The discussion of what is the proper venture fund size to pursue innovation has raged on for almost thirty years. As the creator of the first-ever State of Venture Capital in 2010, I am baffled how many still do not understand the fundamental role and premise of venture capital.
The Wall Street Journal reports “Some venture funds are abandoning caps to gather up more capital amid strong demand for venture assets.”
Large or small fund size doesn’t matter in terms of efficacy, for moving the needle for LPs it does.
The theory of a venture firm determines what innovation can be discovered (Albert Einstein). And when a fund is big, generally a democracy of decision-making, in Monday morning meetings, with a cadre of like-minded GPs becomes systemically incompatible with finding outliers that break the norm.
An outlier has no precedent and cannot be found by arbitrage of socialism or collusion. Hence, the best funds are large, that can bet on the runway to the pursuit of upside with as few General Partners as possible. As Einstein’s wisdom infers, an outlier of innovation can only be found by outlier arbitrage.
Unless, of course, we are dealing with “innovation” sourced by subprime venture capital sold to greater-fools, then all bets are off in the pump-and-dump scheme to public markets that follows.
