This question seems to be in the mind of many investors today. From SoftBank's giant $100b to the proliferation of hundreds of "micro-VCs", understanding the importance of fund size has become critical.
In this post I want to provide some ways to formalize the fund sizing question for the emerging manager. Simply put, the returns of a fund are the summation of exited portfolio company valuations multiplied the ownership of those companies at exit. Although the mathematical formulation of this is trivial (see below) I believe it helps in understanding the dynamics of fund size and ownership:
This equation shows us why ownership is so important for VC funds: if ownership is decreased, to maintain the same returns the exit value of the company must increase. However, given the power law of VC outcomes, this is exponentially more difficult.
This is shown below, with three hypothetical funds, $100m, $150m and $200m. Assuming average exit ownership of 3.0%, the graph shows the required exited market cap to generate various fund multiples. Again, moving up the y-axis is exponentially more difficult given power law VC.
In a recent post, Partner at Founder Collective, Micah Rosenbloom stated "it's easier to make money on carry if you make money on fees." To drive this home for the emerging manager, next we look at how carry dollars are influenced by fund size. Table 2.0 provides the graph above in table form (for example: with a $150m fund and 3.0% exit ownership returning 3.0x requires a combined market cap on exit of $15b.) Table 1.0 links to Table 2.0 and shows the carry dollars to the Partner group in each fund size and outcome scenario.
Here again, moving along the x-axis (higher exits) is exponentially difficult. But what is most interesting in the Tables above is comparing the likelihood of scenarios. What is more likely, generating $4.2b of exits on a $50m fund or $7.5b on a $150m fund? Both generate $15m in carry for the Partner group. Sounding like a broken record now (power law of VC) I would say the smaller the exit value required is better (but as is the game in VC both scenarios are very unlikely.)
There are many factors that can alter the above calculus (initial ownership, ability to execute pro-rata, exposure to quality companies etc.) but hopefully this formalization can contribute to building the most optimal fund given your specific circumstances and goals.
Note: Most material in the above post is taken from my introductory Fund Sizing Deck I use when consulting with emerging managers. For a copy of the full deck and/or the excel model please email firstname.lastname@example.org.