A Deep Dive into the Inherent Scale Limitations of Venture Capital Performance with Increasing Fund Size

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Dec 07, 2023, 08:09 ET

Santé Research Demonstrates That Venture-Backed Exits Tend To Cluster Below $350M – A Phenomenon Unique To Venture Capital That Remains True Across Various Market Regimes

AUSTIN, Texas, Dec. 7, 2023 /PRNewswire/ -- Santé Ventures, (Santé), an early-stage healthcare and life sciences investment firm, shared updated research on venture capital fund performance and the level of correlation with fund size. While large funds offer presumed advantages of scale, brand recognition, and experience, data show that these benefits do not scale accordingly. This comes at a time when the total venture capital raised by sizeable individual funds has increased fourfold from 2012-2022 compared to 1990-2011 – providing a cautionary tale for limited partners in their alternative investment allocations.

Santé originally published a whitepaper detailing these findings in 2011, and updated the research this year to include the impact of macroeconomic market regimes on venture capital performance. By leveraging historical data and applying multivariate regression analysis, the original thesis – that the proper size for a venture fund should be no larger than 1.0 - 1.5x the average equity value generated at exit by venture-backed companies in its investment sector – remained true. Additionally, Santé noted that a properly sized fund is roughly 50% more likely to return 2.5x or more to investors than a large fund. An even greater performance gap exists when measured by cumulative IRR, which is 17.4% in funds smaller than $350M versus just 9.7% in funds larger than $750M.

"Our updated research reconfirms the core tenet of why we founded Santé – that maintaining a disciplined fund size is critical for generating consistent returns," noted Kevin Lalande, Founding Managing Director & Chief Investment Officer of Santé. "While individual fund managers cannot control whether they operate in a bubble, balanced, or bear market regime, they can control the critical variable of fund size in all market environments. The truth is that there are certain empirical realities to venture compared to other asset classes. For a fund to be successful, each investment has to have the potential to return a substantial fraction of the entire fund, without relying on statistically rare multi-billion-dollar unicorn exits. With this in mind, you begin to engineer the luck out of venture capital."

Based on the results, funds in the $200-350M range generated the highest returns across all three metrics (IRR, TVPI, DPI) compared to other fund sizes. This could suggest that funds in this size range are more efficient and adept at generating returns than their larger counterparts. To build on this, Santé expanded the research this year to evaluate performance during certain market environments and confirm how strongly this impacted the overall thesis. Even accounting for times of tightened liquidity (bear market), stable liquidity (balanced market), and rapidly expanded liquidity (bubble market), properly sized funds continue to outperform.

Lastly, these findings are unique to venture capital. Unlike the buyout industry, where exit valuations scale linearly from millions to billions based on the size of cash flows in the underlying companies, the venture industry tends to produce companies whose exit valuations cluster below $400M. This is because they are most often priced based on growth projections and proprietary technology – rather than on cash flow, given the earlier developmental stage of venture-backed companies.

The full analysis is detailed in a whitepaper, which can be downloaded from the Santé website at www.sante.com.

About Santé Ventures
Founded in 2006, Santé Ventures is a specialized healthcare and life sciences investment firm with roughly $800 Million in capital under management. The firm invests in early-stage companies developing innovative new medical technologies, biotechnologies, and digitally enabled healthcare services. Recent Santé successes include Laminar (Johnson & Johnson), Farapulse (Boston Scientific), Claret Medical (Boston Scientific), TVA Medical (Becton Dickinson), Millipede Medical (Boston Scientific), Molecular Templates (MTEM), AbVitro (Bristol Myers Squibb), and Explorys (IBM Corp). Santé invests nationally and has offices in Austin, TX, and Boston, MA. For more information, please visit www.sante.com.

Media Contacts
Santé Ventures Press and Community Relations
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512.721.1200

Ryan Walker, R.J. Walker & Co.
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860.930.3611

SOURCE Santé Ventures