This post is by Jason Lemkin from SaaStr
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The data in everything in venture is … mixed. Yes, the crazy outperformers in venture are smaller funds, from Lowercase Capital to Benchmark, etc. But the goal overall is to significantly outperform the market (+50% higher) to account for risk, while rewarding those who can afford highly illiquid investments (universities, pensions, etc). Very large funds will struggle to produce the insane 8x-10x+ returns of a super successful tiny find with a decacorn or two in it. But, large, later-stage venture funds have two big advantages over small, early-stage funds:
- Investors can deploy a lot of capital into them. A $50m fund with 10 investments leaves room for only $5m per investor. That may sound like a lot, but if you are managing $10b+, $5m is not enough to move the needle. Bigger investors are looking to deploy $50m-$100m per fund.
- The IRR can be very attractive in late-stage investing, done . If you can do late-stage, pre-IPO investing well, the annualized returns can still be very strong — and on a lot more money. Sequoia put ~$100m into Zoom’s last round in 2017 at $1b valuation. That $100m investment is up 15x in just 2 years! Yes, the earlier investors have an even higher multiple. But Sequoia invested later, and deployed a lot more capital.