Are venture capital returns actually getting worse?

Yes, for most funds. Cambridge Associates data shows median 10-year net IRRs hovering around 10-12% for 2018-2022 vintages — barely above public market equivalents once you account for illiquidity premiums and the J-curve drag. The top quartile, returning 17-20%+ net IRR, consistently justifies the asset class; the bottom half rarely does. The gap between top-quartile and median VC has widened as large fund sizes mechanically compress returns for all but the best-performing managers.

Why do larger VC funds underperform smaller ones?

The power law of venture means roughly 6% of deals account for 60% of total returns — a distribution unchanged for 30 years. A $50M fund needs one $500M exit at 10% ownership to return 1x the fund; a $1B fund needs the equivalent of twenty such exits simultaneously. That math breaks at scale: not enough companies reach $1B+ exits in any single vintage to satisfy a large number of large funds. A $30-50M fund can return the entire fund from a single $300-500M acquisition that a $1B fund could never meaningfully care about.

How much of a VC fund's returns come from a few deals?

Research by Horsley Bridge Partners — covering $28B+ in fund investments over 30 years — found that roughly 6% of deals account for 60% of total returns across the portfolio, with the top 10% of investments accounting for over 80%. In practice, a typical 25-deal fund has 1-2 positions that drive the entire fund's performance. This power law distribution has held consistent across different market cycles, geographies, and fund sizes — only the amount of capital chasing those same outcomes has grown dramatically.

What net return multiple should LPs expect from a VC fund?

Top-quartile VC funds return 3.0x+ net TVPI and 20%+ net IRR over a 10-year fund life, with 1.5x+ DPI at full realization, per Cambridge Associates and Carta benchmarks. The median VC fund returns 1.5-1.8x net TVPI and 8-12% net IRR — barely justifying illiquidity versus a public market index. Only roughly the top 20% of VC funds consistently outperform the S&P 500 net of fees and carry over a full fund life. Emerging managers staying small ($30-75M) and concentrated (15-25 positions) have structurally outperformed mega-funds in recent vintages because their math requires far fewer and smaller exits to return capital.

The Real Reason Venture Returns Are Compressing

Q: What is the difference between TVPI and DPI in VC?

TVPI (Total Value to Paid-In) includes both unrealized paper gains and actual cash distributions — it is what GPs report on LP statements. DPI (Distributions to Paid-In) counts only cash that has actually been returned to LP accounts. Most 2019-2022 vintage funds report TVPI above 1.5x but DPI below 0.3x, meaning LPs hold marked-up paper positions rather than realized gains. When IPO markets close and M&A slows, high TVPI becomes a liability: LPs are over-committed on paper with no cash distributions to fund their own obligations.

Everyone blames rising interest rates, the frozen IPO market, or the 2021 valuation bubble. Those are proximate causes. The real reason is math — and it was hiding in plain sight.

The structure of venture capital is built around a power law: a small number of companies produce almost all of the returns. That has not changed. What has changed is how much capital is chasing those same outcomes — and the mismatch is destroying IRRs at scale.

The Power Law Has Not Changed. Capital Has.

Horsley Bridge Partners analyzed $28B+ in VC fund investments over 30 years and found a consistent pattern: approximately 6% of deals generate 60% of total returns. The top 10% of investments account for over 80%. This distribution holds across vintages, geographies, and market cycles.

In 2010, the average US venture fund size was $140M. By 2021, the median had crossed $250M and the average was above $400M. Andreessen Horowitz raised $35B across multiple funds between 2020 and 2023. Tiger Global deployed $65B into private markets at peak. Sequoia restructured into a permanent capital vehicle with no defined limit.

The number of breakout companies did not grow 10x. The number of IPOs capable of returning a $1B fund did not grow 10x. Deployment volume grew 10x into a power law that rewards concentration, not scale.

The Exit Math Is Broken at Fund Scale

Here is the math problem no one wants to say out loud. A $500M fund charging 2-and-20 needs to return $1B just to break even on net fees to LPs — before outperformance. To return a 3x net, which is considered a strong fund, the GP needs to generate $1.5B in realized exits. That requires either one $3B exit at 50% ownership (impossible at this fund size), or roughly 15-20 meaningful exits above $100M.

In 2023 and 2024, the US saw fewer than 60 venture-backed IPOs per year. There are currently over 1,200 unicorns globally sitting on private cap tables — companies marked above $1B with no clear exit path. The backlog does not clear itself.

Meanwhile, median holding periods have stretched from the historical 5-7 years to 8-12 years for 2018-2022 vintages. Longer holds mechanically compress IRR — time is the denominator in the rate calculation. A 3x return over 7 years is a 17% IRR. The same 3x over 12 years is 9.6%.

Five Structural Forces Compressing Returns

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Fund size inflation

Average fund size grew 3x from 2015 to 2022. Multiples compress as deployment targets grow faster than the number of returnable outcomes.

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Entry valuation reset

Seed rounds that closed at $15-20M post in 2021 now require exits above $150-200M just to return 10x — a bar that eliminates most M&A outcomes.

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TVPI vs DPI divergence

Most 2019-2022 vintage funds report TVPI above 1.5x but DPI below 0.3x. Paper gains are not cash. LPs are sitting on illiquid positions with no distributions.

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Extended hold periods

IPO windows closing in 2022-2024 forced 18-36 month extensions on hold periods that were already at historical highs, eroding net IRR without changing exit values.

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Follow-on capital dilution

In large funds, pro-rata follow-on rights require deploying more capital into winners to maintain ownership — but later rounds enter at prices that reduce blended returns on the position.

What This Means for LPs and Emerging Managers

Institutional LPs allocating to venture in 2026 face a real selection problem. Cambridge Associates benchmarks show that only the top quartile of VC funds — returning 17%+ net IRR over 10 years — justify the illiquidity and J-curve against a 60/40 portfolio. The median fund is a negative risk-adjusted bet.

The structural advantage shifts to smaller, more concentrated funds. A $30-50M fund with 15-20 positions only needs one $300-500M outcome to return the fund. It can generate 3x with a single acquisition that a $500M fund could never care about. Ownership percentage matters more than check size when the exit pool is limited.

Emerging managers willing to stay small, stay concentrated, and stay disciplined on entry price have a structural advantage that the largest names in the asset class cannot replicate. The irony is that the denominator of "more capital" has actually created the opportunity for smaller funds to outperform by staying out of the way.

Related Resources

The power law of venture has not changed in 30 years.

The funds that forget this — and raise capital at scale anyway — are the ones compressing the returns.