The benefits of smaller VC funds

Are Megafunds over rated?

Photo by Ariann Laurin on Unsplash

VC Megafunds have been in the news after major investment implosions like FTX and WeWork. With this type of press, it makes sense to start considering the value of investing with smaller funds as an investor and seeking smaller funds as a partner as a founder.

On the one hand, these megafunds can pour massive amounts of money into startups, helping them grow and scale rapidly. This can be especially beneficial for companies in the technology sector, where innovation and growth are key to success. Additionally, having a well-known and well-funded investor can be a major asset for a startup, as it can help to attract other investors and customers.

However, there are also downsides to having a megafund as an investor. For one thing, these funds often have a lot of influence over the direction and strategy of the companies they invest in. This can be a good thing if the fund has a lot of experience and valuable insights, but it can also be bad if the fund's goals and values don't align with the company's. Additionally, because these funds have so much money to invest, they often have a lot of leverage when negotiating terms and valuations.

On the other hand, small funds often have a lot more flexibility when it comes to the companies they invest in. They can take several approaches, whether a close partnership or more hands-off, allowing the startup to make its own decisions and grow at its own pace. Additionally, small funds are often better able to align their goals and values with those of the company, as they are more invested in the success of their portfolio companies.

Another benefit of small funds is that they are more likely to work with companies at the early stages of development. This is because small funds typically have less capital to invest and, therefore, can't afford to wait until a company is already established to make an investment.

In conclusion, while VC Megafunds can benefit startups in certain ways, small funds also have unique advantages. Startups should carefully consider their options and choose the investor that best aligns with their goals and values.