If smaller VC funds outperform large VC funds, is Softbank’s Vision Fund destined to fail?


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.
Hence, even with some challenges to Uber’s IPO, Vision is already substantially in the money, at least on paper: Masayoshi Son claims Vision Fund LPs are already up 45% — but that’s mostly paper gains – TechCrunch So yes, Vision’s multiple isn’t as high as a top tier early stage fund. But it’s IRR might be close, at 45%. Because it invested later in big winners. And 45% still way outperformed the stock market. Small funds can be great. But they are a lot of work for a very large LP that wants to deploy a lot of money. Too much work, really. View original question on quora The post If smaller VC funds outperform large VC funds, is Softbank’s Vision Fund destined to fail? appeared first on SaaStr.

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