Do larger funds mean worse returns? Micro-funds + SPV are becoming the new standard for VC

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Author: Shoal Research / Odin

Translation: Deep Tide TechFlow

Deep Tide Briefing: Traditional VC blind-pool funds from a decade-long era are being replaced by a hybrid model—small managers run lean micro-funds paired with deal-by-deal SPVs for co-investment. This not only lowers mixed fees for LPs, but also lets GPs focus more on early-stage investing. This article breaks down why the “small fund + SPV” combination is mathematically and incentivally superior to a single large fund, and why co-investment is becoming an industry standard.

The era of traditional blind-pool funds is ending

The traditional VC structure is a ten-year closed-end blind-pool fund. LPs agree to let GPs manage their capital for up to ten years (often longer), with no decision rights on any individual investment. Within agreed boundaries, GPs can invest freely in any opportunity.

Clearly, this requires extremely high trust. But the design was originally built for companies managing single-digit or low double-digit millions of dollars and doing early-stage investing. Back then, when a company became an obvious opportunity in the eyes of LPs, it was often already close to an exit.

Today, the situation is totally different: there are more funding rounds per company and the amounts are larger, and LPs are also more mature. Many LPs are former founders or executives in strategic fields, and they can identify good opportunities earlier—making follow-on decision-making simpler.

At its core, the blind pool shouldn’t be VC’s default forever. Its job is to bear risk in the early stage, when venture capitalists must find conviction earlier than everyone else. But once a company shows clear traction metrics or market positioning (possibly as early as Series A, at least by Series C), lower-fee co-investment tools are often more appropriate—both lowering the cost of capital and pooling a group of LPs with aligned interests.

Better infrastructure reduces the friction of running SPVs

Over the past five years, improved back-office infrastructure has reduced the friction of setting up SPVs on a per-deal basis. Independent GPs and small partnership firms can now deploy more capital and invest more precisely through two complementary tools—“double holding”:

A small fund that lets LPs spread capital across early opportunities (which are inherently high-risk and hard to evaluate), functioning like an options portfolio.

Selected co-invest opportunities that let LPs increase their stakes as companies become more attractive, functioning like targeted investments.

Of course, both strategies have their own space depending on the LP base and GP preferences. But small-fund managers are finding it increasingly hard not to use SPVs to access co-invest. Likewise, pure-SPV managers may also be happy to operate without funds.

“I’ve had the best investments I’ve ever been part of have weird ownership structures—later we added a bit, and on top of that we layered in some opportunistic tools. Trying to make early VC’s messy stuff rigid and turn it into a model immediately forces the wrong way of thinking.”

—Enrico Melis, Animal Syndication Company

In the past, early-stage companies built relationships with large later-stage investors to access more capital. But in recent years, this strategy has become riskier as the market has consolidated into fewer companies that are interested in a narrower range of opportunities. There have even been reports that large companies are undermining the fundraising of small funds, trying to control more of the market.

Of course, there are also mid-sized funds with enough capital to continue funding later rounds of portfolio companies. If they use a reasonable process to allocate reserves with an alpha strategy, they can offer attractive returns across a larger pool of funds. But this may not fit small companies: scale can drag performance, and growing companies inevitably drift toward consensus—losing the frontier agility that independent investors or small partnerships bring.

Demand from LPs for selectivity is growing

“LP co-investment activity is expected to grow gradually in the medium term. As more institutional investors build internal resources and portfolio infrastructure, the ability to continuously co-invest centered around diversified deal flow will improve the risk-return profile of this strategy for large LPs’ direct projects, and expand the pool of LPs that can execute selectively.”

—PitchBook analyst report

In VC, demand for co-invest is already something of a meme. Everyone wants it, but it seems nobody truly knows how to use it. Still, this is likely the “growing pains” of an industry starting to treat co-invest as the ideal standard—similar to the broader private equity industry. Over time, better tools, standards, and talent will catch up with practice.

To be blunt, VC’s current desire for co-invest rights is driven largely by FOMO and blind application of power-law thinking. Essentially, if an investor encounters a “hot” portfolio company, LPs want to buy in themselves to gain status and IRR metrics.

Because this behavior is opportunistic, LPs often don’t genuinely understand what’s required—or have the process—to do these investments well. There is also an LP learning curve here.

For example, some LPs put pressure on emerging managers in tough fundraising environments, demanding SPVs with zero fees and zero carry. Eliminating carry is a poor way to bind incentives—unless the LP’s main goal is only to harvest deal flow. This handling of co-invest partly explains why GPs default to fund expansion.

Despite these frictions, co-investment activity will clearly continue to increase. This is a natural evolution as the market seeks to maximize investment opportunities while lowering blended fee costs.

The advantages of “blended” economics

In our previous article, we studied how adopting private-equity-style co-invest rights and fee tables can improve the economics of VC oversized funds. The small-market story is similar.

Imagine two hypothetical scenarios:

First, a manager raises a $10 million micro-fund to support 30 initial investments of $250k, then uses deal-by-deal SPVs (GP commits 2%, no management fee, 10% carry) to selectively follow on.

Second, a manager raises a $38.3 million fund. This is the full size needed to make the exact same investments as in the first scenario (including follow-ons) entirely from the fund itself (no SPV).

Assuming the investment outcomes of the two scenarios are the same and produce 4x total returns, the micro-fund wins on DPI because it drags less from fees.

Of course, that means less immediate revenue for a GP starting out that charges a 2% management fee. But the fund closes faster, delivers better performance, and makes future fundraising smoother. In fact, given that a $10 million fund is more likely to achieve higher multiple outcomes than a $38.3 million fund, the carry compensation gap will shrink quickly. Meanwhile, the GP still has salaries available, and LPs can access attractive deal flow.

The aggressive claim here is simple: income should be tied to performance.

Numbers are only a small part of the picture. The micro-fund wins mathematically, but that’s not actually the most important thing.

The key is that a micro-fund GP is more aligned with the success of the investments it makes. This hybrid structure incentivizes missionary GPs rather than fee mercenaries, which systematically improves investment decisions and returns.

A smaller fund also enables the GP to operate more effectively as an independent investor, maximizing the surface area of its specificity. They don’t face pressure to create hiring that isn’t needed just to justify fee income. Their fund is small enough to keep focus on the earliest stages, without the pressure to chase larger, later rounds. This is an ideal setup for investors who excel at frontier investing.

Better SPV standards

“Co-investment rights have become one of the most concrete tools for small and emerging managers to demonstrate deal access capability and deepen LP relationships. Offering co-investment rights gives LPs a tangible reason to commit capital to less well-known managers, even when they’re under liquidity pressure managing the current environment.”

—PitchBook analyst report

The market is evolving, and small managers are starting to use deal-by-deal terms more effectively. This is driven by the general trend of financing resistance and capital concentration. SPVs have become a crucial lifeline for managers to support portfolio companies in subsequent rounds.

However, this evolution is not finished yet. Before LPs can accept SPVs without worry and capture performance benefits, there is still a lot of work to do. This part is an infrastructure issue, but mainly it’s an education issue. Both GPs and LPs need to understand current standards and how to improve them.

So earlier this year, we surveyed 56 GPs.

Access the SPV survey report:

Of the 56 GPs, 51 invest at the Pre-Seed or Seed stage, 80% of the managed funds are under $100 million, and 61% have 5 years or more of venture capital experience.

Chart: SPV adoption rate by fund size. Of the 56 interviewed GPs, 39 are using SPVs, with the highest usage rate among $50 million–$100 million funds. Source: Odin SPV Survey 2026

Adoption is already high: 39 of the 56 GPs use SPVs—16 use them frequently and 23 use them occasionally. Among the remaining 17, 8 plan to start using SPVs in the future, bringing current and potential users to 84%. Adoption is highest among more experienced GPs, and among GPs managing $50 million–$100 million funds; these operators have networks that can provide capital, but reserves aren’t sufficient to cover follow-on investments.

The main use case for SPVs is follow-on capital: 47 reported using (or planning to use) SPVs, and 39 of those respondents reported this as the case.

“Our seed fund invests at the earliest stage. We use a light-reserve model, then directly use SPVs for growth-round financing. This makes a $20 million fund feel much larger for our companies, allowing us to deploy more capital on winners without running out of funds.”

—Amy Brandenburg, Denver Ventures

Economic terms are generally LP-friendly. Management fees of 0–0.5% are an explicit norm, mentioned by 45% of respondents. The most common carry is 16–20% (mentioned by 46%), but a sizable share—26%—only charges 1–10%. Two-thirds of managers pass formation and management costs directly to LPs. However, on the GP’s own lead commitment, 44% commit only 0–0.5%, and just 27% commit 2% or more.

Chart: Distribution of SPV terms. 0–0.5% management fees are the norm (45%), and carry most commonly is 16–20% (46%). Source: Odin SPV Survey 2026

Where the market disagrees on terms, there is clearly an opportunity to establish better standards—improving outcomes and removing frictions in the process. The goal should be to reduce costs for GPs, ensure they truly bear risk, keep them focused on the quality of results rather than increasing fee income, and reward LP loyalty with priority subscription rights.

“Overall we believe in the principle of dancing with the person who brought you. So even though SPVs help attract new LPs, existing LPs always come first for the opportunities.”

—Dan Kimerling, Deciens

In these cases (follow-on capital in which the GP manages fund investments), a good SPV usage template might look like this:

Chart: Aligned SPV terms template—GP commits ≥2%, management fee is 0, carry is 10–20%, formation fee is borne by LPs at cost. Source: Odin

As always, there are exceptions.

If an SPV is unrelated to the fund, then the GP’s commitment may be better understood as a percentage of the lead investor’s net worth rather than a fixed minimum.

Most importantly, SPVs must not be used as intermediary tools to disguise deal economics or shield fund performance from excessive risk. They must be constructed and provided transparently and honestly, with clear purpose and aligned incentives.

“SPV is just a tool—liking or hating them doesn’t matter. Strong feelings should be about how they’re built, whether there is two-way transparency, and how they’re managed.”

—Helen Min, Articulate

Incentives and outcomes

Finally, the simple advice to LPs.

If small funds perform better, then standard fee incentives pushing managers toward expansion is obviously crazy. If the key to consistent outperformance is to keep fund size stable (thereby keeping a consistent strategy, organizational scale, and target investment stage), then outperforming small managers should have room to raise the fee percentage—not expand the fee base.

Therefore, they are expected to seek additional capital managed through SPVs to fulfill their obligations to founders. This arrangement is also economically beneficial for LPs: it improves alignment and reduces fee drag.

In return, LPs must increase their readiness to participate in these deals—understanding the relevant terms, the costs of breaking commitments, and the portfolio construction methods required to capture performance benefits. Additionally, they must be willing to offer attractive compensation to successful co-investments through carry.

As all these elements converge over the next few years, the industry will become stronger. The shift to a higher level of co-investment represents an evolution that should have happened earlier—moving away from the absurdity of an overly stretched 10-year toolset and misguided fee incentives.