Chasing Outliers: Venture Capital in the AI Era

Key takeaways:

• Set client expectations appropriately: Venture capital is front-loaded in risk and back-loaded in returns, and value creation is concentrated in a small number of later-stage exits.
• Tilt toward smaller funds for return potential: Sub-$350 million funds have meaningfully outperformed larger vehicles on both internal rate of return (IRR) and total value to paid-in capital (TVPI).²
• Use larger funds for access: Larger funds provide exposure to scaled AI leaders and late-stage opportunities but face mathematical constraints that compress return multiples.
• Prioritize manager selection: Performance dispersion is wide, and access to top-tier managers is critical.
• Commit consistently to capture multiple vintage years: Venture outcomes are driven by a small number of investments, and predicting which vintages will outperform is challenging.

Investing in venture capital

Venture capital finances early-stage companies with the potential for rapid growth and significant value creation. Early-stage investing, typically Series A or Series B, carries more uncertainty because business models are still being proven, but it also offers greater potential upside. One reason is ownership: lead investors can often secure equity stakes of roughly 20%.³

Later-stage investing, by contrast, offers more visibility into product-market fit, revenue traction, and business durability, but usually with lower return potential. Competition for these deals can drive valuations higher and ownership stakes lower. That tradeoff is central to capturing power-law outcomes: larger equity positions in successful companies translate into greater upside.

The challenge of scale

The largest venture firms are highly sought after because of their capital base and long track records. But scale can work against performance. By the law of large numbers, bigger funds need multiple exceptional outcomes just to return invested capital, making it harder to generate outsized results.

In larger, later-stage funds, the math becomes more demanding. A $10 million investment that returns 10x has limited impact on a $1 billion fund, meaning a fund of this size requires multiple large wins to generate scaled returns. And because the largest venture funds can now exceed $10 billion, they must put more capital to work across more companies. Those larger check sizes usually target more mature businesses, where ownership stakes tend to be smaller and upside more constrained.

Smaller funds, by contrast, need fewer successful investments to generate strong returns. A $100 million fund with 40 investments can reach upper-quartile performance with just one or two major winners. The performance data reflects that advantage: funds under $249 million have generated a median IRR of 36%, versus 24% for funds above $250 million.⁴

The AI tailwind

The surge in AI-related companies has arguably overshadowed some of these dynamics. In 2025, AI companies accounted for about 65% of total U.S. venture deal value, much of it concentrated in a small number of mega -rounds.⁵ That expanding opportunity set gives large funds more room to deploy capital, while rich valuations and the prospect of AI-driven hypergrowth have pushed deal sizes higher.

AI is also intensifying the power-law dynamics that define venture capital. This cycle’s biggest winners—companies such as SpaceX, Anthropic, and OpenAI—are so much larger than prior outliers that they are concentrating an even greater share of industry returns in a handful of outcomes. In 2025, mega-deals (rounds over $100 million) made up just 3.2% of deals but 67% of total deal value.⁶ These companies also have more venture rounds than prior cycles given their elongated pathways to IPO—in 2025, the venture growth stage deployed $126.9 billion across 937 deals.⁷ While further series of capital raises provides entry points for investment, skyrocketing valuations and smaller portions of equity captured result in difficulty generating an outsized return.

Accessing venture capital

Access to venture capital, especially smaller funds with potentially higher return profiles, remains limited. First-time fund formation fell to 101 funds in 2025, the fewest since 2011 and nearly 78% below the 457 launched in 2021.⁸ At the same time, the top 10 funds captured 33% of all venture fundraising, up from 13% in 2021, further concentrating capital among larger firms.⁹ For advisors, that scarcity reinforces the value of relationships with emerging managers and curated emerging manager platforms. These channels can provide exposure to smaller, more focused strategies while helping reduce the sourcing and due diligence burden on individual practices.

Manager selection is even more critical in venture capital

Manager selection matters more in venture than in any other private markets asset class. Roughly 3% of deals have generated nearly half of total returns, while almost half of deals were done at less than 1x (Exhibit 3). The gap between top- and bottom-quartile managers is also wider in venture than in any other alternatives category. Taken together, the data on fund size, ownership, and power-law dynamics point to the same conclusion: manager selection is critical.

Advisor due diligence should emphasize a manager’s ability to identify and capture outlier outcomes, not just produce modest gains, and should also assess:

• Sourcing networks
• Ownership discipline
• Portfolio construction philosophy
• Sector specialization

Trying to time venture commitments can be counterproductive. Instead, advisors should follow a disciplined pacing strategy by committing capital annually across multiple vintage years. That approach improves the odds of participating in the few vintages that drive most long-term returns, while also helping smooth the J-curve and create a more predictable distribution profile over time.