The Evolution of Venture Capital Fund Sizes

As the old adage goes, your fund size is your strategy. Fund size inherently molds every facet of a venture firm’s strategy, from portfolio composition and investor appeal to check size and follow-on reserves. Therefore, the upward trend in venture capital (VC) fund sizes over the past decade calls into question how the strategy of these funds must shift in sidestep as larger funds fundamentally recalibrate the venture return calculus.

Bigger funds need bigger outcomes. By taking on meaningfully more capital, VCs need companies whose future value can deliver nothing short of a home run come time for exit. Here, we delve into the trends that drove the rise of fund sizes over the past decade and their implications for venture capital valuations and financing rounds.

Trends Propelling the Growth of VC Fund Sizes

Venture wasn’t always the mature asset class it is today. Once home to an obscure cottage industry, Sand Hill Road has transformed from a quiet lane with few visitors to a bustling hub, boasting the largest, sophisticated institutional investors at its doorsteps.

Over the past decade, several trends have caused the world’s most renowned pensions, endowments, and fund allocators to line up with their checkbooks to get a piece of the VC pie. Namely, in the ZIRP environment, achieving a desired return profile in ‘traditional’ asset classes proved challenging for many allocators. Over the past 25 years, venture capital has consistently outperformed public equities, drawing allocators seeking superior returns. Diversification and the opportunity to partake in the value generated by rapid technological innovation have also played significant roles.

The numbers speak volumes: venture’s assets under management (AUM) surged from $300 billion in 2008 to a staggering $3.5 trillion in 2022. Over the same period, the number of venture capital firms more than tripled from 1,000 to 4,000, and venture fundraising skyrocketed from $48 billion in 2008 to a peak of $363 billion in 2021. Today, venture capital has ascended to a mainstream investment strategy, representing almost 25% of total private capital AUM. 

With more capital flowing into the hands of managers, larger fund sizes have naturally followed. In 2013, the average fund size was $84 million; by Q4 2023, that figure climbed to a whopping $153.8 million. The pronounced uptick can largely be attributed to the emergence of mega-funds in recent years, driven by headline-making fundraises from industry giants like Andreessen Horowitz, Tiger Global, and, notably, Softbank’s $100 billion Vision Fund. 

The expansion of venture funds is evident not just collectively but also at the individual manager level, where there’s a consistent pattern of step-ups in venture fund sizes from one fund to the next. Successful fund managers who are capable of rallying LP commitments for subsequent funds are just that – successful. If they are able to raise additional funds on the back of a strong performance, why not?

As an aside, this trend makes it all the more fascinating that managers such as the legendary Benchmark Capital Partners – the early backers of eBay, Uber, Snapchat, Zendesk, Dropbox, and many more dominant technology companies – resist this urge and consistently raise modest funds that they have confidence can be exceptional performers.

With Larger Funds and More Competition, Financing Rounds and Valuations Have Become Inflated Across Stages

As capital has poured into the system, VCs have become flush with dry powder. As a result, valuations have inflated across stages, resulting in a higher price tag for entry. Today, early-stage valuations look more like the valuations of late-stage companies post-GFC, with VCs forced to write much larger checks than they did ten years ago for equivalent equity and ownership.

In 2013, the average pre-money valuation for a seed round stood at $5.3 million. By 2023, this figure tripled to $18.4 million. This surge in seed-stage valuations has reverberated across subsequent stages, with the average pre-money valuation for early-stage rounds (Series A & B) jumping from $22.9 million in 2013 to $78.1 million in 2023. Naturally, this escalation has also driven up financing round sizes across all stages, with later stages experiencing particularly significant increases.

The ascent in valuations and funding rounds has set in motion a positive feedback loop for larger funds — higher price tags mean GPs now need to write bigger checks. Moreover, with companies securing increased capital at elevated valuations across all stages, the dilution post-seed investment has significantly amplified. Maintaining double-digit ownership in a fund’s winners today simply requires a significantly larger seed fund than was needed in recent years. For example, a GP who raised $50 million in 2015 would likely need a $75 million fund to sustain the same level of ownership at current entry valuations.

The above chart alone can summarize the headwinds facing venture investors over the last four years: gaining meaningful allocation to the most promising startups has never been harder. Founders are selling less and less ownership at greater and greater costs. That said, many other factors contribute to a sense of optimism in the asset class. Check out part two of this series to learn how investors are scaling up the venture model to continue backing the best entrepreneurs and returning significant capital to investors.