Episode summary
Why Size Becomes the Enemy of Venture Returns
How I Invest With David Weisburd
· · 34 min · Hosts: David Weisburd · Guests: Logan Allin
Summary
Logan Allin says venture capital breaks when liquidity disappears because the asset class depends on a virtuous circle of exits, recycling capital, and clear marks. He argues that companies are staying private longer, secondaries are becoming the main liquidity mechanism, and the most attractive niche is late-stage pre-IPO secondaries, where Fin Capital can buy at meaningful discounts and underwrite with better information from existing positions.
He also argues that venture returns deteriorate as fund size grows. Citing work from the Kaufman Foundation and Benchmark, he says every dollar raised over $400 million in venture has diminishing returns, and that many managers drift from alpha generation into asset gathering. In his view, pricing in private markets is driven by competition rather than fundamentals, so firms need a clear size discipline and a differentiated strategy to avoid becoming zombie funds.
Allin is skeptical of retail capital flowing into blind-pool venture funds and warns that hype around AI, crypto-like behavior, and huge private-market allocations can mislead investors. Fin Capital’s approach is to stay focused on enterprise software for financial services, favor orchestration and application layers in AI, and keep optionality through venture, growth, and late-stage secondaries.
Key takeaways
- Allin says lack of liquidity is the structural problem in venture, because long fund lives and fewer IPOs make capital recycling harder.
- He believes late-stage pre-IPO secondaries are the most inefficient and attractive part of private markets, with discounts sometimes as high as 50%.
- Allin cites the Kaufman Foundation and Benchmark to argue that venture funds above $400 million face diminishing returns.
- He warns that many managers have shifted from alpha generation to asset gathering, which he says turns the business into winner-take-most.
- He says retail capital is a poor fit for blind-pool venture funds because J-curve risk and duration are hard to explain and underwrite.
- Fin Capital is positioning around enterprise software, AI orchestration and application layers, cyber, and quantum-aware security.
Notable quotes
“the lack of liquidity is a real problem. uh this asset class kind of breaks down when you don't have that virtuous circle”
“if a company reaches 2 to 5 billion, you should be taking money off the table, right? That's just thoughtful risk management”
“the latestage preipo secondary market uh is the most inefficient market in private markets broadly and the most attractive from an alpha perspective”
“every dollar you raise over 400 million has diminishing returns”
“pricing in private markets is driven by competition not fundamentals”
How the episode opens
So Alan Zaffron, founder and managing partner of IQ Capital, said that roughly half of managers are on their last fund without ever knowing about it. — Yeah, — They're not aware of that. I I want to get into that. But first, just as a level set, tell me about where Finn Capital is today from an AUM and size standpoint.
So public information, we manage over one and a half billion in assets. We have about 130 portfolio companies and 25 team members. About 17 of those are investment professionals. Uh we continue to exclusively focus on enterprise software for the financial services industry. Uh full life cycle from preede to preipo.
And you started as a solo GP.
I did. Yeah. So I started a solo in June of 2018.
Uh raised my first two funds. Uh our VC flagship product and then a growth and late stage focus product. And uh I didn't plan to be solo.
Uh, but it took really a couple years to start hiring cuz I ran right into COVID. Uh, and that made it very difficult to have in-depth conversations and relationship building and so forth to make those initial hires. But we got those done at the end of 2020 and and now we're 25 people.
A lot of LPs, even GPS privately tell me they don't really know what's going on in the venture market today. What makes this market different than any other market? — I think the lack of liquidity is a real problem. uh this asset class kind of breaks down when you don't have that virtuous circle and that has made our lives a lot more challenging in raising capital and educating on the asset class. Venture as we all know has significant power law return dynamics.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- venture capital liquidity
- private market secondaries
- fund size and performance
- zombie funds
- ai investing alpha
Companies and tickers mentioned
- SOFI
- Fin Capital
- SoFi
- OpenAI
Watch the episode
Watch “Why Size Becomes the Enemy of Venture Returns” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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