Are megafunds killing venture capital?

Back in the day, $214 million was a decent-sized venture capital fund.

US VC heavyweight Andersen Horowitz’s first investment in 2009 was $300 million, Peter Thiel’s first three Founders Fund vehicles hovered between $200 million and $250 million, and even in Q3 2022, Average US fund size It was still barely $50 million.

However, $214 million is the amount that Sequoia bet and lost on an investment in the notorious crypto startup. FTX. This single investment was the size of many of the first VC funds, and the Sequoia fund itself backed FTX More than 8 billion dollars in size

sequoia FTX (in a now deleted article) as A company that may eventually lead to the creation of the dominant all-in-one financial supercomputer in the future.” These gushing phrases recall what Softbank’s son Masayoshi said about WeWork in 2017:We’re excited to support WeWork as they … launch a new wave of productivity around the world.” Two years later, in 2019, $100 billion Vision Fund $4.6 billion of this investment was hit.

Is there a connection between larger capitals – with more cash – and these huge losses?

Capital is concentrated in large funds

It’s not just Sequoia and Softbank that have grown up. VCs of $1 billion or more They have received 60% of the capital this year so far – compared to 34% in 2021. On the other hand, newer and smaller funds, despite Evidence and evidence They usually perform better.

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Capital is increasingly concentrated in several hundred megafunds worldwide Top 20 VC brands It now manages more than $200 billion, which translates to 10 percent Total VC assets Globally.

This ratio is likely to change even more if we take into account the so-called “VC outsiders” – companies such as Softbank, Tiger Global, Partner Fund Management, Thoma Bravo and other private equity and investment funds that have recently invested billions of dollars in VC games have flooded.

And as megafunds get fatter, they end up facing the same challenge: how to spend that money and get a return. Time to do some math…

Size matters

In VC size It is important Because of, (a) mathematics and (b) accessibility.

Let’s look at the math first. VC exits Follow the power law distribution: 20% of a fund’s portfolio usually accounts for more than 90% of its returns. Returns 25% to 50% of something or close to it.

If you had a $100 million fund and wanted to triple your money (a benchmark that VCs typically look for), each portfolio company should have a chance to return the entire fund. For example, if you manage to secure a 10% stake in a $1 billion exit, that company will net $100 million of your original capital. The result of 20 billion dollars, Like Figma, Even if your stake is only 5%, you will be worth $1 billion.

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And if you had 8 billion dollars of capital? In this case, the result of a billion dollars will return you only 20% of your investment. And $100 million from the unicorn exit? A failure that does not even move the needle.

The second problem that comes with size is accessibility.

Data from Dealroom shows that the most successful “unicorn hunters”—VCs who back $1B+ startups—are those who invest in these early-stage companies for the first time. But to access the initial round or even Series A, you must be able to use the capital at such stages, and the size of the tickets you write must be meaningful for your capital.

Herein lies the problem of access: the grain size is typically only a few million dollars. The average Series A in the US is around $10 million and even less in Europe. If your funds are $50 million or even $100 million, seed checks still make sense. But if your capital is $1 billion + megafund, those tickets aren’t worth your time.

Are Big Funds Killing VCs?

All of this means that we’re now at a time when, for big VCs, a startup that achieves $1B+ is a no-brainer. To achieve 3-5x returns, large funds need startups that can:

  1. accept hundreds of millions or even billions of investment and
  2. Exit from the north of 50 billion dollars.
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If you look at all the public technology companies today, Less than 50 have reached that value.

So, when you meet a founder who attracts global PR, is ready to raise loads of cash and re-quote Sequoia’s now-deleted article, “A vision of your future gives you money – with a complete addressable market for every person in Market”. The whole planet, big investors are tempted. They are tempted to use this promotional tool and make an “Uber” out of it. (By the way, Uber’s market cap is just over $50 billion.)

Masayoshi’s son Apparently he has jumped on the bandwagon After just 28 minutes of meeting Adam Neumann from WeWork.

Sequoia did it with Sam Benkman-Fried, despite the fact that “the damn guy was playing League of Legends the whole session.” This observation was an ironic foreshadowing of his disastrous don’t-follow-the-rules attitude that led to the company’s collapse.

This mentality and the concentration of capital in a few funds creates a A growing budget gap Between the founders that these funds support and others. In addition, larger funds are creating a close network of buzz in their efforts to engineer the next $50 billion Uber, meaning they Naturally, it ends up being invested in many similar companies.

A slowdown in the technology market will only accelerate these forces.


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