About 15 years ago, I learned a lesson I’ve carried around ever since: when I was a rookie consultant visiting an industrial firm in the Midwest I got in a discussion with our client-side project leader about why people sometimes buy things that don’t make obvious sense. “For instance,” my client asked rhetorically, “why do you think the Chevy Suburban [the only extra-large SUV at the time] annually tops the owner loyalty and re-purchase rankings when there are so many great cars out there? You'd think every once in a while some other car would topple the 'Burban, no? And who wants to drive such a behemoth, anyhow?" Before I could whip up a smart-sounding, yet hollow textbook answer about key buyer purchase criteria or some such noise, he answered his own question, “what the heck else are they going to buy, though? If you've got four kids or three dogs or a snowmobile you have to tow, there's just no other choice. What’s the alternative? Buy two cars and split up the family when you go out?"
I’ve thought a lot about that story lately, as it offers an important metaphor for investors. After all, like large SUVs, big venture and private equity funds have been getting kicked around a lot lately. (And I think I can credibly say that I’d been an early and consistent (and sometimes unfair?) fist-shaker in the direction of some large funds. Sure, there are some big funds out there that will be successful — and to be clear, I don’t root against anyone; that’s bad karma — but the arithmetic facing sizable funds is daunting.) Yet, despite my ever-mounting cynicism and some good research and analysis that bolsters the small-fund argument, I’ve actually started to feel some sympathy for big funds and their investors and I’ll (not-so) secretly express a hope that larger investors stay focused on bigger funds. After all, they’re like the Suburban buyers of the story: if they must go out for a spin, it just makes sense for them to find larger vehicles.
See, if you have a gazillion dollars to put to work, it’s actually pretty hard to execute a smaller fund-oriented program, even though many large investors are currently fetishizing such a strategy. And to those investors thinking about jumping on the small fund bandwagon, I’ll note that such funds tend to be hard to find, challenging to diligence, difficult to “sell” internally, expensive to monitor (at least in terms of time), and catalytic of insomnia. Indeed, I love my managers like I love my children — all equally but differently — yet the younger ones tend to keep me up more at night. For sure, the rewards can be great and I’ve got high hopes for all the kiddies, but people never let me forget that I’ve taken a lot of career risk . . .
And then you get to the practical challenge: if an institution is deploying a ba-jillion bucks a year, it’s hard to do it in $10 million chunks. Even if one could write a bigger check to a smaller (sub-$200M?) fund how much more would you want to do? Would you want to be 25% of the fund? 40%? Would the GP want you to be that big? And if an institution is writing a bunch of $10 million checks, are they writing too many of them and seeding a whole bunch of competitors in a space? Are they ruining the experiment by participating in it? Stretching our tiring metaphor, if everyone’s trading in their Suburbans for a pair of roadsters and taking two cars out on family trips instead, all those incremental cars on the road will snarl traffic, no?
So let’s raise a glass to big funds with a toast of sincere best wishes for their success . . . of course, I’ll be explicit about my ulterior motive: keeping the small fund space the preserve of the nimbletons. If big players continue to focus on big funds, it’ll be more beer for us.