Venture Capital

Small VC Funds May Perform Better. So Why Does Capital Keep Flowing to Large Funds?

Smaller VC funds may have better return efficiency, but institutional capital still concentrates in larger funds. Fund size changes strategy, DPI pressure changes incentives, and LPs face constraints around diligence, minimum tickets, and approvals.

Takahiro Kawanishi

— 9 min read
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Small VC Funds May Perform Better. So Why Does Capital Keep Flowing to Large Funds?

In venture capital, smaller funds can have a structural advantage.

That does not mean every small fund is good. It does not mean large VC funds are bad. But the return math of venture capital is sensitive to fund size.

The basic point is simple.

In a smaller fund, a single large winner can move the whole fund. In a much larger fund, the same winner may not be enough.

That is not just a theoretical observation.

Santé Ventures published an analysis in 2023 arguing that properly sized VC funds had a materially higher probability of returning 2.5x or more to investors than very large funds. The same analysis showed that funds in the $200 million to $350 million range performed best across IRR, TVPI, and DPI. It also reported a clear IRR gap: funds below $350 million had an IRR of 17.4%, while funds above $750 million had an IRR of 9.7%.

The exact boundary between "small" and "large" will differ by strategy, stage, geography, and team. But the direction of the argument is hard to ignore.

Venture capital does not scale cleanly.

Yet institutional capital still tends to flow toward larger funds.

That is the tension.

If smaller and properly sized VC funds can offer better return efficiency, why does so much LP capital continue to move toward large funds, established managers, and strategies that are easier to allocate to?

The answer is not that LPs are irrational.

The answer is that LPs are not choosing only on expected return.

Fund Size Changes the Strategy

Fund size is not just an AUM number.

For a VC GP, fund size determines the strategy in a very concrete way. It affects the stage of entry, check size, ownership target, follow-on policy, reserve planning, exit dependency, and the path to DPI.

A small early-stage fund can make small initial investments and still have those investments matter at the fund level. If one or two companies become large outcomes, the entire fund can move.

That is the power-law logic of venture capital.

Many investments may return little or nothing. A small number of outcomes may return a large portion of the fund. In that structure, fund size matters because the winner has to be large enough relative to the fund.

As the fund gets larger, the math changes.

If a fund wants to keep roughly the same number of portfolio companies, the average check size has to rise. If the check size rises, the fund may need to participate in larger rounds, reserve more capital for follow-ons, and depend on larger exit outcomes.

Alternatively, the fund could try to increase the number of portfolio companies. But that creates another problem: selection, support, follow-on discipline, and portfolio construction become harder to maintain.

Buyout funds also change when they scale. Larger buyout funds usually need larger enterprise values, different sourcing channels, and different value-creation playbooks. But buyout funds can often maintain a relatively concentrated portfolio model as they move up in company size.

VC is different.

For venture funds, scale can more directly change the investment behavior. A larger fund may have to write larger checks, allocate more capital to larger rounds, or depend on a smaller number of very large exits to return the fund.

That is why the "small fund advantage" is not just nostalgia for boutique managers.

It is a fund-math issue.

Capital Still Concentrates in Larger Funds

The fundraising market tells a different story from the return-efficiency argument.

According to the NVCA 2026 Yearbook, U.S. VC fundraising in 2025 totaled $67 billion across 585 funds. The top 10 funds alone raised $22 billion, or 32.9% of the total. That share was roughly 13% in 2021.

First-time funds also declined sharply. The NVCA reported 101 first-time funds in 2025, down from 457 in 2021.

Carta's Q1 2026 VC fund performance data points in the same direction. In its sample of 2,775 VC funds closed between 2017 and Q1 2026, about 89% of funds were below $100 million. But on a capital basis, about 54% of dollars in the same sample sat in funds above $100 million.

In other words, small funds are numerous. Dollars are heavier in larger funds.

This is not surprising from an allocator's perspective. But it is important.

The number of funds and the amount of capital do not tell the same story.

From a return-efficiency perspective, smaller funds may look attractive. From an institutional allocation perspective, larger funds may be easier to use.

That difference explains much of the tension in VC fundraising.

DPI Is Becoming More Important

The issue has become more important because DPI has become harder to ignore.

DPI, or Distributed to Paid-In Capital, measures how much cash has actually been distributed back to LPs relative to the capital they have paid into the fund.

It is not a mark.

It is not an unrealized valuation.

It is cash returned.

That matters in venture capital because the best companies often stay private for longer. A fund may show strong TVPI while still returning little cash. TVPI includes unrealized value. DPI only counts what has actually been distributed.

In a healthy exit market, the gap may be easier to tolerate. In a slow exit market, the gap becomes harder to explain.

Carta's Q1 2026 report noted that median DPI for 2019 and 2020 vintage funds remained near zero, with fewer than half of funds having returned any capital to LPs. Even for 2017 and 2018 vintages, fewer than 20% of funds had reached 1.0x DPI.

Cambridge Associates has also pointed to the cash flow pressure in recent U.S. venture capital. In the first half of 2025, U.S. VC managers called $26.9 billion and distributed $16.1 billion. Since 2022, capital calls have been 1.6x distributions. From 2012 to 2021, distributions were 1.3x capital calls.

For LPs, this matters.

If distributions slow down, capital is not coming back to fund the next commitment cycle. LPs still have unfunded commitments. They still need to manage liquidity. They still need to maintain pacing across private markets programs.

Saying "VC is a long-term asset class" is true.

But it does not eliminate the cash flow problem.

Too Much DPI Pressure Can Change VC Behavior

DPI is important.

But if DPI becomes the only thing LPs reward, it can distort venture behavior.

A GP that wants to show early DPI may be pushed toward investments that can return cash earlier: pre-IPO opportunities, larger later-stage rounds, smaller M&A outcomes, or early exits that produce 1.5x to 2.0x returns.

Those outcomes are not bad.

Returning cash is not bad.

But if the portfolio becomes too focused on early, explainable, moderate outcomes, it may begin to move away from the power-law return profile that makes venture capital different.

Venture capital is not supposed to be a high-risk version of a modest-return asset.

The point of taking venture risk is that a small number of exceptional outcomes can move the whole fund.

That creates a real trade-off.

LPs want cash back. GPs need to raise the next fund. Both sides have reasons to care about DPI. But if the industry pushes too hard toward early DPI, some managers may change their investment behavior in ways that reduce the upside they were originally hired to pursue.

This does not have to be a binary choice.

A GP may use secondary sales to return some cash while keeping exposure to the remaining upside. A fund may construct a portfolio that includes both earlier-returning investments and longer-duration companies that can become fund-returning outcomes. A manager may think carefully about how much to reserve for follow-ons and when partial liquidity is appropriate.

But the distinction has to be explicit.

Is a sale being used to manage risk?

Is it being used to manufacture DPI?

Is the fund still positioned to capture the few outcomes that can actually return the fund?

These are not technical questions. They define the strategy.

LPs Are Not Choosing Only the Highest Expected Return

If smaller funds may have better return efficiency, why don't LPs allocate more to them?

Because institutional allocation is not only about expected return.

To invest in a fund, an LP has to diligence the team, strategy, track record, portfolio construction, legal terms, tax issues, operations, reporting, conflicts, and governance.

That work does not shrink in proportion to fund size.

A $50 million fund and a $500 million fund may require very similar diligence, legal review, investment committee preparation, and post-investment monitoring. For an LP with a limited team, the larger fund is often easier to justify because the same internal effort can support a larger allocation.

This creates a practical problem for small funds.

The LP may like the manager. The expected return may be attractive. The strategy may make sense. But the amount the LP can realistically allocate may be too small relative to the internal work required.

Minimum ticket sizes make this more difficult.

Some LPs need to write checks above a certain size for a fund investment to matter in the portfolio. At the same time, they may not want to represent too large a share of a small fund. If an LP does not want to be more than 20% or 25% of a fund, a very small fund may simply not have enough capacity for that LP.

This is not a judgment about the manager's quality.

It is an allocation constraint.

LPs are not only asking, "Which GP might produce the highest return?"

They are also asking, "Which fund can we diligence, approve, allocate to, monitor, and keep in the portfolio within our own constraints?"

That is why capital can flow toward larger funds even when the return-efficiency argument favors smaller funds.

The Approval Process Matters

Large funds often have another advantage: they are easier to explain internally.

For pensions, insurers, financial institutions, endowments, and other institutional LPs, fund selection has to survive an internal process. The team has to write memos. It has to present to an investment committee. It has to explain the strategy, risks, manager quality, track record, legal terms, and monitoring plan.

An established large fund is not necessarily better.

But it may be easier to approve.

The manager may have a longer track record. The reporting may be more standardized. The LP may already know the team. The investment committee may be more comfortable with the name.

Small funds face the opposite problem.

There are many of them. Strategies vary widely. Emerging managers may have shorter track records. A high expected return may not be enough if the LP cannot explain why this specific fund belongs in the portfolio.

This is where the fundraising challenge becomes clear.

Small and properly sized funds may be attractive, but LP capital often flows toward funds that are easier to approve.

Large Funds Still Have an Important Role

This argument should not be read as an attack on large VC funds.

Large funds play an important role in the startup ecosystem.

They can provide risk capital at scale. They can support companies through later rounds. They can help more founders access capital. They can finance businesses that require large follow-on rounds before reaching liquidity.

That function matters.

The better question is not whether every VC fund should stay small.

The better question is whether the fund size matches the strategy.

If a GP raises a larger fund, the GP should be able to explain what changes.

Will the stage shift?

Will check sizes rise?

Will ownership targets change?

Will reserves become more important?

What exit size is needed for a single company to matter at the fund level?

How much of the TVPI is based on unrealized marks?

Over what time frame can that TVPI turn into DPI?

Those questions matter because fund size is not just a fundraising achievement. It is a commitment to a strategy.

Fund Size Is Strategy

The VC market often treats fund size as a sign of success.

A larger fund can signal demand. It can signal LP confidence. It can give the GP more room to support portfolio companies.

But larger is not always better.

In venture capital, size changes the return math.

It changes the way checks are written.

It changes the exit outcomes required to move the fund.

It changes the pressure to produce DPI.

And it changes the kind of LP base the GP can serve.

For GPs, the question is not simply how much capital they can raise.

It is what strategy that capital size makes possible, and what strategy it quietly rules out.

For LPs, the question is not simply which funds look best on expected return.

It is whether their own allocation process allows them to access the managers that may have the best return efficiency.

Small VC funds may be able to win on return math.

But large funds often win the allocation process.

That is the real tension.

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