2. How to Determine Your Venture Capital Fund Size

In addition to your fund Thesis, most of the decisions you will make as a new venture fund manager are directly affected by the size of your fund.

Fund size influences investment strategy, team size, and overall impact. There are very different decision criteria between new managers (Fund I) and emerging managers (Fund II or Fund II) when deciding a fund size. Emerging managers can do their next fund at 2x to 5x the size of their previous fund, depending on performance.

This article focuses on fund size criteria for new managers.

What are limitations faced by new managers?

New managers on Fund I have practical limits on investor access. Large institutional investors often bypass Fund I due to additional risk and an unproven track record, leaving new managers to rely on smaller investors. As a result, the target fund size of new managers needs to be smaller. 

Fund Size Framework

The target fund size for new managers is a minimum. The goal is to oversubscribe this minimum by 2x or more. So, if you want to raise a $20 MM fund, you set your target fund size as $8 MM or $10 MM.

Here is a simple framework to choose a target fund size based on the size of the limited partner network of managers and the target region for the investments.

FUND SIZE	$2 MM	$5 MM	$10 MM
Developing Region	Large Network	Exceptional Network	N/A
Developed Region	Small Network	Large Network	Exceptional Network

How do regions influence fund size?

Managers in developed regions, like the US and Europe, have much more access to capital for raising larger funds than managers in developing regions, like India, Africa, or LATAM. As a result, fund sizes are smaller in developing regions. Additionally, managers with smaller networks in developing regions are often unable to raise a fund at all. If a manager is in one region and focused on another region, the fund size should be set based on the smaller of the two regions. 

How does my network affect fund size?

The size of your network and skill with capital raising affects your fund size. Managers with less than 2,500 LinkedIn followers and without experience raising capital will have difficulty closing a first fund, and, as a result, they are forced to set a smaller fund size. Managers that have raised millions in the past, have large networks, or thrive when fundraising set fund sizes around $2 MM in developing regions and $5 MM in developed regions. For those that have raised tens of millions or are famous, larger fund sizes are a consideration, although warned against. Sequoia started with a $3 MM fund, and the best returning fund of all time was a $7 MM fund. 

What are the risks of having too big of a fund size?

Managers commonly set the fund size too large and then fail to reach this target. Missing the target fund size has lasting repercussions. These managers are forced to outperform to attract future interest, and they forever have fundraising risk with limited partners. As a result, many of these managers end up leaving the industry. 

Fund I is the MVP

The inaugural fund, or Fund I, serves as a minimum viable product (MVP) within the venture capital landscape, demonstrating the manager’s skill in creating a compelling thesis, executing strong deals, and managing venture investments. Managers are encouraged to set a small fund size, raise it quickly, and start executing. The goal is to get to Fund II as quickly as possible, which reflects product market fit.

Choosing a Fund Size

Here are some quick activities to help you choose a fund size for Fund I.

• First, evaluate the size of your network and your fundraising experience to see if you fall within the small, large, or exceptional categories. 
• Next, based on your region and network size, select the baseline fund size from the table on this page for Fund I of $2 MM, $5 MM, or $10 MM. 
• Then, go back to your Thesis and evaluate if the baseline fund size alters the stage that you invest, as smaller fund sizes normally are for earlier stages. 
• Lastly, write your updated Thesis with the new fund size, which may vary from the baseline slightly, and write a couple of sentences about how your thinking on fund size has changed.

NOTE: LPs will often say that “your fund size is too small.” This is a common way of saying “no” politely. Do not increase your fund size.

What happens after you determine your fund size?

This is just one part of the first steps to starting a venture capital firm, which include: 

1. What is your Venture Capital Fund Thesis
2. How to Determine Your Venture Capital Fund Size
3. How to Select a Venture Capital Firm Focus
4. How to Determine your Venture Capital Secret Sauce

About The Author