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Ryan Caldbeck November.17.2014 8 min read

Early Stage Markets — The (Unsurprising) Correlation Between Size and Performance

Anyone who says that size does not hurt investment performance is selling. The highest rates of return I’ve ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It’s a huge structural advantage not to have a lot of money. — Warren Buffett

At CircleUp we believe early stage financial markets present outsized opportunities to investors. A wealth of empirical research underpins this belief, showing that, across asset classes, returns have historically been greatest at the lower-end of the market.

Nonetheless, the overwhelming majority of investment funds intentionally scale out of the lower-end of the market and into its later stages. Even though later-stage markets are more efficient, more competitive and less alpha-friendly. Why? Quite simply: traditional investment funds, be it private equity or venture capital, are perversely incentivized to grow assets under management to bolster fees. In the language of fees, bigger is unmistakably better.

This creates for a fascinating paradox in the private markets: the preponderance of investment funds live at the upper end of the market while the preponderance of companies (investment opportunities) live at the lower end of the market.

86% of U.S. businesses with revenues greater than $1M have less than $10M in revenues. An extraordinarily target-rich environment—that the lion’s share of funds size themselves out of. Of the population of active private equity funds in the U.S. only 21% have less than $100M in assets under management—and these funds control less than 1% of available capital according to Preqin data.

We love this paradox. And we’ve structured our marketplace, and our technology platform, from the ground up to exploit it. Let more investors compete for fewer opportunities in later-stage markets. We call early-stage markets home; where fewer funds have access to more opportunities; and where investors have historically thrived.

Early-Stage Venture Capital

Over a 20 year period the Kauffman Foundation invested in 95 venture capital funds. In 2012 it audited its performance and found that no single fund with more than $1BN in AUM exceeded a 2x cash-on-cash return after fees. (PDF: We Have Met the Enemy and He is Us). A clear correlation was observed: as fund sizes increased, returns compressed.

Research from Silicon Valley Bank (SVB) mirrored Kauffman’s findings. Reviewing 850 venture funds from vintage years 1981 – 2003, SVB found that small funds with $250M or less in AUM significantly outperformed larger funds. Indeed, the majority of funds larger than $250M (51% of funds) failed to even return investor capital after fees.

“There are many compelling reasons for the attractiveness of small funds. Managers of such funds often have industry-specific expertise and focus on particular strategies or sectors compared to those of larger funds which usually target multiple stages and sectors.” —Silicon Valley Bank

Early-Stage Private Equity

Moving up into traditional private equity — does the negative correlation between size and performance persist? It does.

In a comprehensive academic study of 7,500 global private equity investments, researchers found that PE suffers from the same diseconomies of scale. Funds were rank-ordered by size and their returns regressed—a fund in the 10th decile being the largest and in the 1st decile, the smallest. Across all metrics—IRR, PME, MIRR, and Median Exit Multiples — they found the same negative relationship between performance and size.

Source: Giants at the Gate: Investment Returns and Diseconomies of Scale in Private Equity.

And Early-Stage Consumer?

We’re fascinated by this negative relationship between fund sizes and returns. The question is: does it hold true for CircleUp’s addressable market, consumer private equity?

It does. We developed a unique data set of the consumer PE market over the past twenty years. Using deal level information from over 15 leading consumer early stage and growth capital funds—comprising over 150 individual deals in multiple vintages for each fund manager—we analyzed the relationship between check size and return. (Notes on our methodology in the end notes below). Here are the results.

At the smaller end of the market, investments tend to outperform, on an overall average basis, as seen in the downward sloping red trendline, and the potential for outsized winners. 21% of investments less than $20M had a gross IRR of more than 60%, compared to only 13% of investments greater than $20M.

When the “crowdfunding” revolution started two plus years ago, we couldn’t fully appreciate all the implications. Perhaps the most important one in the long run will be the elimination of perverse incentives in the market—such as the desire to raise larger and larger funds to capture more management fees—that prevent the efficient flow of capital to the most productive uses.

Investors have historically thrived in early-stage markets — markets that we’re thrilled to create access to and call home.


We compiled our consumer return data from public filings, press releases, interviews, reports and in-house research. The return data for specific funds has been intentionally anonymized to protect proprietary data for the funds. To conduct our research we first independently constructed a list of the most relevant firms in the early stage consumer space today. We then reviewed public filings, press releases, documents from several independent sources all with specific knowledge of particular funds and/or firms, and conducted interviews.

The data presented comes from a subset of the firms in the Top 50 consumer focused VC/PE firms from the Preqin Database dated 11/11/14. While not perfect, we believe there are no structural biases in the way the data was gathered that would alter the conclusions presented here.

The Top 50 consumer focused VC/PE firms from the Preqin database are as follow:

  1. Alliance Consumer Growth
  2. Appletree Investors
  3. Arbor Investments
  4. Beekman Investment Partners
  5. Berkshire
  6. Brentwood Associates
  7. Bruckmann Rosser Sherrill & Co
  8. Castanea Partners
  9. Catterton Partners
  10. Charlesbank Equity Partners
  11. Encore Consumer Capital
  12. Endeavour Capital
  13. Fireman Capital
  14. Forerunner
  15. Freeman Spogli
  16. Generation Equity
  17. Graham Partners
  18. Guardian Capital
  19. Hilco Consumer Capital
  20. JH Partners
  21. Kainos Capital Partners
  22. Karp Reilly
  23. Lakeview Equity
  24. Larsen MacColl Partners
  25. Leonard Green & Partners
  26. Littlejohn
  27. LNK Partners
  28. Mariner Capital Partners
  29. Maveron
  30. Mill City Fund
  31. Mistral Equity Partners
  32. North Castle Partners
  33. One Rock Capital
  34. Palladium Equity Partners
  35. Partnership Capital Growth
  36. Prometheus
  37. Red Swan Ventures
  38. Rock Island Capital
  39. Rosewood
  40. Satori Capital
  41. Sentinel Capital
  42. Sherbrooke Capital
  43. Sheridan Legacy
  44. Swander Pace Capital
  45. Sycamore Partners
  46. Tengram Capital
  47. TSG Consumer Partners
  48. VMG Partners
  49. Wasserstein
  50. Winona Capital