Why the Best Venture Returns Still Belong to the Little Guys
Every few years, someone proclaims that venture capital is all about scale — bigger funds, more capital, larger teams, wider networks. Rinse and repeat. And yes, the power law still holds. But if maximizing returns is the objective, recent Carta data tells a different tale: the top-performing outcomes still come from small funds.
According to Carta's analysis of 234 vintage 2017–2018 U.S. venture funds (here), smaller funds—particularly those in the $1M–$10M range—have delivered dramatically higher top-quartile and top-decile returns than their larger counterparts. Here's what stands out:
The 95th percentile net TVPI (Total Value to Paid-In):
$1M–$10M funds: 7.01x
$10M–$25M funds: 3.77x
$25M–$100M funds: 4.00x
$100M+ funds: 2.63x
Yes, you read that right: the top-performing micro-funds more than double the returns of the best large-cap funds.
Interrogative: If this dynamic holds, why do so many LPs commit large sums to massive multi-stage funds? Why allocate $100M to one multi-billion-dollar fund instead of spreading $10M across ten smaller, sub-$100M funds?
Even at the 90th percentile, the smallest funds crush it:
$1M–$10M funds: 4.88x
$100M+ funds: 2.24x
While many large funds are still working toward liquidity events, the smaller funds have already marked significant paper gains—or exited outright. They’re faster, nimbler, and often get into breakout startups earlier and cheaper.
Why Do Smaller Funds Outperform?
Micro-funds possess several structural advantages that help explain their outsized performance relative to larger venture vehicles:
They typically gain early access to promising startups by participating in pre-seed or seed rounds. Many of these funds are located near engineering and computer science schools (MIT, for example), giving them a significant advantage. These early investments often come with smaller checks but higher ownership stakes, thanks to lower entry valuations. That combination—early access and meaningful ownership—can drive substantial returns if the startup succeeds.
Some small funds build large portfolios by making many small bets. Therefore, neither fund size nor portfolio construction strategy is a definitive predictor of success. When one of those bets hits, it can return the entire fund and then some.
Micro-funds face less pressure to deploy capital quickly. Unlike larger funds that may need to allocate hundreds of millions annually, micro-funds can afford to be patient. This flexibility allows them to be more deliberate in their investments and to stay closely aligned with founders’ timelines rather than fund cycles.
Small VC funds are typically backed by high-net-worth individuals, family offices, and experienced operators—who value access, relationships, and niche exposure. Unlike large institutional investors, who rarely participate, these LPs prioritize connection and flexibility over rigid expectations. Partners in small VC funds often bring greater value than those in large VC or PE firms, as they are typically former operators with a deeper understanding of the challenges and needs faced by startups and growth-stage companies.
Lastly, and most importantly, alignment with founders is often stronger. Many emerging managers behind micro-funds come from founder backgrounds themselves or are deeply embedded in early-stage ecosystems. They are often viewed as collaborative, hands-on partners rather than extractive capital providers—an advantage that helps them win access to top deals before they’re on the radar of larger firms.
Together, these dynamics create a powerful formula for performance that even scale-driven firms struggle to match.
🧠 🌀 Can big VC and PE funds adopt these small fund characteristics?
Short answer: With notable exceptions, no way man!
The Emerging Manager Edge
This data is a shot in the arm for emerging managers who are told they need to "scale" to be relevant. While bigger funds may dominate headlines and asset centerpieces, performance still lives in the messy, volatile, beautiful chaos of early-stage investing.
And that’s where small funds shine.
🧠 🌀 Should large VC and PE firms co-invest with smaller funds to tap into their unique edge in deal flow and operator-driven insights?
Short answer: Absolutely!
🧠 🌀 For Founders and Startup CEOs: Could collaborations between smaller funds and large VC or PE firms lead to more hands-on and operational support, other guidance, and added benefits?
Short answer: With some exceptions, no way baby!
Median Performance Tells Another Story
Outside the top decile, returns flatten: median TVPI across all fund sizes range from ~1.42x to 1.79x. This highlights a brutal truth: venture capital follows a power law—where a few top funds generate the majority of returns, while most deliver only modest results. So yes, small funds outperform— when they outperform.
Takeaways
The VC and startup landscape is dynamic and intricate, shaped by shifting markets, evolving strategies, and unspoken power dynamics. The core insight from CARTA’s performance fund analysis is both fundamental and revealing:
For founders, don’t overlook the small, scrappy fund on your cap table. While they may write smaller checks, they often punch above their weight in conviction, hustle, and strategic value.
For VCs, the lesson is clear: bigger isn’t always better. In this business, better is better.
For LPs, it’s time to look beyond the usual suspects. That emerging manager raising a modest $5 million fund—armed with grit, insight, and a differentiated edge—might just deliver your next 7x return.
Whether you’re building, backing the next wave of breakout companies, or funding the firms which fund them, pay attention to the underdogs. They’re quietly outperforming the field—one overlooked, high-conviction deal at a time.
A Final Word
It's perplexing that more capital isn't allocated to small funds. It's unclear whether large LP allocators are simply unwilling to do the necessary research, lack the expertise to evaluate a broader set of managers, or are operating with a subconscious CYA mindset—defaulting to large, well-established brands to minimize perceived risk.
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