We’ve spent the past 12 months navigating a relentless wall of worry: a series of macro shocks that have brought venture capital LPs into a sit-and-wait posture. When you drill down, however, the innovation economy hasn’t had a sudden collapse in fundamentals. Investors’ flight to perceived safety fundamentally misunderstands the risk profile of the moment.
The flight to ‘safety’
Feeling uncertain, the herd does what herds do: run toward the megafunds. Crunchbase data shows that through April of this year, 80% of all U.S. venture investment went to rounds of $500 million or more, spread across just 29 companies.
Some have called this the bifurcation of venture. Frankly, it’s a flight from venture to something else entirely.
It’s an understandable psychological defense mechanism. If you’re an investment officer, it’s hard to be criticized for backing a brand-name firm. But let’s be honest about what that trade actually is.
When a fund manages billions of dollars, it’s no longer “venture capital” as we’ve known it. To return a fund of that size, you need massive outcomes. You are no longer investing in high-conviction, early-stage firm building; you are buying an expensive index of the tech sector.
To be fair, for some LPs that index is the rational choice. The largest institutions often can’t write checks small enough for emerging managers, and can’t even reach them through a fund of funds, so broad venture exposure is a reasonable, eyes-open decision. The LPs worth challenging are the ones who could invest in next-generation managers and choose not to.
And so it comes as little surprise to me that for two years running, LPs have reported their venture allocations are underperforming their benchmarks. But the apparent “wisdom” of the crowd persists — invest in the big name funds. Meanwhile, more than half of them say they aren’t considering investing in emerging managers.
The result? LPs who flocked to these funds to avoid risk have simply traded venture risk (Will this specific company work?) for returns risk (Will this massive vintage actually outperform the S&P 500?).
The signal in the noise
While the herd is busy overcrowding the megafunds or sitting on the sidelines, something interesting is happening in the quiet corners of the market. True venture — the smaller, disciplined, sub-$100 million funds — keeps working. The latest research, a study of nearly 2,500 VC funds from 2000 to 2024, found that emerging managers had an average IRR of 17.15% as compared with established managers’ 9.94%.
At my platform, we see emerging managers who haven’t stopped deploying just because the headlines got scary. They’ve continued to find and attract founders who are resilient enough to build through this market cycle that’s overwhelmingly funding the giants.
These managers are the ones still capturing the original spirit of venture: high-alignment, high-conviction investing that isn’t dependent on asset gathering fees to survive.
The savvy money is already moving
The savviest allocators are awake to this reality. They recognize that the “safety” of the megafunds is an illusion and that the real alpha lies in the managers who are hungry, specialized and right-sized for this specific market.
For those willing to leave the herd, opportunity awaits. Let the tourists buy the index. We’ll be over here building the future.
Sara Zulkosky is the co-founder and managing partner of Recast Capital, a 100% woman-owned platform investing in and supporting next-generation managers in venture.
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Illustration: Dom Guzman
