What’s Good for Sovereign Wealth Funds Isn’t Necessarily Good for Founders

A few supersized venture funds have been in the news lately, posting eye-popping results.

– 2–3× DPI on $1B+ funds
– Tens of billions in cash returned to LPs
– Plenty of TVPI still to be taken

Not long ago, many people were skeptical these funds would work, that they could work. They were dismissed as fee machines, too large to outperform the market. The very best of them have proven those critics wrong.

Their model works, at least for their LPs and GPs.

However, what’s good for sovereign wealth funds (SWFs) isn’t necessarily good for founders.

Pensions funds, SWFs, university endowments, and other large institutional LPs have specific needs.

The defining one is scale.

These LPs manage tens of billions of dollars. That reality shapes everything. Their models require diversification. VC has historically been a great asset class for capturing upside from technological disruption. However, at their scale, these fiduciaries can’t dabble. They must “deploy.”

The only exits that will move the needle are those that have the potential to be added to indices.

– $100M exits don’t matter.
– A $1B exit barely registers.
– The median market cap of a startup that went public in the 2010s (n=166) is ~$2.3B.
That would barely make a dent in most of these funds.

Only the very largest exits are worth entertaining.

Large venture firms respond to these incentives by raising behemoth funds. They aim to find/fund the diamonds in the rough and apply pressure to make them shine. There is nothing at all immoral about this model. However, by the numbers alone, it’s not a great trade for founders.

If you’re building one of the dozen or so generational companies of a given vintage, this model works incredibly well.

Unfortunately, most startups have to grind and struggle, and a system optimized for producing index-scale outcomes is, by definition, indifferent to everything below that bar.

At Founder Collective, we have definitely made trade-offs & first and foremost, they favor founders.

I’m aware of how self-serving this reads, but our economic structure supports it. We’ve appeared on the Forbes Midas List nine times. We’ve backed over two dozen $1B+ companies. And we’ve kept all our funds to date under $100M.

That choice carries a cost for sure. We’ve left tens of millions of dollars in fees, and who knows how much carry, on the table.

We don’t do this out of charity. We want to back startups like Shield AI, Whoop, Suno, Uber, Coupang, and The Trade Desk, which are worth hundreds of billions of dollars, collectively. We want to back founders who reshape markets.

However, our business model doesn’t require startups to do so in order to be successful.

There’s a George Merck quote I love: “We try never to forget that medicine is for the people. It is not for the profits. The profits follow, and if we have remembered that, they have never failed to appear.”

Substitute founders for patients and that’s a good summation of what we believe.