Performancing Metrics

A Series of Small Things

Random Thoughts on Building Venture-Backed Companies in the Midwest

Does size matter?

1.15.13 by Dov

According to a recent National Venture Capital Association report, the venture industry is continuing to bifurcate into smaller, focused funds (either by industry, geography, or something else) and massive funds that invest across a wide spectrum of deal types.

On one hand, the reduction in the number of overall venture firms nationally is probably a reflection of the poor returns the industry has had over the past decade plus.  If a relatively small portion of venture firms are actually good at their job, then of course investors should want to give their capital to those firms, driving them to be larger.  Newer firms then enter the industry with small funds (because that’s all they can raise), but grow over time if their performance enables them to raise larger funds in the future.

As for Allos, we remain unconvinced that bigger is better.  Those massive funds must out of necessity invest across a whole swath of industries, geographies, and deal stages in order to put so much capital to work.  It seems to me that there are two basic ways they can do that.  Become complete generalists or effectively act internally as a collection of smaller firms.  In either case, I wonder if their performance can possibly continue to keep pace with the returns that presumably drove investors to give them so much capital in the first place.  If they have become generalists, they lose the expertise they presumably had in their earlier models.  If the become siloed, then it’s as if their investors were diversifying across a number of small funds.  Perhaps their internal teams really can be the best in each of those areas.  But it seems more likely that some of those silos will probably not be “up to par” and thus the firm overall would be better off dropping them from the strategy.

Would we like to have a $1 billion fund?  Of course.  Am I just a bit jealous of those management fees?  Sure – maybe more than just a bit.  But we also remain convinced that those smaller, $30-100 million funds will continue to outperform (oh, and here’s more).


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