SFOs and MFOs like to directly back startups, hoping that their “access”, connections, and intuition will find the next breakout. Yet most families discover quickly that picking winners in VC is a statistical game, not an exercise in genius..

When these investments go sideways or under (most), it is tempting to cite founder execution, market timing, external shocks. But numbers do not lie, and just as angels need tens of shots on goal to see return and DPI, seasoned SFOs/MFOs must learn that doing only a few deals rarely beats the odds.

Professional VCs accept that most investments will hit zero, so why wouldn’t SFOs/MFOs. Discipline is key in structuring portfolios, as much as timing deployment and commitment, knowing that momentum investing and vintage picking is the cost of the game. No matter the investor pedigree, no one can outplay probability. It is called “Power Law”.

The way to go for SFOs and MFOs is to implement robust risk management in VC, which means that it is crucial, when they start they VC exposure, to partner with experienced GPs and/or fund-of-funds. MFOs/SFOs should let time and thoughtful portfolio construction work in their favor, and not aim to “win” as a solo outlier. Time means minimum spending 1-3 cycles as an LP, before considering adding direct exposure.

The “direct deal” dream in VC is deceptively alluring for MFOs/SFOs.

We always talk about valuations as if they were ~facts of reality, such as “This X startup is worth A”. But in practice, valuation a framework to align interests, to benchmark progress, to structure risk, and to negotiate ownership.

Most VC educational materials present startup valuation courses titled “Valuation methods”. However, these courses should be titled “Valuation as a tool”.

The same startup can be valued at $30 million in one term sheet and $60 million in another, depending on preference stacks, liquidation terms, or even just investor appetite for scarcity. Both numbers can be “right”, because valuation is shorthand for a moment in time with a specific group of actors.

A VC’s valuation exercise helps justify an investment thesis. A founder might use valuation to motivate a team or attract credibility in the market. An investor “calculates” valuation to model risk, ROI etc. These are not the same exercise, they just use the same word. In summary, purpose defines the metric.

Also, a valuation often encodes things that cannot be modeled, such as trust in the founding team, belief in a macro trend, or even the narrative pull of being in “the category winner.” Valuation spreadsheets never reveals those intangibles, but they sit in the number nonetheless.

When as GP, an LP, a Founder, you stop treating valuation as absolute truth, you start seeing its real role. It is a tool for decision-making, alignment, and storytelling. And that shift changes how you use it, for instance instead of asking “Is this valuation real-fair-legit?”, the sharper question is “What is this valuation for?”.

Startup valuation is not a single truth, it is a lens. And like all lenses, it can distort as much as it can clarify.

Most family wealth begins with entrepreneurship, the FOUNDATION: committed, long-term, and illiquid industrial assets. Over time, as families grow and diversify, focus shifts to the more liquid Preservation side: Private Banking and Cash Management. These offer more safety but their mandate is not to drive real growth.

When foundational assets mature, families must embrace new growth engines. Venture Capital, when “done right”, delivers compounding returns and sustains the legacy of wealth creation.

In nearly two decades at the intersection of private banking and venture capital, I’ve observed this “Wheel of Wealth”, too often static, and tilted to the left-hand side.

Let’s discuss Venture Capital, when “done right”.

In VC, there is a common misconception by “rookie” LPs that it is possible to time the market when “hot” years of innovation arise, and that it is the best strategy to get high returns from this, what they believe, “momentum” asset class.

However, especially within early stage VC (<$150 million tech VC funds), 42 years of fund data reveals* the truth: consistent, diversified investment across all vintage years and cycles is paramount for maximizing returns.

Unlike other private asset classes like Buyout, Credit, or Real Estate, where DPI (aka “distributed to paid-in capital”) plateaus around Year 7, VC’s DPI continues to grow deep into Years 12 through 15. This highlights the long-term compounding nature of this asset class.

The cumulative multiple for consistently investing in early-stage VC across every single vintage year over 42 years is a 1’154x. Compare this to Real Estate (26x) or Buyout (9x) over the same period.

BUT, to really understand why consistency is paramount, let’s look at the impact of missing top-performing vintages: missing just the best three vintages in VC reduces cumulative multiple by 65% (from 1’154x to 421x). In contrast, missing the best three vintages in Real Estate causes only a 6% reduction, and in Buyout, it is 4%.

This data demonstrates that VC is a power law asset class**, where 80% of returns often come from just 20% of managers. Missing key vintage years means missing out on the critical winners that drive outsized returns.

For LPs, this means structurally diversified exposure is not just an advantage, but a necessity to capture those winners and mitigate vintage timing risk. Whether through a fund of funds or a dedicated, well-resourced in-house program, ensuring continuous exposure to high-quality managers across cycles is the path to truly compounding capital.

As an LP in Venture Capital, consistently committing capital across all vintages is key.

The VC industry has undergone a massive transformation, fragmenting from a monolithic structure, into a barbell model with distinct strategies for different-sized firms.

So it is high time we revisit the old purist way of thinking about VC and challenge the demonization of big firms by acknowledging their fundamentally different risk profiles and product offerings.

On one end of the barbell, we have the mega-shops and large, established VC firms, such as Andreessen Horowitz, Lightspeed, General Catalyst. These are often described as playing a game of “innovation capital” (Forbes has a great article about that, see in comments) with a very different strategy than smaller, early-stage investors.

Their risk profile is just fundamentally different, and they offer different products. While they may not achieve the 50x or 1000x multiples seen in early-stage deals, they offer greater consistency and aim for significant total capital returns, often through blended checks over time, targeting 5-10x on individual companies.

These large funds can raise capital at a time speed that we have rarely seen before, and are frequently multiple times over subscribed due to a perception of real quality.

On the other end, we have the small funds and the new and emerging pre/seed managers, which embody what VC used to be, investing in two people “in a garage”. These funds have the potential for really high return, with some seed funds achieving returns of 250x (ping Lowercase Capital Fund I), 30x, or 40x.

However, this comes with significant volatility and intense competition. It is not uncommon to see fundraising for an new/emerging VC fund to be two years, and leading to a high mortality rate, with 50% of firms that start a Fund I even get to a Fund II.. and only 20% get to a Fund IV.

Understanding these fundamental differences in strategy, and risk management is crucial for all stakeholders in the VC industry as this space continues to evolve into a mainstream asset class.

Both types of VC firms are essential for a healthy VC ecosystem.

We must challenge the “old purist” venture capital mindset and understand the divergent, yet complementary paths of big and small VC firms.

In most Venture Capital structures, the IC is composed of senior members and the GP team, who are responsible for investment decisions, and ensuring adherence to the fund’s strategy and risk framework.

The LPs are passive investors whose role is usually limited to oversight via LP Advisory Committees (LPACs), which provide input, approve waivers, and help manage certain conflicts but DO NOT participate directly in deal selection or approval.

Standard Limited Partnership Agreements (aka “LPAs”) in jurisdictions such as the US, Switzerland, or the EU strictly separate these roles to avoid conflicts of interest and maintain investor protections.

LPs have limited liability *specifically* because they do not direct or participate in fund management decisions. Joining the IC would compromise this very limited liability status.

This post is intended to new and emerging VC managers in particular.

This is the worst environment ever to launch a new VC firm. Fundraising is tough. You won’t probably close any significant capital before 12 to 18 months. With this backdrop, this is tempting to accept such terms in order to eventually push to a first, second, final close...

... But this is a major threat to the principle of independent fund management and limited liability. No LP should have direct investment authority. Be they large, or strategic.

If a large, prospective LP asks you to also be a member of the fund’s investment committee.. you must say NO.

In today’s incredibly challenging VC fundraising environment, in particular for new and emerging VC GPs (raising from Fund Is to Fund IIIs), every manager needs to truly understand this concept of “MVFS”. This is not about hitting an exact number, but rather identifying a range representing the minimum amount a GP needs to raise, to be able to execute their business model and thesis.

It is more critical than ever due to several things:

This is arguably the hardest fund raise environment we have seen for VC funds maybe ever, according to the industry. For first-time managers, raising any significant capital can take 12 to 18 months. Managers must be realistic about what is genuinely possible.

It can be tempting to abandon a portfolio strategy if ideal fundraising targets are not met. However, focusing on the MVFS ensures GPs can adhere to their proposed strategy. It is about strategy integrity.

Small, on-the-margin adjustments are acceptable, but radical shifts are not accepted by LPs who may call you out because of strategy drift. For instance, the “follow-on reserves” are not your fund buffer. As a GP, you cannot for instance say “if I raise my target size of $35m, I’ll have a 50% reserve strategy, but if I raise only $20m, I won’t set aside any reserves”.

Such significant deviations, as drastically reducing reserves from 50% to zero, fundamentally change the business model.

This minimum viable fund size must allow the GP to generate enough proof points to demonstrate proficiency in at least two of the three core components of VC fund management: sourcing, picking, and winning. This is foundational for a successful subsequent fundraise, like moving from Fund I to Fund II.

For new and emerging VC GPs, the “minimum viable fund size” is the smallest capital to execute a fund strategy and is the best “on paper” demonstration of being cognizant about their industry dynamics.

It refers to making forward-looking investment choices based on the probability of future success rather than relying solely on past outcomes, acknowledging the inherent uncertainty and long-term nature of Venture Capital.

This is even more relevant when assessing new and emerging GPs (Fund Is to IIIs).

It means several things:

When an LP makes an ex-ante decision, they are not buying a “secondary” or looking at what has already happened. Instead, they are actually just looking at what is the probability of success in the future for the GP. This is crucial because, especially for new and emerging managers, assessing that takes minimum 8 to 10 years to know if somebody was a great picker or they just happen to be in the right rooms.

Because future success is always uncertain, LPs must focus on process more than just outcomes in the past. This means understanding how the GPs think, the managers’ mental models, their thought process, and their strategies. Looking for GPs who have completely stressed tested every single assumption they make, is a good approach (e.g. with the “minimum viable fund size”).

For a deeper understanding of this process, LPs should ask really dumb questions that GPs are not used to see, in order to unearth the Why behind their beliefs.

Eventually, and especially with new and emerging managers where traditional performance metrics like are not available, the ex-ante decision ultimately should be a bet on the person. LPs must be looking for unique drive, self-awareness, ambition, and an asymmetric edge in the GP. It is about investing in GPs who are building a 20, 30, 40, 50-year firm, not just trying to raise a fund because it seems like a fun thing to do.

As an LP, mastering “ex-ante” decisions when investing Venture Capital is critical.

Over the past 12–18 months or so, we have had the “unsolicited” opportunity to help academia, family offices, and UHNW individuals develop a prepared mind for Venture Capital exposure.

Today, VC represents, on average, less than 1% of global wealth allocation, a figure that is quickly evolving. While the observation that private companies are remaining private longer is valid, it merely scratches the surface of a much deeper transformation within the asset class.

VC is becoming more efficient, more transparent, more accessible, with liquidity also on the rise. New cohorts of individual LPs and smaller institutions are entering the market, contributing unprecedented flows of capital to this space.

Despite these advances, VC can still appear a bit daunting due to persistent misconceptions. The democratization of this asset class is not uncertain, the real question is “how can you participate now with foresight and a prepared mind?”

If you have not considered this, it is high time you start.

If you already have, we will guide you to invest in VC with foresight and a prepared mind. Contact us at Vertices Capital:

Venture capital is for everyone.

Learn more and contact on vertices.vc.