You’ve probably noticed many of the leading VC funds now have raised much, much larger funds. Some of it is to compete better. Some of it is for fees (20% of the fund goes to fees and expenses).
But it’s not just that. It’s energy vs. output. It’s just in many cases much easier to make a lot more money in VC by writing bigger checks — even if the nominal returns are lower. As long as the Limited Partners will give you that capital to invest.
In fact, the larger a check a VC writes, the lower the returns it needs from that check.
This sounds wrong, but on balance, it’s correct.
E.g.,
⏩ Invest $1B in OpenAI, it 3x’s to $3B, VCs take home $400m+ of it themselves (20% of gains)
➡️ Invest $1m in a start-up and it 10x’s to $10m, VCs take home $1.8m of it themselves (20% of gains)
Both investments honestly are about the same amount of work. But the first investment “only” needs to triple, and the VCs make 200x more. 200x more.
This is a vast oversimplification many will poke holes in. There are a number of great examples of VCs making tons from owning a huge stake in a decacorn early.
👉But also, it explains why many top VC funds raise as many billions as humanly possible.
