The Napkin Math of Venture Capital

“Your fund size is your strategy.” 

Venture capital is often romanticized as a world of bold bets, unicorns, and the chase for billion-dollar exits. But beneath the glamour lies a simple, often-overlooked truth: your fund size determines everything. It’s not just a reflection of how much capital you manage—it’s a map for your strategy, your deal flow, and, ultimately, your returns.

The Napkin Math: Small Funds vs. Large Funds

Imagine you’re managing a $100 million fund, and your goal is to generate a 3x return for your LPs—turning that $100 million into $300 million. In venture capital, only a handful of investments will drive most of your returns. Typically, 80% of a fund’s success comes from just 20% of the portfolio.

To achieve this, at least one or two of your portfolio companies need to return the entire fund. If you’re targeting a $100 million return from a single investment, your ownership stake is critical. Let’s break it down:

• 5% ownership requires a $2 billion exit.
• 10% ownership requires a $1 billion exit.
• 20% ownership requires a $500 million exit.

If you’re a small fund writing $1–$2 million checks, you’re comfortable taking 5–10% ownership. But larger funds managing $500 million or more face a different challenge—they need to write $10–$20 million checks and secure upwards of 15–20% ownership to make the math work.

The Power of Mid-Sized Funds

Mid-sized funds, typically in the $50–$150 million range, hit a unique sweet spot. These funds offer several advantages:

1. Flexibility in Ownership: Mid-sized funds can target 10–15% ownership stakes, which are achievable without monopolizing a round. This allows them to collaborate with other investors and syndicate deals more effectively.
2. Focus on Early-Stage Opportunities: Unlike mega-funds, mid-sized funds don’t need billion-dollar exits to generate meaningful returns. A $100 million exit can still move the needle.
3. Appeal to LPs: Limited partners (LPs) love mid-sized funds because they balance risk and reward. According to Preqin data, funds in the $50–$150 million range often outperform larger funds in terms of multiples, delivering higher returns with less reliance on outlier exits.

Fred Wilson’s Playbook: Discipline Over Scale

Fred Wilson, co-founder of Union Square Ventures (USV), has long championed the idea of maintaining small, focused funds. USV has consistently kept fund sizes between $150–$200 million, even as the firm’s reputation skyrocketed.

Why? Wilson believes smaller funds enable sharper focus and better alignment with early-stage founders. When USV invested in Twitter, they didn’t need a $10 billion exit to deliver stellar returns. By keeping their fund size disciplined, they could bet on transformative ideas without succumbing to the pressures of inflated valuations or chasing control.

Wilson’s approach has proven highly effective. According to CB Insights, Union Square Ventures’ portfolio includes multiple $1 billion+ exits, yet their mid-sized fund structure has allowed them to deliver outsized returns without relying on the risky economics of mega-funds.

The Challenges of Large Funds

Larger funds face inherent constraints that mid-sized funds avoid. For instance:

• Ownership Requirements: A $500 million fund needs to secure 20% ownership in companies that could exit at $1 billion or more. This often means leading rounds and squeezing out other investors.
• Fewer Collaboration Opportunities: As funds scale, collaboration diminishes. Seed rounds that once included multiple investors now become tightly packed, with room for only one or two major players.

This dynamic has led to the decline of the collaborative “party rounds” that were common in the early days of ecosystems like NYC or Silicon Valley.

LPs Love the Sweet Spot

From an LP perspective, mid-sized funds offer the best of both worlds:

• Lower Risk: They’re not chasing billion-dollar outcomes, which are statistically rare.
• Consistent Returns: Data from Cambridge Associates shows that funds in the $50–$150 million range consistently outperform their larger counterparts in terms of net IRR.
• Alignment with Market Trends: Smaller funds are nimble and can focus on emerging opportunities, from AI to climate tech, without the burden of deploying massive amounts of capital.

Conclusion

Bigger isn’t always better. Instead, aligning fund size with your investment philosophy creates a foundation for long-term success. The best VCs are those who understand their own constraints and leverage them as strengths, proving that in venture capital, as in life, discipline is the key to winning the game.

About Taghash

Taghash provides an end-to-end platform for venture funds, private equity, fund of funds, and other alternative investment funds. Over the last seven years, we have served as the tech arm for top VCs, helping them manage operations across deal flow, portfolio, fund, and LP management. Trusted by leading fund managers like Blume Ventures, Kalaari Capital, and A91 Partners, we enable our clients to achieve greater success.

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