#218 Size Matters: Small vs. Big VC Funds (5x+ vs. 2x+), Lightspeed Returns Detail
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Key Challenge For Large VC Funds
Sheel Mohnot recently highlighted a key challenge for large VC funds: even with breakout hits, it's difficult to return more than 3x on a large fund. From 2006 - 2018, Lightspeed raised 6 VC funds >$480M and only one fund is >3x DPI.
Lightspeed is one of the top brands in venture capital and these funds had massive successes with investments in companies like Mulesoft, AppDynamics, Snap, Glean — each of which returned more than 1x their respective fund!
Lightspeed's Performance: A Deeper Look
Sheel was pulling detail that Eric Newcomer recently shared on Lightspeed's returns and performance. For those that aren't aware, Lightspeed is one of the Top 10 VC Firm / Brand of all-time, with notable investments in Rubrik, Nutanix, and Affirm since its founding in 2000. Here’s a closer look at some of their Select Fund performance (Select Fund focuses on backing their winners):
While firms like Lightspeed generate substantial absolute returns, smaller funds often achieve higher multiples. This aligns with insights from our post #155 Venture Insights & Small VC Fund Outperformance, where we analyzed how small VC funds can deliver outsized returns despite higher volatility (more below).
While these numbers reflect solid performance, they also underscore the difficulty of achieving high multiples on large funds. Even with standout exits, the overall fund returns are constrained by sheer fund size and portfolio math.
Our Key Takeaways On Small vs. Big VC Performance
Venture Insights & Small VC Fund Outperformance: “Our view, both heuristically and backed by our own data, is that small funds can materially outperform, but there is a clear added dimension of risk that shouldn't be ignored.”
“TLDR: Small funds (0-100MM) definitely can outperform when successful, but come with a much higher level of volatility (and even this data set has survivorship bias). The challenge for risk mitigation for small funds is discovery, diligence, and building an appropriate level of diversification through picking multiple of these funds. This can be very time intensive and laborious for most investors (given nearly 70% of current VC managers raised funds that fall in this range).”
“Also, many larger brands staple offerings of early stage + growth, which by definition will provide lower volatility and should provide liquidity sooner (in theory). However, the tradeoff for less manager risk/lower vol is a tighter band of potential outcomes, with top-end DPI outliers being very rare given the basic math of venture (especially when premium carry is taken into account).”
”At the end of the day, each investor needs to assess their own constraints of time, risk, and return expectations to develop a portfolio of VC funds that makes sense for them.”
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