In the cutthroat world of seed-stage venture capital, everyone talks about finding unfair advantages. But what if your fund's size is a built-in disadvantage? David Frankel, a seasoned VC, dropped a bomb on 20VC, claiming a specific cohort of seed funds is set up to fail: those managing $50 to $100 million.
He pulled no punches, stating these funds are, unequivocally, the "worst performing funds." It's a bold claim, and it cuts against the conventional wisdom that 'more capital means more options.' For founders, understanding this dynamic isn't just academic; it might be the key to picking the right money.
The Awkward Middle of Seed Investing
Frankel's argument boils down to an uncomfortable truth about scale. A $50-100 million fund sits in a financial purgatory, stuck between two effective strategies. On one side are the truly small, nimble funds or angel syndicates. They can write quick, collaborative checks, often in the $100,000 to $250,000 range. They act as friends, co-investors, adding value without the pressure of leading a massive round. Frankel says the $50-100 million funds are “too big to be collaborative to write those 100 to 250k checks and be a friend.”
On the other side are the behemoths: the funds with hundreds of millions, even billions, under management. They can confidently lead $8 to $10 million seed rounds, commanding significant ownership and setting the terms. These funds have the firepower to double down on winners and truly shape a company's early trajectory. The problem? Frankel continues, the $50-100 million funds are “too small to lead a $8 to $10 million seat round.” They lack the gravitas and the sheer capital to dictate terms, yet they're too large to just sprinkle small, friendly checks around. This leaves them in a no-man's land, chasing deals without a clear, dominant strategy.
The Trillion-Dollar Gamble
The pressure on these mid-sized seed funds isn't just about check size; it's about the math of venture capital itself. Frankel talks about a "narrowing out" in venture, where the vast majority of returns come from a tiny fraction of companies. He calls it a pyramid, where only a few "trillion-dollar" companies truly return entire funds. This means every seed investor is playing a high-stakes lottery, hoping to catch that one outlier.
In this environment, Frankel observed a trend: “what's gone on in seed is like there are whole bunch of unreasonable bets being taken with loads of funds and loads of money.” Why? Because funds, especially those in the awkward middle, are under immense pressure to deploy capital quickly to show activity and raise their next fund. This often leads to a frenzy of investing in companies that might not truly warrant the capital or the valuation. It’s a volume game driven by survival, not necessarily conviction.
He points to the stark reality of company value: “The median company, we've done a lot of work on this very recently, but the median of the top 500 companies created in the last 25 years, the median is 2.6 billion.” To hit those numbers, and to return a fund several times over, you can't just back good companies; you need to back generational ones. A $50-100 million fund faces the same pressure to find these outliers but with fewer strategic options for deploying and managing their capital.
What to Do With This
When pitching seed investors, don't just sell your vision; vet their fund size and strategy. Ask them directly about their typical check size, their target ownership stake, and how they define their value-add in a round. If a fund falls into that $50-100 million range, press them on how they avoid the 'awkward middle' Frankel described. Look for investors with a clear and consistent deployment model, whether it's leading significant rounds or consistently co-investing as part of a strong syndicate, rather than those caught in no-man's land. Your capital partners should have an unfair advantage, not a structural disadvantage.