The Small Fund Size Fallacy: Why True Venture Performance Depends on Strategy, Not Size
My mental model for achieving true venture alpha. A nuanced perspective on the real reason small funds outperform—and it's probably not why you think.
[Work-in-progress!]
I keep hearing that "small funds outperform." It's a neat line for LP meetings, but it doesn't hold up. The usual argument is that smaller exits can "return the fund" more easily. That sounds right until you look at the mechanics of venture returns.
Venture math is proportional. You write a check, you get ownership; the company exits, you receive your share. A $5M fund writing $100K checks into 50 companies has the same relative ownership per deal as a $50M fund writing $1M checks into 50 companies. If both invest at a $10M valuation, each still needs one company to reach about $500M (pre-dilution) to return the fund. The relationship between fund size and required outcomes scales linearly—being small doesn't magically improve the math.
So why do some small funds appear to outperform? Because size enables advantages—it doesn't cause returns. Smaller checks are easier to slot into competitive rounds, which raises win rate into top deals (check size → win rate: a $100K check fits into a $3M round far more easily than a $1M check). Small funds also tend to invest earlier, where ownership per dollar is higher in exchange for higher risk— creating more convex outcomes if a few outliers hit.
Beyond access and timing, small funds can layer special economics (targeted advisory grants, pro-rata protections, selective SPVs) and benefit from sharper incentive alignment (carry over fees, faster decisions, fresher networks/theses). None of this makes small funds inherently superior, but it does explain why the best small funds can outperform: higher win rates, earlier ownership, and occasional incremental upside.
The takeaway is simple: size isn't a strategy. Outperformance comes from access, selection, and disciplined portfolio construction—then from helping winners compound. Small funds can outperform when they use the advantages that small size affords, but small size alone is not the driver.
If you're evaluating a manager, don't ask "How small is the fund?" Ask: What unique access do they have? What's their edge in selection? How do they size, reserve, and support? Those are the levers that create real, risk-adjusted alpha—at any fund size.