Bill Burhnham made a great point in his post today about the size of venture funds and the respective size of their investments.
He points out correctly that the size of the fund drives the size of the investment. A billion dollar fund simply can't afford to make $1 or $2 million investments. A $5 million would be small, maybe too small. This pushes funds to invest too much, he says, in companies that aren't ready or may never need to deploy that much money in order to achieve a successful exit.
Consider the economics, if a company can effectively use $2 million to create a business worth $50 million, that doesn't mean that the same company could use $5 million to grow to $100 or $150 million in the same time frame, meaning that returns on the larger investment would be lower!
What does this mean for entrepreneurs?
Bill points out that that smaller funds that have invested less in a deal are more likely to be willing to accept as successful, the sale of the portfolio company earlier. This can be good or bad. If you'd rather sell your business early than effectively doubling down with the objective of reaping more, you may be better off with a smaller fund. On the other hand, if you want to swing for the fences, the larger fund may be more willing to be more patient, waiting for the the big return. The problem in the latter case, may arise when that day never comes. Frankly, most businesses never make it THAT big.
Of course, this entire discussion presumes that you have a choice among potential venture partners. While it isn't unusual for VC's to compete for good deals, most deals aren't THAT good. It is more likely that you will be faced with the choice between accepting a term sheet and continuing to look for capital.
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