The Myth of the “Fund Returner” and Why mitigating losses often beats chasing unicorns
“This will be our fund returner.”
I’ve heard this line from countless fund managers after writing a check into an exciting new company. It’s a moment filled with optimism — and occasionally, ego. The thinking goes: If this company hits, we’re golden. It could return the entire fund.
But in most cases, that optimism isn’t backed by math.
Most people don’t fully understand what it actually takes for a single investment to return a fund — especially after factoring in dilution, management fees, and portfolio construction strategy. That disconnect creates a false sense of security around a portfolio’s performance potential and distracts from one of the most powerful drivers of long-term returns: avoiding zeroes.
Let’s dig into what it really takes to return the fund — and why focusing on fewer losses can often outperform the pursuit of a single massive win.
The math behind returning the fund
Let’s assume you’re managing a $100M fund. After a standard 2% management fee and $5M in total expenses, your investable capital is closer to $85M.
Now let’s say you deploy that capital evenly across 25 companies — no reserves strategy, just naive diversification.
If 24 of those companies go to zero (which, unfortunately, is not that rare in early-stage venture), your one remaining company needs to return ~30x just to return the fund to 1x net of fees.
That’s an enormous ask.
But if those other 24 companies each return just 0.5x, suddenly your big winner only needs to deliver ~14x. Still ambitious — but far more achievable.
Here’s a visual breakdown of how much a single investment must return, depending on how many companies are in the portfolio:
Why we over-index on outliers
Venture capital, by its nature, is a power-law business. Most managers accept (and often expect) that one or two companies will carry the fund.
But this mindset often leads to two mistakes:
Over-indexing on a single company’s potential while ignoring the underlying probability of a true breakout.
Neglecting the “middle of the pack” companies that could return 0.5–1x if given a little more time, capital, or support.
Many managers give up on companies that aren’t growing fast enough, raising their next round, or fitting the narrative. But getting any return from those companies — even partial — can meaningfully change your fund’s performance.
0.5x > 0.0x
The difference between a total loss and a modest return is massive when measured across a portfolio. A portfolio full of zeroes and one home run is far more fragile than one where a few underperformers still return something.
And yet, many GPs treat struggling companies as sunk costs.
But in early-stage venture, companies pivot, exit unexpectedly, or stumble into niches that lead to solid outcomes. Secondaries happen. Acqui-hires happen. Getting your 0.3x back on a $1M check might not feel like a win — but if you do it consistently, it adds up. Especially if it unlocks relationships, insights, or follow-on opportunities elsewhere in the portfolio.
Supporting the middle matters
Fund performance isn’t just about picking the next Figma or Canva — it’s also about knowing which portfolio companies still have a shot at something. The overlooked founders who are still shipping, still making payroll, still building toward a smaller (but real) outcome.
By staying engaged with your portfolio — even the laggards — you can improve your odds of turning write-offs into write-downs, and write-downs into positive IRR.
In other words: your best bet isn’t always to swing harder. It’s to stop letting base hits walk off the field.
Final thought
The next time you're tempted to write off a struggling portfolio company, ask yourself:
Is it really dead — or just under-supported?
Chasing unicorns will always be part of venture. But don’t let it blind you to the boring truth:
Reducing losses is often the most powerful — and overlooked — way to improve fund performance even in Venture Capital.
