Thread by @ShahramSN

If you're a #LifeSciences VC or #founder, read this first before #JPMorgan2023.

This 2011 paper by Santé has fresh relevance as the biotech bubble has burst, and old norms return.

Big funds (>$300M) will underperform B I G.

Key take aways. 👇 (1/9) 🧵

sante.com/wp-content/upl…

No VC as of 2011 "larger than $750M ha[d] ever returned more than 2.0x to its LP investors.

Fewer than a dozen funds larger than $300M" had.

With #biotech IPOs now a memory (like the period analyzed in the 2011 paper), VCs won't be able to engineer quick $$$ returns.👇🧵

The "inescapable conclusion" from the 2011 data was that larger venture funds generally *under*perform smaller funds...

"despite the presumed advantages of track record and brand name that allowed them to raise such large pools of capital in the first place."

How can that be?🧵

For a portfolio of venture investments to perform overall, "winning companies must return BIG multiples.

But big relative to what?

Winning deals must generate large returns as a fraction of TOTAL FUND size, rather than as a multiple of capital invested."

This implies 👇🧵

A VC "should be no larger than 1.0-1.5x the average equity value at exit of venture-backed companies in its investment sector. [$156M as of 2011 in #biotech]

Fund performance drops off precipitously as the ratio of fund size to average exit value increases above that."

& 🧵

There's a "mistaken belief that the most successful companies (i.e., the companies most likely to exit well above the mean) will also tend to raise the largest amounts of capital."

The data say otherwise.

In fact, more money raised may just mean more $ lost.

Paradox⁉️ No👇🧵

Unlike other industries,

Venture "tends to produce companies whose exit valuations cluster below $300M because they are most often priced based on growth projections and proprietary technology rather than on cash flow given the earlier developmental stage."

This means that👇🧵

"In reality, the correlation between total amount of venture capital raised and ultimate exit value is very low.

There are plenty of examples of co's that raised less than $25M... and went on to exit for $100-500M."

(Shameless @CivilizationVC plug👇)🧵

fiercebiotech.com/biotech/intell…

So why such BIG funds? VCs cash in on fund size.

"The net present value of management fees alone for a fund at $500M exceeds the fees and carry of a fund at $100M, even if it returned 4x"!

So bigger isn't better.

But don't feel too sorry for the big funds! 😁