The math isn't broken. VC is just too broad a term.
1) The new a16z fund is not really "VC" in the traditional meaning.
2) the LPs in this new fund are not blindly expecting a 3x.
3) the value of a company doesn’t stop at IPO and many funds hold beyond that so the $478B figure is far too low.
Not really a shot at James Sedgwick-Heath at all, I think he's a sharp thinker and a worthy follow here.
It can feel annoying when so much capital is going to mega funds but these truly are different games. The size and capital vacuum of the mega funds is a new feature in private markets.
Take as an example an LP putting $1 billion into this new $20B fund. Some might argue they should instead put $25 million in 40 managers each raising $100M funds.
Okay but then:
They have to manage 40 relationships (and select from a pool of many, many more).
Even at $25M (which is a drop in their proverbial bucket) they are likely the anchor check into each $100M fund which has more responsibility attached.
If they are 𝘃𝗲𝗿𝘆 above average in selecting managers, perhaps 4 of those 40 will hit 3x with maybe 1 fund hitting 5x. That's $425 million from those 5 funds. Add in a bit more from the other non-winners, sure, but the chances of even breaking even on the initial billion are slim.
There are a lot of good reasons outside of pure performance to be in an a16z vehicle - plus the adage of "no one gets fired for buying IBM" still applies.
Should they put their money in mid-cap PE or public equities instead? Maybe! But they almost certainly 𝗮𝗹𝗿𝗲𝗮𝗱𝘆 𝗵𝗮𝘃𝗲 a ton of money in those asset classes as well, they are a big LP.
Completely sympathetic to the emerging managers out there having difficulty fundraising. I too think the best innovations will come from believing in founders at the earliest stages with smaller amounts of capital.
But that doesn't really help the billion-dollar LPs.
Happy to be proven wrong in the comments 😁
#venturecapital #megafunds #VC #LPs #privatemarkets
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