The Empirical Evidence: Small VC Funds Beat Large Funds

By Andrew Romans, General Partner, 7BC Venture Capital

In venture capital, the headlines are dominated by billion‑dollar and multi‑billion‑dollar mega‑funds raising eye‑popping amounts of capital and writing massive late‑stage checks into the biggest unicorns and decacorns. The industry has been conditioned to believe that bigger is better and that the big names are where Limited Partner (LP) investors can find alpha. In reality, the data shows the opposite: smaller funds—particularly those under $50m—consistently outperform mega‑funds. I’ve seen this firsthand as a VC, an LP, and an operator. Below I unpack why the math, the structure, and the incentives all work in favor of smaller funds—and why the proliferation of new managers since 2015 has made it harder for LPs to capture this alpha even as the opportunity has expanded.

Why smaller funds beat mega‑funds

It comes down to math and structure. A $30m fund can get to 3x to 5x on the back of a few $100m to $200m exits. A $1bn fund must find multiple $10bn+ outcomes just to move the needle. Those exits are exceedingly rare, and the bigger the fund, the harder the math gets. When a fund drifts from early‑stage VC—writing small checks at modest entry point valuations—into late‑stage growth—writing $25m, $50m, $75m, $150m checks—its entry prices move much closer to (or above) realistic exit values. Many such funds ultimately struggle to return even 1x after ten‑plus years of illiquidity.

Here’s a real‑world cap‑table outcome from a transaction we invested in over several rounds (we invested in the first three):

· Series Seed‑1 = 11.1x

· Series Seed = 7.8x

· Series A‑1 = 5.0x

· Series A = 3.1x

· Series B‑1 = 2.0x

· Series B = 1.8x

· Series C = 1.17x

This is just math. The investor writing the huge Series C check did not even return principal once fees are accounted for: 2% management fee over ten years is about 20% of committed capital. On the 80% deployed, a 1.17x outcome barely breaks even in present‑value terms—while it was a stellar outcome for our smaller, more agile fund.

A smaller fund can invest $250k–$5m checks across a diversified set of startups and still achieve 10x returns even if a company sells for $200m. There are plenty of strategic buyers at $200m. If the math requires a $1bn+ exit, the buyer universe shrinks dramatically, and an IPO becomes the only likely way out. Growth‑stage entry prices are often higher than where the same company would trade in the public markets on discounted cash flow (DCF) and comps. Competition among large growth funds and crossover hedge funds for scarce unicorn/decacorn allocations has bid up these entry prices even further.

Beyond simple multiple compression, growth investors often struggle to achieve their ownership targets of 25–30% when a round only issues ~10% new stock and earlier VCs like 7BC are handing our pro rata rights to our LPs. That forces growth investors to buy secondaries from existing VCs or even founders, which can further delay the final M&A or IPO. Meanwhile, smaller funds can sell 5–50% of their preferred shares into growth rounds to return capital to LPs earlier and lock in gains—turning paper TVPI into cash DPI. Mega‑funds typically can’t sell secondaries because their cost basis hasn’t appreciated enough, and selling early can signal negatively to the market.

Ironically, earlier‑stage VCs are now often returning LP cash faster than growth‑stage investors who promised one‑to‑three‑year paths to exit. In a “stay‑private‑longer” world, skillful secondary sales by smaller funds can outpace the liquidity profile of late‑stage growth investors.

When you’re the GP of a large fund, you tend to go head‑to‑head with other large funds and demand to lead—buying at least 50% of each new issuance. If you fail to win the lead, you’d rather walk away than accept a small allocation. Smaller funds, on the other hand, build portfolio construction models that welcome co‑investors and small allocations across more high‑performing startups. Bill Draper (Tim Draper’s father and cofounder of Draper Johnson with the great Pitch Johnson in 1962) once told me that he was excited to see my firm establish with a smaller fund size and that it would bring back the original Silicon Valley culture of collaborative VCs working together—versus boxing each other out with sharp elbows after the rise of mega‑funds.

The mega‑fund dilemma: escaping a burning room with no doors or windows

Imagine you just raised $1bn and must deploy in 24–36 months. What’s your average check size to achieve your target portfolio? Even if you manage a $5m early‑stage investment into a repeat founder that returns 25x (i.e., $125m), that win is dwarfed by the $625m–$3.375bn you’ll commit to late‑stage growth at exit‑proximate valuations. Most good VC‑backed outcomes are M&A, not IPOs, and only a low single‑digit share of M&A clears $1bn in any given period. In other words, the math works against mega‑funds. 2024 was an IPO-drought year ~4% of U.S. VC exits were IPOs (42 IPOs out of 1,147 total exits), with most liquidity coming from M&A. (NVCA Releases 2025 Yearbook Showcasing 2024 VC Trends, March 27, 2025). In the first half of 2025 only 3.27% of exits reached $1bn or more. (H1’25 (global): Crunchbase tracked 918 startup acquisitions; ~30 were >$1bn, i.e. 3.27%. Q1’25 (global): 550 VC-backed M&A deals; 12 were >$1bn, i.e. 2.18%).

We once backed a company co‑founded by two of Silicon Valley’s most successful AI founders. We pre‑seeded it and invested again in the late‑stage seed. After we helped the team land its largest customer and reach $10m in annual recurring revenue (ARR), we ran a tight process with multiple VCs. We turned down a $50m raise on a $200m pre‑money valuation and chose a $10m raise on a $40m pre. Why? Many VCs would have taken the $250m post over $50m to boost marks and TVPI, but we preferred the lower entry, higher velocity path. A $50m post only required a $200m exit for a 4x—a relatively straightforward M&A outcome. A $250m post would have required ~$1bn to deliver 4x, a far riskier, longer journey. We ultimately received a $225m offer. Had we accepted a mega‑fund on the cap table, they might have blocked that sale, pushed a $100m round, and put us on an IPO track, extending time to liquidity and raising the liquidation stack with potential for us to risk a zero-return outcome.

Ask Google how many $1bn+ startups it has acquired

As Mao Zedong once said let's "seek truth from facts" and examine how many startups Google/Alphabet has acquired for over $1bn. One of the most acquisitive buyers in tech has acquired only a handful of VC‑backed startups for $1bn+ (e.g., YouTube $1.65bn [2006], Nest Labs $3.2bn [2014], Looker $2.6bn [2019]. [Reuters, SEC, Alphabet Investor Relations]. Reported/announced: +2, Raxium ~$1bn [price not officially disclosed, widely reported around $1B; closed 2022], Wiz $32bn [announced Mar 2025; largest ever for Google; AP News]). By contrast, Google/Alphabet has completed 200+ acquisitions overall, nearly everything for < $1bn or undisclosed amounts. Talk to anyone in Alphabet’s corporate development team and you’ll hear about frequent tuck‑ins, acquihires, and $30m–$200m deals—while they can count the $1bn+ startup buys on two hands.

Portfolio construction, liquidation stacks, and DPI vs TVPI

For a $50m fund, a few 10x and 4x wins can offset losses and put the fund on a realistic path to 2.5x–5x DPI. A $1bn+ fund needs extraordinary luck (or repeated $10bn+ exits) to achieve similar multiples. We have seen inflation in the market caps of NVDIA, Microsoft and others hit multi-trillion dollar valuations and so we expect inflation of VC-backed M&A exits, but smaller early‑stage funds can still hit 3x–5x DPI with $100m–$200m exits—outcomes that barely move the needle for multi‑billion‑dollar funds unless paired with IPOs or $1bn+ M&A.

The more a startup raises, the higher the liquidation stack. That adds risk to both founders and early investors. Typically, invested capital is paid back from the exit before profits are shared pari passu among investors and founders. Founders do better when they own more at exit and the liquidation stack is lower. Early investors in smaller funds are similarly advantaged. Sometimes taking a life‑changing exit now and swinging for the IPO on the next company is the smarter path for the founder and experienced founders have figured out which VC to partner with. Today, both founders and early investors can also sell portions of their holdings into growth rounds—helping growth funds reach ownership targets while getting LPs cash back sooner in smaller funds.

Incentives: why mega‑funds often deliver mediocrity to LPs

Big funds are great for GP compensation but make less sense for LPs. Simple math: raise a new $1bn fund every two to three years and collect 2% management fees—$200m per fund—stack two or three funds and you’re at $400m–$600m in fees regardless of performance. Even at 1.2x, 20% carry on gains becomes a sizable $80m to $120m cash bonus—for delivering results that lose to inflation. Smaller‑fund GPs, by contrast, are in it for carry, creating far better alignment with LPs.

Where value‑add actually happens 

By the time a mega‑fund writes a $25m check into a startup already doing $25m in ARR with clear product‑market fit, most of the key strategy decisions have already been made. At that stage, involvement from the mega‑fund is largely capital support. In other words, the meaningful value add beyond cash usually happened before this mega round—during the messy, early‑stage company‑building where smaller funds tend to be most active.

The Cambrian explosion of funds

Since 2015, venture capital has experienced a Cambrian explosion of new funds. Thousands of managers—ex-VC-backed operators, angels, and alumni of tech titans such as OpenAI, Palantir, and Google—as well as other AI experts have launched sub-$50m and sub-$100m vehicles. In the U.S., over 500 sub‑$250m funds were raised in 2021 alone. The number of active U.S. VC firms peaked that year and has since fallen by about 25%, yet the manager universe remains unprecedented. For LPs, this is overwhelming. Fifteen years ago, an LP could know most firms in Silicon Valley and New York (with a few in Austin, Boston, Boulder/Denver, LA, Seattle, and Chicago). Today, it’s thousands. The irony: while small funds outperform, most capital has flowed to larger funds. In 2024, ~75% of all U.S. VC dollars went to just 30 firms. Andreessen Horowitz alone captured ~10% of the market.

That’s not because mega-funds outperform—they don’t. It’s because they’re known quantities. Nobody gets fired for going with Big Blue. Even when DEC was half the price of an IBM mainframe and 4x faster most large corporate execs still went with IBM to avoid any risk of being fired. The incentive is to NOT get fired, NOT investing in alpha.

The Empirical Evidence: Small Funds Beat Large Funds

Cambridge Associates found that funds under $150m outperformed larger funds in 19 out of 30 vintages between 1981 and 2010. Erin Harkless Moore, former Managing Director at Cambridge Associates, Fellow at The Aspen Institute, and Managing Director of Pivotal Ventures, founded by Melinda French Gates, published this article in Pensions & Investments on August 27, 2025 "Commentary: Stop calling them ‘emerging.’ Next-generation fund managers are outperforming their ‘established’ peers." She argues, "Funds and managers labeled “emerging” aren’t actually a riskier bet. In fact, they often outperform their established counterparts." Laura Thompson, a partner at Sapphire Partners, which invests in early-stage VC funds and runs an emerging manager program, said. “Where can you get really good returns [in venture]? It’s the smaller fund sizes and emerging managers.” 

The Kauffman Foundation, after two decades of backing venture firms, bluntly concluded that most large funds fail to return capital and shifted its strategy to support sub-$400m funds. In Kauffman’s 20-year review of ~100 VC funds, only 4 of 30 funds >$400m beat a small-cap public benchmark, and they report no funds >$500m in their portfolio returned >2x net. More recently, Carta’s analysis of funds between 2017 and 2021 showed that micro-funds under $10m posted higher IRRs and TVPIs than funds over $100m at nearly every performance percentile. The likelihood of “2.5×+” outcomes (TVPI/MOIC): Among U.S. VC funds raised 1979–2018, 25% of funds < $350m achieved ≥2.5× TVPI vs 17% of funds > $750m (PitchBook dataset analyzed by Santé Ventures). Net IRR by size: In the same study, cumulative net IRR averaged 17.4% for funds < $350m vs 9.7% for funds > $750m. Invesco’s and Gridline’s study showed that funds under $400m averaged ~20% IRR, while mid-sized (larger) funds delivered ~7%, and billion-dollar+ funds only ~2%. That isn’t small—it’s a magnitude difference.

The math speaks for itself: smaller funds generate alpha; mega‑funds deliver mediocrity.

What we’re doing at 7BC (and why)

We execute a dual strategy that mirrors the thesis of this piece:

· Fund of Funds: back smaller managers where entry prices, alignment, and velocity support outperformance actively tracking thousands of smaller funds.

· Direct Funds: run smaller, high‑impact direct vehicles where we can lead or co‑lead early rounds and selectively double down - often converting TVPI to DPI in later rounds via secondaries when it benefits LPs.

· Meet us at our in-person Global VC Demo Day events or VIP dinners: https://www.7bc.vc/events.

Standard note: past performance is not a guarantee of future results, and nothing here is an offer to sell or a solicitation to buy securities.

Final thoughts

Venture capital does not scale infinitely. At some point, bigger becomes worse. You can argue smaller funds outperform because they are faster, more focused, more aligned, and more involved. True—but at the end of the day, the math is what makes the case.

The mega‑funds will continue to grab headlines. If you look at the data—as I always do—the best‑performing dollars are flowing into small, scrappy funds that can turn a $250k to $5m seed check consistently into 5x, 10x, 30x and a plausible shot at 100x returns.