗩𝗖𝘀: 𝗪𝗵𝗼 𝗶𝘀 𝗪𝗶𝗻𝗻𝗶𝗻𝗴 𝗶𝗻 𝟮𝟬𝟮𝟱? While the VC industry is experiencing its biggest set of challenges in over a decade, 𝙨𝙤𝙡𝙤 𝙂𝙋𝙨 𝙖𝙧𝙚 𝙦𝙪𝙞𝙚𝙩𝙡𝙮 𝙤𝙪𝙩𝙥𝙚𝙧𝙛𝙤𝙧𝙢𝙞𝙣𝙜. 𝗧𝗵𝗲 𝗙𝘂𝗻𝗱𝗿𝗮𝗶𝘀𝗶𝗻𝗴 𝗟𝗮𝗻𝗱𝘀𝗰𝗮𝗽𝗲 𝗶𝗻 𝟮𝟬𝟮𝟱: • H1 2025: $26.6B raised across 238 funds (decade low) • First-time fund managers: Only $1.8B raised across 44 funds (⬇️ 32% YoY) • Median time to close: 15.3 months (⬆️from 12.6 months in 2024) • Top 30 VC firms captured 74% of all LP commitments 𝗕𝘂𝘁 𝗛𝗲𝗿𝗲'𝘀 𝗪𝗵𝗮𝘁'𝘀 𝗥𝗲𝗮𝗹𝗹𝘆 𝗛𝗮𝗽𝗽𝗲𝗻𝗶𝗻𝗴: • The Median VC fund from 2018-2024 hasn't returned more than 0.03x DPI • Smaller funds consistently deliver higher TVPI across ALL vintage years • At the 90th percentile, small funds hit 4.17x TVPI vs 2.59x for $100M+ funds (2017 vintage) 𝘛𝘩𝘦 𝘴𝘮𝘢𝘳𝘵 𝘓𝘗𝘴 𝘢𝘳𝘦 𝘭𝘰𝘰𝘬𝘪𝘯𝘨 𝘧𝘰𝘳 𝘥𝘪𝘧𝘧𝘦𝘳𝘦𝘯𝘵𝘪𝘢𝘵𝘪𝘰𝘯 & 𝘵𝘰𝘱 𝘵𝘪𝘦𝘳 𝘱𝘦𝘳𝘧𝘰𝘳𝘮𝘢𝘯𝘤𝘦 - 𝘯𝘰𝘵 𝘳𝘪𝘴𝘬 𝘢𝘷𝘦𝘳𝘴𝘦 𝘴𝘢𝘧𝘦 𝘣𝘦𝘵𝘴 𝗧𝗵𝗿𝗲𝗲 𝗧𝘆𝗽𝗲𝘀 𝗼𝗳 𝗦𝗼𝗹𝗼 𝗚𝗣𝘀 𝗔𝗿𝗲 𝗪𝗶𝗻𝗻𝗶𝗻𝗴:* 1️⃣ Former operators (Joshua Browder, Nik Milanovic) 2️⃣ Tier 1 VC spinoffs (Rex Salisbury ex-a16z, Peter Boyce II ex-GC) 3️⃣ Social influencers (Packy McCormick, Turner Novak) *Several GPs also fit into multiple categories above 𝗧𝗵𝗲 𝗦𝗲𝗰𝗿𝗲𝘁 𝗪𝗲𝗮𝗽𝗼𝗻: • Almost all of these solo GPs started small & worked their AUM up • Most raised from high net worth LPs, which are ~56% of sub-$10M funds • Median commitment size in Fund I under $10M: Just $75K 𝗪𝗵𝘆 𝗦𝗼𝗹𝗼 𝗚𝗣𝘀 𝗔𝗿𝗲 𝗪𝗶𝗻𝗻𝗶𝗻𝗴: • Speed: No partnership politics, instant decisions • Specialization: Deep expertise mega-funds can't match • Founder alignment: Often former operators who get founder mentality • Lower fees: Leveraging technology with smaller teams means more shots on goal, more capital goes to startups, and less legal overhead • Secondaries: Liquidity in a $60B+ secondaries market is a top LP priority 𝗧𝗵𝗲 𝗕𝗼𝘁𝘁𝗼𝗺 𝗟𝗶𝗻𝗲: While everyone chases bigger teams and Blackstone-in-a-hoodie strategy, solo GPs are quietly building the future of venture. They're not trying to be smaller versions of a16z—they're creating an entirely new playbook. Sources: Alex Klein/Nucleus Talent, Carta, PitchBook-National Venture Capital Association Q2 2025 Venture Monitor

Taking a 'fund-of-funds approach' is the secret sauce for LPs. As data from Preqin shows: Venture Capital Fund of Funds can generate up to 3.5x - 5.5x multiples over ~10 years, which is the timeframe fund returns truly start to mature. Establishing a portfolio of highly curated venture funds does not only prove to generate high returns, it is also a more diversified, more de-risked, and less time-intensive approach to venture. However, I would not stop here. If you consider the fact that emerging funds (Funds 1-3) are proving to outperform larger funds, a fund-of-funds approach, focused on Emerging Managers, becomes even more powerful. As Kyle Thorpe showed in his report with Pattern Ventures, 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. The probability of generating top-quartile venture returns is now not only higher because you diversify across several funds, but accessing smaller funds additionaly increases the probability of achieving outlier returns. The problem for LPs to consider is: accessing the best-in-class emerging managers is challenging and conducting due diligence on Emerging Managers is a craft the requires time and refinement.

It turns out in venture capital investing - smaller is better, and the proof is in the results. The top performing funds over the past 40 years (top and median quartile) are sub $70M in size. In other words bigger is not better based on return performance results over the last 4 decades. The logic is based on both math and operation focus and expertise: smaller funds stay focused on their area of competence and returns not on management fees to drive fund success. In the next decade the top 5% of venture managers who rely on category skills and real operational insights not spreadsheets will continue to outperform their larger peers by being focused on core metrics and staying close to consumer trends that affect their niche area of expertise and NOT stretching or expanding to grab larger AUM's. https://lnkd.in/gjeGSNau

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.