The Small Fund Conundrum
Why smaller funds are harder to raise—but may deliver better returns
There’s a quiet contradiction at the heart of private equity and venture capital: smaller funds are harder to raise, yet they consistently outperform larger ones.
At True Beauty Ventures, we’ve chosen to build our platform around smaller, high-conviction funds. We focus on emerging beauty and wellness brands, categories where early insight, agility, and deep operational support matter. And we have seen the benefits of staying small and focused firsthand.
But this is far from the path of least resistance.
Institutional LPs often shy away from smaller funds due to minimum commitment sizes and concentration limits. If an LP’s minimum investment is $20M, and a fund is only $100M in size, that’s 20% of the fund, which is too much exposure for many institutions. This means smaller fund managers must rely more heavily on family offices, high-net-worth individuals, and select institutional relationships, adding complexity and time to the fundraising process.
Meanwhile, GPs face their own incentives. Raising a larger fund typically means more in management fees, which can offer financial stability and help grow a platform faster. It’s understandable why many GPs feel pressure to go bigger.
But going bigger doesn’t always mean going better.
The data is clear: funds under $250M in size have delivered superior performance, especially those under $100M. And this isn’t just a one-off anomaly, it has held true across multiple vintages and cycles.
PitchBook has also highlighted the strength of emerging managers, noting that first- and second-time funds account for a disproportionate share of top-quartile returns, particularly in niche, founder-led industries.
📊 Chart 1: Top-Quartile Performance by Manager Tenure
Manager Type Top Quartile Rate
First-Time Funds 42%
Second-Time Funds 36%
Third-Time+ Funds 26%
Source: PitchBook, 2023 Emerging Manager Report
So why do smaller and newer funds tend to outperform?
More agile capital deployment: Smaller funds can move faster and don’t require billion-dollar exits to drive meaningful returns.
Better alignment with founders: Emerging managers tend to be closer to the companies they invest in, often offering more strategic value.
Focused, niche strategies: Specialization drives deeper conviction and better selection, particularly in sectors like consumer and beauty.
Less competition: Smaller funds can operate in areas that are too “small” for larger institutions, giving them access to overlooked deals.
Sector specialization matters more than ever in today’s fragmented and saturated consumer landscape. In beauty, domain knowledge, founder access, and operational expertise are critical to identifying breakout brands early and supporting them through inflection points. At True Beauty Ventures, we intentionally align our fund size with our sector-specific strategy. By keeping our fund under $100M, we can make investments between $3-7M that are still meaningful to the overall performance of the fund. This sizing discipline allows us to invest early, lead rounds, and maintain a hands-on role without the pressure to over-allocate capital simply to deploy.
This is what we call the Small Fund Conundrum: GPs must choose between building something easier to raise or building something more likely to deliver stronger returns.
At True Beauty Ventures, we have chosen the latter.
We remain committed to our sector focus and fund size discipline because we believe it’s where the best risk-adjusted returns live. We have seen firsthand that niche, high-growth consumer brands are often underserved by larger funds, and that our operational support and category expertise can make a measurable difference.
We do not aspire to raise the largest fund on the market; however we do aspire to generate the strongest returns by doing what we know best.
🔁 Conclusion: Small by Design, Not by Accident
In a capital-rich world, size often becomes the metric of success. But for us, staying small is not a limitation, it is a strategy. And if the data is any indication, it is one worth sticking with.
If you’re an allocator interested in emerging managers or just someone who believes in sector focus over scale, we would love to connect. Because in our view, the best things in beauty (and investing) come in smaller packages.