Interesting stuff in the latest VentureOne data. Fund-raising by venture firms was up 69% year-over-year in the first quarter, but the number of funds with LP commitments is down from 22 to 17. Granted, these are small numbers of funds, so things can get skewed, but the upshot is still that the average fund size has, for the first time ever, reached $209m.
While this is interesting in itself, it is doubly so when you consider the countervailing trend toward doing more seed and early-stage investing in IT. Hmmm.
Question: How do you reconcile larger funds when, on a per-deal basis, the amount of money being committed to startups should rationally decline?
Answer: You almost certainly can’t.
So why is it happening? Partly because funds can — hey, why not draw management fees on more assets? — but also because of an ironic side effect of better LP knowledge of the serial persistence of returns phenomenon. Investors increasingly want in to the venture asset class, and more than in any other asset class they want to be in the first quartile to the exclusion of all else. The result: Incredible pressure on first-tier funds to raise fund sizes precisely when they should be shrinking them. Fascinating.