I’ve previously written about which fund metrics are the most important when quickly looking at a fund. I’d like to complement that this time by adding the component of fund size.
Fund size itself is not a metric, but should absolutely be used to contextualize IRR, DPI and TVPI. This is especially true in the context of a GP using a fantastic angel/ micro fund track record, to raising a much larger vehicle. At the end of the day, fund size impacts performance.
A $1M angel fund that returns 5x+ is fantastic but also a lot easier to do than a $100M fund returning 5x+. As a fund scales in size, the strategy and outcomes begins to shift. In simple terms, the math gets harder. With a $1M fund, you can spray 25K-100K cheques and pray your way to a 5x+ fund outcome— you just need 1 unicorn. It’s a lot harder to do with a $100M fund— you would need multiple unicorns and most likely a decacorn too if employing a spray and pray strategy.
If I was running $1 million today, or $10 million for that matter, I'd be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I've ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It's a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.
Warren Buffet
In other words, the strategy that you can use for a 5x+ fund at $1M needs to be adjusted or even changed for a fund at $100M. For the later, you need to be more thoughtful about entry valuation, ownership and exit paths than the former.
A fund returning 5x+ on a few million dollars has proven something— what that something is, is usually more unclear. An LPs job is to contextualize the track record and see if the strategy previously employed at the smaller fund size, is replicable larger fund sizes. Metrics without the context of fund size, doesn’t actually mean too much. Returning 10x on a few millions is fantastic, but is it replicable on a $50M fund? That’s the ultimate question.
If you have comments, questions or criticism, message me on Twitter @Lawrence_Ou and I’m happy to chat and discuss!
Follow us on Twitter @LP_Perspectives. None of the above should be considered fund advice, financial advice or even legal advice. The views and writings above are strictly that of the author(s) and do not in any way represent the views of past or present employers.