Venture capital is increasingly bifurcating into two camps. A few mega-funds have opted to amass huge pools of capital, whilst many small “cottage” funds have opted to stay lean and focused. General Partners (GPs) raising a fund today must decide which side of this growing divide they belong on, because fund size dictates strategy in modern VC.
The size of a venture fund now all but determines its approach. On one end, giant firms like a16z and Sequoia are capital agglomerators, raising multi-billion-dollar funds and playing a volume game. On the other end, there are cottage industry VCs, intentionally keeping funds small to chase high-conviction bets. This split has widened since the late-2021 venture boom and subsequent downturn, creating a barbell distribution in the VC landscape. GPs planning a new fund need to be deliberate: either build a massive platform optimised for scale, or stay small and specialised. Don’t get stuck in the mediocre middle.
Incentives and economics: Fund size isn’t just a number. Rather, it hardwires the incentives and strategy of a VC firm. Large funds ($1B+) thrive on management fees and broad exposure, functioning more like a traditional asset manager than a VC. A 2% annual fee on a $1B fund is $20M to run the firm, allowing GPs to hire big teams and expand into multiple sectors. However, they must deploy capital quickly and efficiently. Firms focused on “more resources, more exposure, and more coverage” are ultimately optimising for one thing: fees. These fees, of course, are a function of assets under management (AUM). In other words, a capital agglomerator fund’s growth is contingent on AUM, thus tending towards large fund sizes and rapid, frequent deployment.
Small funds, by contrast, can’t live on fees alone. 2% of a $100M fund is only $2M, or $250,000 p.a. over 8 years. This is barely enough for a lean team in most developed markets. Smaller funds stretch this equation even further. These boutique, cottage VCs instead live or die by investment performance (carry). As such, they concentrate on fewer deals where they can earn outsized returns, taking larger stakes in ventures within their portfolio. Their goal is a high multiple on a small base, not a moderate return on a huge base. This alignment drives very different behaviour: a cottage fund must be highly selective and hands-on to earn its keep, whereas a capital agglomerator can afford to be more hands-off and simply “wire the money” as long as it hits a target IRR.
Capital flows and LP preferences: The bifurcation of fund strategies is reinforced by how Limited Partners (LPs) now allocate capital. Institutional LPs have gravitated toward a barbell approach in accordance with their risk appetite and mandate. Either they commit big checks to established large firms (for the “safe” bet and brand name cover) or seed a few promising new GPs with small funds, while skipping the undifferentiated middle of moderate safety, size and expected IRR. Similarly, founders raising money often bifurcate their preferences: some seek the massive networks and deep pockets of a Founder’s Fund or SoftBank, while others prefer the high-touch support and conviction of a smaller firm like Benchmark. Very few founders deliberately choose a middling fund that offers neither scale nor specialisation. In short, extremes have their appeal, and the middle is fading in relevance.
No observation should be levelled as a trend without sufficient evidence, lest it be dismissed as purely anecdotal. However, the numbers behind this bifurcation are relatively clear. Examine the following:
Surging Capital, Fewer Funds: Venture fundraising hit record levels in 2020-2022, but the capital became highly concentrated in large funds. During the pandemic, LPs gravitated to established “brand-name” GPs, causing mega-funds to dominate new commitments. In 2020, mega-funds (>$500M) accounted for about 70% of all VC capital raised, a huge jump from 44% in 2018-2019.
2021–2022 – Record Raises, Skewed to Mega-Funds: 2021 was a banner year (U.S. VC funds raised $158B across 1,397 funds), and 2022 set a new high ($168B across 1,057 funds). Fewer funds raised more money in 2022, meaning average fund sizes ballooned. A handful of giant vehicles dominated: nearly half of LP dollars in 2021 went to funds over $1B, and in H1 2022, that share swelled to 63.9% (roughly two-thirds of all VC capital) raised by just 30 mega-funds. Correspondingly, hundreds of smaller funds competed for only ~36% of the capital in H1 2022. PitchBook data show that in at least one 2022 quarter, 86% of U.S. VC fundraising dollars went into funds ≥$500M, underscoring how “mega-funds” were capturing the bulk of commitments. This era saw multi-billion-dollar raises by top firms (e.g. in 2022, Andreessen Horowitz closed over $14B across funds, Lightspeed $6.5B). Notably, fund count dropped even as capital hit records: many emerging and sub-$100M funds were crowded out by the capital agglomerators.
2023 – Fundraising Pullback: As market conditions cooled, overall VC fundraising plummeted. In H1 2023, U.S. VC fundraising was just $33.3B across 233 funds (versus $121.5B across 415 funds in H1 2022). Globally, Preqin data show 2023 saw a sharp decline in new funds closed (e.g. 1,645 funds raised $135.9B in 2023, down from prior years). This reflected a tough environment for fundraising. Yet the capital that did get raised remained heavily skewed to large vehicles. In Q1 2023, about 62.8% of all VC capital went into funds $500M+, as LPs continued to concentrate commitments. Many smaller VCs sat out the market or delayed new fund launches due to LP liquidity constraints. By mid-2023, fundraising had become bifurcated: a few huge funds closed, while many sub-$100M managers struggled to raise anything.
2024 – Extreme Concentration: The bifurcation reached new extremes in 2024. U.S. venture fundraising for the full year totalled $76.1B across just 508 funds. Fund count hit a decade low (~31% of the 2022 peak). Only 20 firms captured ~60% of all capital raised in 2024. PitchBook-NVCA reports that established firms (mostly mega-funds) raised 79.4% of alll 2024 VC dollars, the highest concentration of the past decade. Andreessen Horowitz alone accounted for nearly 10% of all U.S. VC fundraising that year. In Q1 2024 specifically, funds > $1B represented an astonishing 81.2% of global private capital raised, meaning virtually all new VC money went to a few mega-funds. Meanwhile, small and mid-sized funds closed in 2024 were exceedingly few. Through Q3 2024, only 118 U.S. venture funds under $500M had closed, on pace for the lowest count in years, and together those sub-$500M funds secured only $13.7B (a paltry sum historically). Larger “franchise” firms, often raising multiple funds (core, growth, opportunity vehicles), dominated the fundraising landscape.
2025 – Signs of Bifurcation (H1): Preliminary 2025 data suggests the pattern persists. In the first half of 2025, just a dozen firms collected over 50% of all VC fundraising. Industry analysts describe VC as splitting into two camps: a small set of “capital aggregators” managing mega-funds that soak up most LP dollars, versus boutique and emerging GPs raising much smaller funds (often focused on seed/early-stage) with far less capital. There has also been a noted shift in LP strategy. Rather than backing many small managers, risk-averse LPs have been concentrating commitments into a few large funds with perceived safer profiles. This has meaningfully reduced the share of capital going to small funds. In short, large funds now command an outsized majority of capital, while sub-$100M funds must scrape by on what remains.
Now, the interesting counterbalance to this capital agglomeration strategy is IRR. Despite attracting most of the capital, large VC funds have generally underperformed smaller funds on return metrics. This lends credence to the view that “bigger is not better” in venture. Historical performance data shows a clear inverse relationship between fund size and returns:
In summary, venture is bifurcating: a handful of mega-funds (>$1B+) now hoard the lion’s share of capital and operate with an “index-like” approach to capture large outcomes, while at the other end, dozens of lean, small funds (<$100M) continue to pursue outsized multiples (often by hunting the next generation of startups) and, on a relative basis, have delivered higher IRRs. The share of capital going to large funds has markedly increased each year since 2020, yet performance data shows no corresponding increase in returns for those vehicles. If anything, large-fund returns have lagged, reinforcing the “concentration curse” observed in venture investing. Meanwhile, the boutique GPs and smaller funds, though raising a fraction of the dollars, focus on agility and high-impact investments, which is evident in their stronger probability of achieving high multiples despite operating at a smaller scale
For GPs, the clearest implication of these two trends is to “know thyself” as a venture firm. Given the split in strategies, a GP needs to determine which game they can win and set their fund size accordingly. If you aspire to be a capital agglomerator, you’ll need to raise very large funds and build a platform to match , that means hiring lots of staff (operating partners, marketing teams, domain specialists), offering services to portfolio companies at scale, and likely expanding into multi-fund strategies. It also means accepting lower concentration per investment and possibly lower target returns per deal (you’re playing for volume and a steady portfolio IRR). Don’t limit yourself to only “1% of companies” if you’re going big , large funds must cast a wide net to find enough winners. In practice, this approach suits established firms with access to huge pools of capital (so if you’re a new GP, this path is a steep climb unless you have a stellar pedigree and LP network). On the other hand, if you position yourself as a “cottage” VC, then keep your fund small and your focus sharp. Use a product-led or thesis-led strategy to differentiate, and offer founders a reason to choose you beyond just money. This could be a unique expertise, a tight sector focus, an “operating playbook” you bring, or a community you’ve built. With a smaller fund, you must insist on high-potential deals (shoot for those that can return 5x or 10x the fund). That often means disciplined ownership targets (e.g. trying to own 15-20% of a startup at entry) and not over-diluting your winners. It’s absolutely critical to articulate to LPs why your smaller fund size is an advantage, not a limitation. For instance, you can say it allows higher return multiples and more hands-on support per company. Many LPs acknowledge that emerging small funds can outperform, but you have to convince them you’ll be one of those, especially in a tight fundraising market.
In today’s venture market, fund size is destiny. The venture landscape has split into two distinct playbooks: running a massive fund that spreads bets and scales as an institution, or running a small, thesis-driven fund that stays nimble and aims for outlier wins. Both models can work and have made money in their own ways, but they require very different resources, mindsets, and promises to LPs and founders. GPs need to be brutally honest about which game they are equipped to play. The worst position is to be caught in the middle, attempting a bit of everything and satisfying nobody. By choosing the path that fits their strengths (be it “capital aggregator” or “cottage craftsman”), venture investors can align their fund size, strategy, and investor expectations in a consistent way. In short, plan your fundraise to match the strategy you can execute. Don’t raise more (or less) than you can manage, because in venture, your fund size will define your strategy, whether you like it or not.
