Every venture capitalist knows that your fund size is your strategy. And that it’s way easier to return 10x on smaller funds than mega-funds.
But the latest analysis from Decile Group shows that micro funds are even better for emerging managers in today’s climate.
We studied 600 emerging funds that went through VC Lab, the “YC of VC” accelerator that has launched more than 1,000 venture funds to date, specifically looking at various factors that might contribute to early traction within the first four weeks of fundraising.
Momentum is crucial in venture capital: Of all the funds Decile admits to the program, statistically only 20% will make it to a final close. The biggest difference is often getting early enough momentum and maintaining it, says CEO Adeo Ressi.
Decile Group found that GPs who raised more than $2 million in the first four weeks on average targeted $19.9 million fund sizes. These GPs succeeded largely because they were well connected, as measured by higher Linkedin followers than peers, and had more investment experience.
On the other end of the spectrum; GPs who raised nothing, on average set a target size of $9.5 million while GPs who raised up to $500,000 on average set fund targets of just $5.6 million.
Although these two groups were generally less experienced and less connected than the fund managers who raised more than $2 million in their first four weeks, there were no meaningful differences between the two groups themselves in terms of their prior investment experience, previous jobs in the venture industry or LP networks. The only consistent differentiator between the two groups was their fund strategy. Among these relatively less experienced and less connected managers, those who set more attainable fund sizes around $5 million were the ones who were able to achieve early traction.
“Cohort after cohort we tell emerging managers to start with more conservative fund sizes, and we finally have data to back up why,” says Ressi. “If you are spinning out of Kleiner Perkins you can raise a $50 million fund. But those people are the exception, not the rule. We are here to help create the tools and the playbook for the next 10,000 funds, not the rare elite few.”
The takeaway: If you have a strong investing track record and LP network, a large fund size can be a good strategy. If not, setting an attainable first fund size could be the difference in achieving a first close and building crucial early momentum or not.