Santé Ventures, an Austin, Texas-based early-stage healthcare and life sciences investment firm, shared updated research on venture capital fund performance and the level of correlation with fund size.
While large funds offer presumed advantages of scale, brand recognition, and experience, data show that these benefits do not scale accordingly. This comes at a time when the total venture capital raised by sizeable individual funds has increased fourfold from 2012-2022 compared to 1990-2011 – providing a cautionary tale for limited partners in their alternative investment allocations.
Santé originally published a whitepaper detailing these findings in 2011, and updated the research this year to include the impact of macroeconomic market regimes on venture capital performance. By leveraging historical data and applying multivariate regression analysis, the original thesis – that the proper size for a venture fund should be no larger than 1.0 – 1.5x the average equity value generated at exit by venture-backed companies in its investment sector – remained true. Additionally, Santé noted that a properly sized fund is roughly 50% more likely to return 2.5x or more to investors than a large fund. An even greater performance gap exists when measured by cumulative IRR, which is 17.4% in funds smaller than $350M versus just 9.7% in funds larger than $750M.
Based on the results, funds in the $200-350M range generated the highest returns across all three metrics (IRR, TVPI, DPI) compared to other fund sizes. This could suggest that funds in this size range are more efficient and adept at generating returns than their larger counterparts. To build on this, Santé expanded the research this year to evaluate performance during certain market environments and confirm how strongly this impacted the overall thesis. Even accounting for times of tightened liquidity (bear market), stable liquidity (balanced market), and rapidly expanded liquidity (bubble market), properly sized funds continue to outperform.
Lastly, these findings are unique to venture capital. The venture industry tends to produce companies whose exit valuations cluster below $400M. This is because they are most often priced based on growth projections and proprietary technology – rather than on cash flow, given the earlier developmental stage of venture-backed companies.