As the venture capital landscape evolves, a surprising trend is emerging: small VC funds are consistently generating better returns than their larger, more established counterparts. This David vs. Goliath scenario in the investment world is reshaping our perceptions of fund size and success.
As per PitchBook’s data, we can see that smaller funds have been consistently outperforming larger funds in IRR. In the last decade even the bottom quartile of smaller funds have delivered higher IRR than large ones is contrary to the high risk - high reward concept. A couple of reasons that provide smaller funds an edge over their larger counterparts are:-
- Given the smaller AUM, it provides flexibility to pivot and adapt to market changes.
- Since most of the smaller funds focus on early-stage investments, which helps them enter in high-potential startups at more favorable valuations. Thus providing better returns during exit
The current economic climate, characterized by higher interest rates and lower valuations, has made the venture capital environment more challenging. Yet, it is in these times that small VC funds are proving their mettle, demonstrating that when it comes to venture capital, bigger isn’t always better.
As we look to the future, it’s clear that small VC funds will continue to play a pivotal role in the venture ecosystem. Their ability to deliver outsized returns is not just a stroke of luck but a result of deliberate and strategic investment choices.
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