A VC firm with a bloated fund size faces a dilemma: write larger checks or make too many investments. Both have negative results on returns. Larger checks limit the scope to later stage investments with larger valuations— where a 10x return on capital is less likely. Meanwhile increasingly the number of investments a fund makes beyond the manageable 20-30 count, a strategy often dubbed spray and pray, has historically resulted in poor returns. Most firms have opted to write larger check sizes. Thus, median pre-money valu- ation for a Series A investment has also increased from $6M in 2003 to $14M in 2015. While a Series A investment in 2002 typically started at the inception stage, today a Series A investment only takes place well after product market fit has been established. Larger fund sizes not only created an inflation in lat- er stage valuation, but also created a funding gap for early stage companies. More importantly, they resulted in mediocre returns. The loss of focus Historically, the Venture Capital industry focused on technology based invest- ments with high gross margins. Once a technology product takes off, busi- nesses can garner substantial valuations (whether via an IPO or an acquisi- tion) and return a handsome multiple on the initial investments. As more money funnels into the industry, however, Venture Capitalists tend to invest into auxiliary industries—from Clean Technology in the mid 2000s to Introducing software into online retail and, most recently, restaurants and coffee shops years. The clear majority of these investments resulted in substantial loss of capital. an existing industry does not increase the margins Most investors point out that investments in these areas had a technology or the valuation multiple focus—be it a disruptive new battery technology or an improved food order- for the business ing process. But we now know that introducing software into an existing in- dustry does not create venture return: specifically, software by itself does not increase the unit economics, the gross margins, or the valuation multiple of the business. A close look shows that financial tech companies are starting to trade at valuations more similar to a bank than to Facebook. Similarly, we believe Tesla will eventually trade with the multiples of an auto manufacturer. For VC funds to realize outsized returns, they must resist the temptation to expand into industries outside of technology or to products that lack the high gross margins necessary for venture return.