The megafund narrative of the last few years has largely been that these firms provide a solution to the large LP allocation problem. You can park a load of cash and get private market exposure with returns above the cost of capital.
This was a reasonable premise, and in a world where foundation labs are incinerating billions of dollars there even seems to be an obvious customer for these funds.
It seemed like a bifurcation not only of strategy but also of LP base, tapping pools of capital that would otherwise go to some larger bracket of PE before meddling with tiny venture funds.
In this context, it felt rational. LPs invested in small firms for alpha, and big firms for beta. The two had some overlap but it was largely complementary.
Then a few things started to change.
First, big platforms and platform partners pulled back from their own LP activity in small firms.
Second, their partners went on a podcast tour to promote the idea that big funds can perform just as well as small funds.
Third, some have (apparently) began telling other LPs that small funds were a losing bet, discouraging investment.
So whatever was written from 2023 to 2025 about “bifurcation” appears to have been mistaken. Narratives about a “barbelling” of the market are false. Instead, it appears more like the consolidation of the auditing industry in the 1980s and 90s.
As a result, even excellent firms on the boutique scale are struggling. Track record is of little value in the face of a dominant narrative that the market has changed forever.
There are a number of innocent explanations. It could simply be bullish enthusiasm for growth and scale. It could be a mistaken projection of AI capital requirements onto all future technology investing. It may all be a hangover of the bad practices of ZIRP.
Another possible explanation is that the big platforms are taking advantage of a frosty market to kill off the competition from small firms, who offer an unwelcome performance benchmark and a constant reminder to traditional LPs that venture capital simply does not scale.
If it could scale, it would not be venture capital
Larger funds have worse performance. There’s a simple mathematical basis, an incentive basis, and a more complex risk basis for this simple fact.
From every observable angle, and for obvious reasons, this is true, and yet the individuals managing large funds would have you believe otherwise.
The fact that there are widespread debates about “kingmaking” in venture capital is the largest and reddest of flags. It’s a topic that ought to be laughed out of the room, were it a room of competent and well-intentioned investors.
It should not, for example, be surprising that the size of early stage rounds is not predictive of success, for if venture capital could be so predictable there would be no need for a venture capital industry in the first place.
It’s absurd that any of this requires explanation. The idiosyncracy and unpredictability of success are self-evident, and venture capital was built on these two pillars.
What if you change the victory condition?
What if the goal was not eventual cash returns, but predictable markups and volatility laundering at scale?
What if “venture capital” became an entirely synthetic asset, designed to manipulate the metrics of an institutional allocator’s portfolio in a manner that exploits their short-term incentives and risk aversion?
In this world, everything is upside down.
Instead of finding outliers and fighting toward an exit, investors just fire capital into the biggest gravity well they can find.
Consensus is a superpower for capital coordination, offering simple narratives to sell LPs, pulling more money into the market that will concentrate into the most obvious opportunities.
Everything that venture touches turns to gold. Charts only go up and to the right. There’s zero friction.
People might start bitching about delayed exits and poor liquidity, at some point there will be a 2021-style “liquidity window” to dump bags. Fingers crossed.
To enable this reality, you begin by telling a number of lies.
First, you tell people that you have identified an ideal founder archetype; the type of person who could lead any company to greatness.
Second, you tell people that being in San Francisco provides such an incredible edge that you’re just not serious if you choose anywhere else.
Third, you tell people that the clear opportunity of the day is (insert here), and that’s where all of the next great companies will come from.
It’s a simple checklist of founder, location and company type which becomes the focal point for capital, regardless of any genuine idiosyncratic quality.
Finally, you build the largest investment firm with the most capital in San Francisco, index every deal that matches these criteria and herd vast swathes of capital behind you.
Marks go up rapidly, your portfolio booms, the thesis is proven.
Congratulations, you’ve invented the megafund.
Adapting the hypergrowth playbook
Research on historical venture outcomes is clear that all of these behaviours are associated with worse returns. It’s an outlier business, as everyone knows.
Indeed, venture capitalists make predictably bad investment decisions by pattern-matching founders. The best returns are found outside of San Francisco. The largest outcomes are rarely in the obvious categories.
Implicitly, doing anything that feels “obvious” is going to generate less alpha, with less opportunity for outperformance. Eliminating risk through herd behavior will always have a commensurate cost on returns.
The cognitive dissonance occurs because commentators have always assumed that generating returns is the goal of venture capital, albeit perhaps lower returns at a larger scale.
However, if your goal is just to grow as large as you can, as fast as you can, to dominate the market and shut-out competitors, then you will gladly market these lies to exploit the deeply flawed relationship between LPs and GPs.
In doing so, you will concentrate the market on fewer firms, and fewer companies. Exits will suffer, innovation will slow, and performance will droop, but you will get super fat and happy on your management fees as competence and competition wither out of the market.
(top image: “Joseph’s Bloody Coat Brought to Jacob”, by Diego Velazquez)
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