Why Most New VC Funds Fail

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[Section 14] What about VC Funds? - Highlights

1. The Right Path: Angel → Syndicate → VC Fund

• Transitioning from angel investing to running a syndicate before launching a VC fund is the optimal strategy.
  
• Many emerging fund managers underestimate the challenges of launching a fund.
  

2. The Reality of VC Fundraising & Market Trends

• Venture capital (VC) has been through a 15-year growth period but is now facing a major market correction.
  
• Capital is increasingly concentrated in larger funds, making it harder for first-time fund managers to raise capital.
  
• The share of capital going to first-time funds has decreased significantly (from 30–40% in 2011 to just 6% in 2021).
  

3. Power Law & VC Fund Constraints

• VC firms rely on fees & carry, creating pressure to deploy capital quickly.
  
• Larger fund sizes require a vast deal pipeline (e.g., evaluating 2,000–3,000 startups in 3 years).
  
• The need for rapid deployment can lead to a decline in deal quality.
  

4. Economics: Why Small Funds Don’t Work

• A subscale fund (<$20M) does not generate enough fees to sustain GPs.
  
• Example: A $10M fund with 2 GPs results in each making ~$50K/year—far from a viable long-term career.
  
• Even with top-quartile returns (3x fund), financial incentives remain weak compared to syndicates.
  

5. First-Time Fund Challenges

• First-time fund managers typically underperform established funds due to:
  
  • Limited deal flow & weaker networks.
    
  • Higher risk from niche strategies to stand out in fundraising.
    
  • Less ability to follow on in strong portfolio companies.
    
    
• Data shows that first-time fund performance has declined over time.
  
• 50% of first-time fund managers fail to raise a second fund (twice the industry average failure rate).
  

6. Syndicates Have Structural Advantages Over Funds

• Faster & More Flexible: Syndicates can launch in months, while VC fundraising takes years.
  
• Better Economics: Deal-by-deal carry means earning from Day 1, unlike funds with long lockups.
  
• Scaling Capital & Upside: Syndicates enable writing larger checks while improving risk-reward dynamics.
  
• Skip Subscale Funds: Instead of struggling with a small $5M–$15M fund, prove your thesis via a syndicate and then raise a $30M+ fund.

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