If you’re starting a venture Fund, you want to raise as much as you can, right? Not according to Founders Fund’s Brian Singerman.
“Raise as small of a fund as you can in order to just crush it, because then you can write your ticket for a number of funds. It is much harder to get returns on larger funds than it is on smaller funds. It just is.”
Brian Singerman
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Once a manager has great returns on that small first fund, subsequent funds become a lot easier to raise. And thus begins the flywheel…
Small Funds Outperform
Brian’s contention that it’s easier to get huge returns on a small fund is backed by data. Pitchbook has found that funds below $250 million outperform larger ones.
This isn’t hard to understand. Even if everything goes right, most startups won’t be worth more than a couple billion dollars at IPO.
For a small fund, even a thin slice of that means a huge return. But big funds need giant, decacorn exits — and those are rare, especially these days!
The Minimum Viable Fund
Let’s say I wanted to raise my first venture fund. What would be the best way to do it?
I generally invest at pre-seed and seed. At those stages, most startups take checks of $25,000 or lower for direct investments.
So the Minimum Viable check size is $25,000. If I wanted to make 36 investments over 3-4 years, a reasonable pace, that adds up to $900,000.
I like to keep half my capital in reserve so I can pour it into my winners. After years of working with a company, I have a much better idea if it will succeed, and I want to act on that conviction.
So let’s write that $900,000 up to an even $2 million. That would be my Minimum Viable Fund.
A Nimble Fund Slides Into Deals
One of the most common questions from LP’s is “How will you win allocation in competitive deals?” For the minimum viable fund, the question is largely moot.
Seed and pre-seed are not very competitive, especially if you’re not leading the round. If the founder likes you and you’re at all helpful, there’s almost always room for another $25,000.
The same is true for sums up to about $250,000, which would imply a $20 million fund given my model.
The ability to get into most any deal is very valuable. A venture round only has one or perhaps two leads, but smaller investors have greater flexibility.
Easy to Raise
Needless to say, it’s a heckuva lot easier to raise $2 million than $20 or $50 million. I could even provide a lot of the capital myself.
First funds are the hardest to raise. Anything that makes that process easier is a good idea.
As I stack up returns, subsequent funds could be larger.
Does It Work Operationally?
The legal costs to set up a fund run from $30,000 to $200,000 in most cases. Even a teeny tiny $2 million fund should cover that easily, producing $400,000 in management fees over its lifetime.
What a tiny fund doesn’t allow you to do is take a salary or hire anyone. But I’m fortunate enough not to need a salary, and AI means much less need for researchers.
A microfund won’t be flush in fees like the big boys, but there should be more than enough to keep the lights on.
And if I crush it and 5x the fund, for example, I’d rake in $1.6 million in performance fees — hardly insignificant.
Wrap-Up
For any new manager, raising the first fund is the hardest. We make it even harder on ourselves by thinking we need a big fund to compete.
But you’re actually more competitive with the minimum viable fund. It’s easier to raise, easier to deploy into great companies, and easier to get whopper returns.
I don’t know if I’ll ever start a fund. It’s an intense, 10 year commitment to founders and investors.
What’s more, I want to produce at least one unicorn before I ask other people for money. I wouldn’t invest in a manager without a track record — so why should they?
But if I do start one, don’t expect to see some $100 million colossus. I’ll be keeping it lean and mean.
What do you think is better, a small fund or a big one? Leave a comment and let us know!
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