Why bigger funds are winning in tech and AI investing

This article summarizes an episode of 20VC’s video series featuring David George, general partner at Andreessen Horowitz.

David George, General Partner, Head of Growth Fund at a16z/ Photo credit: Invest Like The Best

David George, general partner at Andreessen Horowitz (a16z), disagrees with the venture industry’s doubts about large funds. He argues that growing fund sizes are a needed and profitable way to invest in how tech companies are built today.

The myth of the small fund

A common belief in venture capital is that smaller funds are the only way to get the best returns. But as a16z’s funds have grown into the billions, George argues this idea is wrong. The firm’s data shows something else.

A16z’s largest funds have beaten its smaller ones
George says, “Our larger funds have outperformed our smaller ones, and our larger ones actually have similar multiples of money to our smaller ones across strategies.”

Massive scale still delivered high multiples
“Our best performing fund in the history of the firm is actually a $1 billion fund,” he notes. “In that fund, Databricks has returned 7x the fund so far. Coinbase has already returned 5x of the fund in DPI [Distributions to Paid-in Capital].”

Why have large funds become necessary

This performance is not a fluke. It reflects a shift in how companies grow. The old model of making the most money in a company’s early days no longer matches the market. Today, more returns come from later investment rounds.

Over half the gains now happen after Series B
George argues, “47% of the dollars of gain happen between the seed and the series B, and 53% of the dollars of gain happen from series C plus. There’s a tremendous amount of dollars of gain that happens at the later stage.”

The quality of small public companies has dropped
He explains, “The ROIC [Return on Invested Capital] of the Russell 2500 over the last 30 years, it’s gone from 7.5% steadily down to 3%. So the quality has deteriorated.”

The real reason founders avoid going public

Getting money is often cheaper on the public markets. George suggests the reason founders decide against it is more about psychology than finance.

Money from public markets is often cheaper
George claims, “I think you can get a cheaper cost of capital in the public markets. I’m pretty confident that if [our portfolio companies] were in the public markets, they’d probably have access to capital at a cheaper cost.”

The main benefit is avoiding stock price swings
“I think the biggest advantage is the avoidance of volatility in your stock price and sort of employee management,” he reveals. “If you can kind of steadily grow or control your stock price in the private markets… I get the benefit of that.”

Betting on strengths, not perfection

Instead of looking for perfect teams and plans, a16z looks for founders with great but narrow strengths.

• Principle 1: Invest in extreme strengths. The idea is to back founders who are great at one thing, even if they are weak in other areas.
• Principle 2: Accept clear weaknesses. It is okay if there are problems or weaknesses, as long as the founder’s main strengths are strong enough.
• Principle 3: Ignore potential competition. Worrying too much about big companies entering the market is a mistake that makes you miss good investments.

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