Marque Ventures reposted this
In 2024 9 VC firms raised more than 50% of all VC dollars with 30 firms raising more than 75%. Approximately 10,000 other venture firms had to fight over 25%. A detailed analysis* found that large VC firms generate an average 9.7% internal rate of return (IRR) while smaller firms generate an average IRR of 17.4%. In dollars and cents, $1 invested for 10 years at 9.7% IRR will grow to $2.52, while that same $1 at 17.4% IRR will grow to $4.97. Why then is VC concentrated in the hands of a few large firms? Institutional LPs often explain that it takes the same work to make a $5M investment as it does to make a $50M one. Thus, while they may like to deploy into smaller managers, they lack the administrative resources to do so. However, this explanation makes no sense to me... Compare two simple models: Endowment 1 Endowment 1 is managing $2B in venture capital and each investment manager on their staff oversees 10 investments. Their average check size is $25M. This means that each investment manager can oversee about $250M. Therefore they have a staff of 8 assigned to the venture asset class. If the average compensation for the allocators is $400K per person, per year, this endowment is spending $3.2M per year to manage ~80 relationships, or $32M over the course of a decade. If endowment 1 generates average returns (9.7%), they will turn their $2B into ~$5.04B Endowment 2 is also managing $2B in venture capital and their staff can also each oversee 10 investments. This endowment however divides their $2B into two $1B buckets. A large fund bucket with average check sizes of $25M and a small fund bucket with average check sizes of $5M. The large fund buckets requires 4 investment managers to oversee their ~40 relationships costing the endowment $1.6M a year. The small fund bucket requires 20 managers to oversee 200 small fund relationships at an administrative cost to the endowment of $8M per year. Over a 10 year time period endowment 2 will spend $96M in administrative costs managing ~240 relationships. If the large fund bucket generates an average return of 9.7% it will turn $1B into $2.52B over 10 years. If the small fund bucket generates an average return of 17.4% IRR it will turn its $1B into $4.97B over 10 years. The combined total return for endowment 2 is $7.49B Endowment 1 turns $2B into $5B net of admin costs Endowment 2 turns $2B into $7.4B net of admin costs In other words endowment 2 by staffing up and targeting small funds can expect to generate an additional $2.4B in returns. At essentially any AUM scale a professional allocator only needs small funds to outperform large funds by ~1% IRR to justify staffing up. The argument is even more compelling when you consider that specialist funds outperform generalists by 4% IRR according to pitchbook and there are few specialist firms in the large firm bucket What am I missing? *https://lnkd.in/eQxBWyTr