When most people think of Australian venture capital, they picture the "Big Three" – AirTree, Blackbird, and Square Peg – who collectively manage billions in assets. Their brand recognition leads to a natural assumption: if they're managing more capital, they must be delivering better returns.
For years, this logic held true. These firms built their reputations by delivering exceptional performance as they scaled from boutique operations to major players. But something fundamental has changed. As these funds have grown beyond certain thresholds, the dynamics of venture capital have begun working against them.
The numbers don’t lie
According to Cambridge Associates, the relationship between fund size and returns has been inverse for over four decades.
From 1980-2018, the average returns followed a clear downward trend:
- 2.3x for funds sized $0-50 million
- 2.1x for funds sized $50-200 million
- 1.8x for funds sized $200-500 million
- 1.6x for funds sized $500 million-$1 billion
Recent data continues to confirm this long-standing trend. According to Carta's 2024 report, US VC funds with $1 million to $10 million in assets posted a median IRR of 13.8% for the 2017 vintage, compared to just 9.8% for funds over $100 million. The top decile of small funds achieved a 4.03x TVPI in the 2018 vintage, while the largest funds reached only 1.67x.
This isn't about fund manager quality—it's about structural constraints that have become more pronounced over time, not less. This connects directly to how venture returns actually work, where the power law distribution becomes more challenging to capture at scale.
When scale becomes a constraint
The power law problem
Venture capital operates on the power law: a small percentage of investments generate the vast majority of returns. For a $50 million fund, one company returning $100 million can double the entire fund. For a $1 billion fund, that same exit barely registers.
This creates the "deployment problem"—the challenge of writing enough cheques to put billions of dollars to work within reasonable timeframes. As we explore in our analysis of seed fund performance, this mathematical reality pushes larger funds away from the very opportunities that generate the highest returns.
Deployment and portfolio constraints
A $50 million fund can write 50 cheques of $1 million each, diversifying across dozens of opportunities while maintaining meaningful position sizes. A $1 billion fund needs to write much larger cheques to deploy capital efficiently within their fund timeline.
This pushes them toward larger cheques in fewer companies, fundamentally changing the risk-return profile and often forcing them toward more mature companies where potential upside is more limited. They lose the portfolio flexibility that smaller funds maintain—the ability to take concentrated positions in high-conviction opportunities while still diversifying broadly.
The alignment disaster
When incentives go rogue
Under the traditional "2 and 20" structure, a $1 billion fund generates $20 million in annual management fees before returning a dollar to investors. That's $200 million over a 10-year fund life, creating perverse incentives where fund managers can earn more by managing larger pools of capital, regardless of performance outcomes.
If you're wondering about these fee structures and how they impact your returns, understanding how VC funds actually work reveals why smaller funds are more dependent on carry, meaning fund managers are incentivised to achieve real performance, not just asset growth.
The "unicorn or death" problem
Because large funds need massive outcomes to move their performance needle, they often encourage founders to pursue billion-dollar outcomes, even when a sustainable $100 million company might be more achievable and less risky.
This "go big or go home" pressure can lead to premature scaling, risky expansion, and ultimately, failure. Smaller funds can succeed when companies grow sustainably, better aligning with founders pursuing disciplined growth.
Market conditions have shifted. Today's environment favours that discipline. According to the 2024 State of Australian Startup Funding, investors are prioritising capital efficiency and profitability over hypergrowth. Smaller funds are naturally better suited to this landscape.
The Australian reality check
Australia's largest VC funds have built the ecosystem through transformational investments like Canva and SafetyCulture. Blackbird's early Canva investment delivered returns exceeding 90x their deployed capital—a spectacular outcome that demonstrates both the power law at work and the challenge ahead.
The uncomfortable question: as Blackbird has evolved from a boutique early-stage fund into a billion-dollar management company, how likely are they to replicate this performance? Their fund size now pushes them toward larger cheques and later-stage deals where exponential returns are more limited.
This creates opportunities for emerging managers. Many smaller Australian funds are now focused on the earliest stages with volume-based approaches and deep founder support.
What this means for investors
For investors considering venture capital exposure, fund size should not be viewed as a proxy for safety or performance. The data suggests smaller funds have:
- Greater exposure to early-stage upside
- Stronger alignment between managers and LPs
- The ability to succeed without chasing unicorns
- Better suitability to today's market environment
While getting into top-tier mega funds requires significant minimums and connections, many high-quality smaller funds actively welcome sophisticated individual investors. Current market conditions favour funds whose size naturally aligns with sustainable growth strategies rather than "unicorn or death" approaches.
When you're evaluating funds, understanding the specific criteria that matter becomes crucial—and size is just one factor among many.
Large funds aren't inherently flawed, but they operate with different constraints. Understanding those constraints is essential to evaluating where real performance will come from in the next decade.
Final thought
In public markets, capital flows toward scale. In venture, it flows toward insight, access and timing. The most successful venture funds of the past decade may have grown beyond the optimal size for future performance. While bigger funds may win headlines, smaller funds often win outcomes. And in venture capital, outcomes are everything.
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