Does fund size matter in Venture Capital? It’s a marathon, not a sprint.

The data in the above image are returns broken down by venture capital fund size from 1978 to 2019.

The distribution of returns are highly similar for funds in bracket 3 and 4.

Even the $250m to $500m VC fund bracket is similar, except for the percent above 20x.

That’s likely because it’s easier to deploy smaller amounts of capital into earlier stages of VC, where there’s more upside, while the largest bracket has the lowest loss ratio, but a cap on upside.

In the full dataset, only 0.1% of funds have a TVPI >40x (they’re in bracket 4)

Years to exit data, is obviously missing, given a seed fund will take much longer to exit than a growth fund.

So even if the TVPI is the same, the ROI will differ and time is money in that regard.

Inflation isn’t corrected (e.g A £100m fund in 1978 would be equivalent to a £426m fund in 2019).

– 21% don’t return the principal

– 60% underperform the S&P 500 (2x over the life of the fund is like 7% CAGR with no dividend)

– 80% do not meet the 15% benchmark for as illiquid an investment as VC is.

– 1% have outstanding returns inversely correlated with smaller fund size.

All of the above is data prior to the pandemic/ongoing economic downturn.

It highlights the pressure the Venture Capital industry is currently under, caught in strong economic headwinds with all logic pointing to LP’s deploying more capital to earlier stage and emerging VC funds to align with expectations of recovery and maximise returns.

Anecdotally, my friends/contacts who have single family offices tell me it is likely that will be the case with LP’s doubling down on early stage focussed funds, but I guess larger institutions and anchor LP’s will shape trends more.

What startup founders can take from that (if it does turn out to be the case) is it’s a marathon.

A marathon isn’t about speed, it’s about pacing yourself.

As someone who directly experienced how tough the “trough of despair” is between Series A and Series B during the last cycle, I can only imagine how hard that will become during this cycle.

Timing is so, so important.

Obviously, I’m sure VC’s will be spraying and praying as ever in whatever the latest hype spaces are (e.g Gen AI / ML right now) but we will see more caution and real, solid fundamentals are sexy again.

As Ben Horowitz says “startups are about speed; investing is about accuracy”.

I’m sure there will be an S Curve slow down of speed in startups velocity + VC deployment, I also believe the economic downturn lasts until 2028.

The classical playbook for governments after a deep, hard recession is heavy infrastructure investment, that will take time to stimulate the economy and restore confidence and let’s not forget we are in many ways in uncharted waters currently e.g A global credit contraction, with a commodity cycle surge. Some may interpret that as the final straight for fractional dollar led reserve system and the looming launch of CBDC’s, who knows.

I’m sure there are probably many anxious Venture Capital GP’s utilising Booking.com’s cancellation policy and taking some skiing trips to Verbier off their calendars for the next few years. All funds are really going to need to double down on the day job during this cycle. 😉

There has been a rapid rise in global interest rates since the start of last year. Higher rates have caused the value of stocks to plummet, as investors have moved capital into what are perceived to be safer assets such as cash and government bonds. The tech-heavy nasdaq index has lost more than a fifth of its value over the past year. In 2022 the amount of capital raised in IPO listings dropped to a 32-year low.

Public-market slowdowns such as the one currently in progress reduce expected returns for investors in private markets by lowering the valuation at which startups “exit” into public markets. Venture capitalists therefore demand lower prices in order to invest in the first place.

With $300Bn of dry powder in VC funds, the current climate clearly isn’t lost on them and I’m sure many will be looking to tighten up their belt and perhaps not autopilot back YC companies, Stanford grads and ex Uber and AirBnB alumnus.

Startup founders will therefore need to be conscious of how important it is to get their expectations, storytelling + timing of their fundraising strategy correct (If they do intend on going down VC route) as the playing field has changed.

But the thing to be optimistic about for early stage founders: Downturns are always when the category defining companies start/grow?

Tortoise and the hare, baby! #Onwards

To follow Henry on Twitter click here:

Credit to Burgiss / Jamie Rhode on data.