Do larger funds lead to worse returns? Micro-funds + SPVs are becoming the new standard for VC

Odin survey of 56 GPs found that 84% have already used or plan to use SPV; the hybrid model combining micro-funds with SPV mathematically outperforms a single mega-fund, with lower fee drag and more consistent incentives.
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Table of contents

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• Why did the ten-year blind pool funds fail?
• The backend technology revolution: SPV setup costs drop dramatically
• The LP follow-on investing frenzy: FOMO or rational choice?
• A mathematical proof: A ten million micro-fund beats a 38.3 million mega-fund
• SPV term template: GP commits 2%, management fee 0, carry 10-20%

Traditional venture capital’s ten-year blind pool funds are facing structural challenges. Odin’s latest SPV survey report says that small managers are replacing single large funds with a hybrid approach of “micro-funds + per-deal SPV”—which not only lowers the blended fees for LPs, but also lets GPs focus on early-stage investing. Of the 56 GPs surveyed, 84% have used or plan to use SPV, and 47 are using it for subsequent capital follow-ons.

Ten-year closed-end blind pool funds are facing structural challenges.

Traditional VC revolves around ten-year closed-end blind pool funds. LPs delegate their capital to the GP to manage for as long as ten years (often longer), with no decision power over individual deals. Within the agreed scope, the GP is free to invest in any opportunity.

This obviously requires very high trust. But this design was originally meant for companies managing single-digit or low-double-digit million USD amounts for early-stage investing. When a company becomes an obvious opportunity in the eyes of LPs, it is often already close to an exit.

The market ecosystem has changed completely: there are more financing rounds and larger amounts, and LPs are more mature. Many LPs are themselves former founders or executives in strategic domains; they can identify great opportunities earlier, making follow-on decisions simpler.

In essence, a blind pool should not be VC’s default choice forever. Its role is to take risk at the early stage, when VC must find conviction earlier than everyone else. But once a company has clear traction indicators or market standing (possibly as early as Series A, at least by Series C), lower-fee co-invest tools are often more appropriate—reducing the cost of capital while also gathering a group of LPs with aligned incentives.

Over the past five years, better backend infrastructure has reduced friction in setting up per-deal SPV. Independent GPs and small partnership firms can now deploy more capital and invest more precisely through two complementary tools via “dual holding”:

A small fund that lets LPs diversify across early opportunities (which are inherently high-risk and hard to evaluate) is essentially an options portfolio.

Why did ten-year blind pool funds fail?

Selected co-invest opportunities let LPs increase their stake as the company becomes increasingly attractive, which is targeted investment.

Of course, both strategies have room depending on LP base and GP preferences. But as micro-fund managers increasingly find it hard to avoid using SPV to execute follow-on investments, pure SPV managers may also be happy to operate without a fund.

“The best investments I’ve participated in all had weird ownership structures—later we added a bit, and stacked some opportunity-based tools on top. Trying to rigidify and turn that early-VC chaos into a model immediately forces out wrong ways of thinking.”

—Enrico Melis, Animal Syndication Company

Previously, early companies would build relationships with large later-stage investors to secure follow-on participation. But in recent years, that strategy has become riskier: capital has concentrated into fewer companies, and they are only interested in a narrower set of opportunities. There are even reports that large companies are undermining fundraising by smaller funds in an attempt to control more of the market.

Of course, there are also mid-sized funds that can keep capital supporting the follow-on rounds of portfolio companies. If they follow a reasonable process and allocate reserves using an alpha strategy, they could offer attractive returns across a larger pool of capital. But this may not fit small companies—not only would scale drag down performance, but growing companies inevitably drift toward consensus, losing the frontier agility that independent investors or small partnerships bring.

“LP co-investment activities are expected to grow gradually over the medium term. As more institutional investors build internal resources and portfolio infrastructure, the gradual institutionalization of large LP direct investment projects will improve the risk-reward profile of this strategy and expand the pool of LPs that can execute selectively.”

—PitchBook analyst report

The demand for co-invest among VC has become a running joke. Everyone wants it, but it seems like nobody really knows how to use it. Still, this is likely the industry’s “growing pains” when co-invest becomes the ideal standard—similar to the broader private equity industry. Over time, better tools, standards, and talent will catch up to practice.

To be frank, the current VC desire for co-invest rights is driven largely by FOMO and the blind application of a power-law mindset. In essence, if investors encounter a “hot” portfolio company, LPs want to buy in themselves to gain position and hit IRR metrics.

The backend technology revolution: SPV setup costs drop dramatically

Because this behavior is opportunistic, LPs often don’t truly understand—or have processes in place to competently execute—these kinds of investments. Here too is the LP learning curve.

For example, some LPs pressure emerging managers in difficult fundraising environments, demanding SPV with zero fees and zero carry. Removing carry is a bad way to tie incentives to interests unless the LP’s main goal is simply to harvest deal flow. This handling of co-invest partly explains why GPs default to fund bloat.

Despite these frictions, co-invest activity is clearly set to continue increasing. This is a natural evolution as the market seeks to maximize investment opportunities while lowering the cost of blended fees.

In our previous article, we looked at how adopting private-equity-style co-invest rights and fee schedules could improve the economics of VC mega-funds. The same is true for smaller markets.

Imagine two hypothetical scenarios:

First, a manager raises a $10 million micro-fund, supports 30 initial investments of $250k, and then performs selected follow-on co-invests using per-deal SPV (GP commits 2%, no management fee, 10% carry).

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

Assuming the resulting portfolio performance is the same in both scenarios and produces 4x total returns, the micro-fund wins on DPI because it suffers less from fee drag.

Of course, this means less immediate revenue for GPs that are just starting out and charging a 2% management fee. But the fund will close faster, deliver better performance, and make future fundraising smoother. In practice, given the premise that a $10 million fund is more likely than a $38.3 million fund to achieve higher multiples, the compensation gap caused by carry will shrink quickly. At the same time, the GP still has available salary, and LPs also get access to attractive deal flow.

The aggressive claim here is that revenue should be tied to performance.

The LP follow-on frenzy: FOMO or rational choice?

Numbers are only part of the picture. A micro-fund wins mathematically, but that’s not actually the most important point.

The key is that micro-fund GPs and the success of their investments are more aligned. This hybrid structure incentivizes missionary-style GPs rather than fee-motivated mercenary types, systematically improving investment decisions and returns.

Smaller funds also allow GPs to operate more effectively as independent investors, maximizing their surface area of distinctiveness. They are not under pressure to hire for work that may be unnecessary just to justify fee income. Their funds are small enough to keep focusing on the earliest stage without pressure to chase bigger, later rounds. This is an ideal setup for investors who excel at frontier investing.

“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 a less well-known manager, even while facing liquidity pressure in the current environment.”

—PitchBook analyst report

The market is evolving, and small managers are starting to use per-deal terms more effectively. This is driven by the overall trend of financing friction and capital concentration. SPV has become an important lifeline for managers to support investments in later rounds of portfolio companies.

However, this evolution is not complete yet; there is still a lot to do before LPs can accept SPVs without hesitation and capture performance benefits. This is partly an infrastructure issue, but mainly an education issue. Both GPs and LPs need to understand current standards and how to improve them.

That’s why earlier this year we surveyed 56 GPs.

Get the SPV survey report: https://spvsurvey.joinodin.com/

Of the 56 GPs, 51 invest in Pre-Seed or Seed stages, 80% of the funds they manage are under $100 million, and 61% have five years or more of venture capital experience.

Mathematical proof: A $10 million micro-fund beats a $38.3 million mega-fund

Chart: SPV adoption rate by fund size; among 56 surveyed GPs, 39 are already using SPV, with the highest adoption in the $50 million–$100 million fund range. Source: Odin SPV Survey 2026

Adoption is already high. Of the 56 GPs, 39 use SPV, including 16 who use it frequently and 23 who use it occasionally. Among the remaining 17, 8 plan to start using SPV in the future, bringing current and potential users to 84%. Adoption is highest among more experienced GPs, and among those managing $50 million to $100 million funds; these operators have networks that can provide capital, but reserves are not sufficient to cover later investments.

The main use case for SPV is follow-on capital. Among the 47 respondents who said they use (or plan to use) SPV, 39 reported this as their use case.

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

—Amy Brandenburg, Denver Ventures

Economics terms are typically LP-friendly. A management fee of 0–0.5% is the clear norm, mentioned by 45% of respondents. The most common carry is 16–20%—mentioned by 46%—though a sizable portion of 26% charges only 1–10%. Two-thirds of managers pass formation and management costs directly to LPs. However, on the GP’s own lead-invest commitment, 44% commit 0–0.5%, while only 27% commit 2% or more.

Chart: SPV term distribution; management fee 0–0.5% is the norm (45%), carry most commonly 16–20% (46%). Source: Odin SPV Survey 2026

Where the market is split on terms, it’s clearly an opportunity to establish better standards—improving outcomes and eliminating friction in the process. The goal should be to lower costs for GPs, ensure they truly take risk so they focus on the quality of results rather than adding fee income, and reward LP loyalty with preferential subscription rights.

SPV term template: GP commits 2%, management fee 0, carry 10–20%

“Overall we believe in the principle of dancing with the people who bring you. So while SPV helps attract new LPs, existing LPs always get priority for access to opportunities.”

—Dan Kimerling, Deciens

In these situations (where the GP invests follow-on capital), a good SPV usage template might look like this:

Figure: Aligned SPV term template—GP commits ≥2%, management fee 0, carry 10–20%, formation fee paid by LP at cost. Source: Odin

As always, there are exceptions.

If the SPV is not tied to the fund, then the GP’s commitment might be better understood as a percentage of the lead investor’s net assets rather than a fixed minimum.

Most importantly, SPV must not be used as an intermediary tool to obscure deal economics terms or shield fund performance from excessive risk. They must be structured and provided transparently and honestly—with clear objectives and aligned incentives.

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

—Helen Min, Articulate

The final element is a simple piece of advice for LPs.

If smaller funds perform better, then standard fee incentives will push managers toward expansion, which is obviously crazy. If the key to sustained outperformance is to keep fund size (thereby maintaining consistent strategy, organizational scale, and target investments), then outstanding small managers should have room to raise fee percentage rather than expand the base of fees.

So they should be expected to seek to manage additional capital through SPV in order to meet obligations to founders. This arrangement is also economically beneficial for LPs—improving alignment and reducing fee drag.

In return, LPs must raise their readiness to participate in these deals: understand the relevant terms, the cost of breaching commitments, and the combination approach needed to capture performance gains. They must also be willing to provide attractive compensation for successful syndicate investing through carry.

As all these elements converge over the coming years, the industry will become stronger. Moving to a higher level of co-investment represents an evolution that should have happened earlier—escaping the absurdity of an overly stretched ten-year toolset and misguided fee incentives.