The largest VC fund of all time

New Enterprise Associates (NEA) recently announced the closing of its $2.8 billion fund. This is the firm’s fifteenth fund and it largest fund to date, surpassing the $2.6 billion fourteenth fund that it raised in 2012.

The increase in the size of VC funds is the result of two factors.

The first is the growing importance of technology in our every day lives. Together with mobile platforms, people who couldn’t access the internet in the past are now able to. In addition, since we now always have the internet with us, we’re always accessible. This gives consumer and enterprise internet companies a larger target market than ever before.

The second reason is that companies are staying private much longer. While the core reason why companies are doing this is to avoid public scrutiny, it’s only possible because of the appetite which large investors who traditionally invest in public markets have for private tech companies. As a result of the slow growth of traditional sectors, large investors like private equity funds and hedge funds are searching for returns in the technology sector. This creates competition for VC funds that resort to growing larger in order to win late stage deals over their otherwise better capitalized competitors.

The problem is that, in their search for returns, large non-VC investors are extending beyond their domain of expertise. They are driving up the valuations of late stage private tech companies, a topic I explored in an earlier post. While everyone is happy as long as valuations keep rising, these sources of capital aren’t committed to the tech sector. When the tide turns, they will likely leave as fast as they arrived.

The first reason for the increase in the size of VC funds is because of the tech sector’s fundamentals, and the second is the result of a temporary market dynamic. When non-dedicated sources of capital leave the market, VC funds will have less competition for late stage deals and this will likely lower their fund sizes. We’re therefore likely to see fund sizes fall below this $2.8 billion peak in the coming years.

When this happens, the fundamental factors supporting the tech sector’s growth will return to being the key drivers of fund sizes.