Smaller funds are the new normal

The average fund size dropped to $115m in Q1 2024, its lowest point in about five years, according to new research from Venture Capital Journal.

Expert analysis by Lawrence Aragon, David Bogoslaw and Ryan Hibbison

We’re putting the final touches on our Q1 2024 fundraising report, but the headline, as you no doubt guessed, is that it was terrible. Look for our final report early next week.

One data point that we are comfortable sharing now is the average fund size for Q1: $115 million. That is a dramatic drop from about $158 million for all of 2023 and $167 million for all of 2022. It is the smallest figure since 2019, when the average fund came in at about $112 million.

The smaller average is consistent with what we’ve been reporting about recent fund closes. The difficult fundraising market shows no sign of letting up, as LPs remain tight fisted due to lack of distributions from their prior fund investments. Until the exit markets open back up, fundraising will continue to be a slog for most firms.

There are outliers, of course, like Andreessen Horowitz, which this week reported that it had raised a combined $7.2 billion for several funds.

Most funds are finding that they were too bullish about LP appetites when they were setting their initial fundraising targets. For example, Maven Ventures hoped to raise $100 million for its fourth fund when it set out on the fundraising trail in June 2022. This week, the seed-stage firm announced that it closed on $60 million.

Few VCs are willing to talk on the record about their fundraising shortfalls, which is odd given that most of their peers are also coming up short. We see no shame in it. Raising a smaller fund is the new normal.

Sean O’Sullivan, founder of deep tech investor SOSV, is one of the few willing to talk about the difficulty in raising a fund today. “We set a target for SOSV V in the heady days of 2022 for $400 million, and we did have indications that the fundraise could close at over $400 million right up until the crash of Silicon Valley Bank in March of 2023,” O'Sullivan told Venture Capital Journal.

“But the crash of VC fundraising in late 2022 and early 2023 slowed our progress, as it did for everyone else in the industry. We told our start-ups, ‘The wild market of 2021 is in the rearview mirror; you’ve got to prioritize profitable growth over growth for growth’s sake.’ And we knew that applied to VCs as well.”

Given the challenge SOSV was faced with, O’Sullivan sees the fundraising effort as a success. “In the end we did end up closing a record fund for us, $306 million, but it was a longer and more involved process than the three or six months we would have hoped it to take, based on our track record. LPs are being far more cautious in this market, and I don’t blame them.”

We think Liam Donohue, co-founder and managing partner of .406 Ventures, was on the money when he spoke to VCJ in February about why his firm closed on $265 million for its fifth flagship rather than spend more time trying to hit its target of $325 million.

Said Donohue: “In this market there’s no rationality to go bang your head against a wall for another nine months.”

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