EP279: Why Size Becomes the Enemy of Venture Returns w/Logan Allin
Timestamps are as accurate as they can be but may be slightly off. We encourage you to listen to the full context.
Podcast Summary
Logan Allin, Founder and Managing Partner of Fin Capital, discusses the structural changes happening in private markets and why traditional venture capital is breaking down in this liquidity-constrained environment. (01:19) The conversation explores how secondaries are becoming a primary liquidity mechanism, the dangers of unconstrained fund sizes, and why discipline—not optimism—separates enduring managers from those destined to fail. (09:26) Allin explains how Fin Capital built a full-lifecycle platform across venture and late-stage secondaries, managing over $1.5 billion in assets with 130 portfolio companies. The discussion also covers his contrarian investment approach, including bold predictions about market consolidation and why he believes OpenAI will fail.
- Main themes include the breakdown of venture capital without liquidity, the rise of secondaries markets, fund size constraints, and contrarian investing strategies in an increasingly competitive landscape.
Speakers
Logan Allin
Logan Allin is the Founder and Managing Partner of Fin Capital, a firm he launched as a solo GP in June 2018. He has grown the firm to manage over $1.5 billion in assets with 130 portfolio companies and 25 team members, focusing exclusively on enterprise software for financial services across the full lifecycle from pre-seed to pre-IPO. Allin is known for his contrarian investment approach and expertise in both traditional venture capital and late-stage secondaries markets.
Key Takeaways
The Venture Capital Liquidity Crisis is Creating Fundamental Market Shifts
The lack of liquidity is causing venture capital to break down as a functioning asset class. (01:19) Without the virtuous circle of exits returning capital to LPs, the traditional venture model faces unprecedented challenges. Companies are staying private longer, with typical venture funds extending from 10 years to 15+ years, and even adding continuity vehicles. This creates a cascading effect where early-stage VCs are increasingly using secondaries as their primary exit mechanism rather than traditional IPOs or M&A. The secondaries market now has approximately $200 billion in dry powder specifically to support this trend, fundamentally altering how venture capital operates and returns capital to investors.
Fund Size Constraints Are Critical for Alpha Generation
Every dollar raised over $400 million in venture funds has diminishing returns, according to the Kauffman Foundation research. (10:52) This creates a fundamental tension between asset gathering for management fees versus actual alpha generation - you cannot have both effectively. Benchmark's success with size-constrained funds and academic research consistently show that larger fund sizes make it exponentially harder to achieve top-tier returns. The persistence of top quartile performance that many cite historically doesn't necessarily apply when fund sizes increase 10x, yet many managers are making this logical error in their strategy.
Secondaries Markets Offer the Most Inefficient Alpha Opportunities
Late-stage pre-IPO secondaries represent the most inefficient market in private markets because most institutional capital focuses on buying portfolios rather than individual companies. (04:50) This creates significant bid-ask spreads, with discounts as high as 50% for assets priced between 2018-2021. The market requires extensive diligence work that many participants aren't willing to do, creating structural advantages for specialists. Unlike the increasingly efficient GP-led secondary market where bankers run competitive processes and "closest to NAV wins," direct company secondaries require deep company-specific knowledge and relationships.
Contrarian Positioning During Market Euphoria Creates Sustainable Returns
Going against market trends during periods of exuberance, like the ZERP (Zero Interest Rate Policy) era, can generate significant alpha if executed correctly. (22:09) In 2021, Allin raised capital but chose not to deploy it due to nonsensical market valuations, instead raising smaller pre-seed/seed funds at low valuations. This contrarian approach proved prescient as interest rates rose and valuations corrected. The key is having LPs who believe in your thesis and can withstand short-term pressure, even if it means losing some "weaker hand" investors who don't understand the long-term strategy.
Specialization and Customer Access Create Unfair Advantages
Deep domain expertise combined with direct customer relationships provides sustainable competitive advantages in venture investing. (30:58) Fin Capital's focus on enterprise software for financial services, combined with CISOs in their LP base, creates direct validation paths and commercial opportunities post-investment. This specialization allows them to derisk investments through proof-of-concept work and expert networks while building deeper relationships that transcend individual deals. The approach enables them to add genuine value through business development and corporate development rather than just providing capital.
Statistics & Facts
- Fin Capital manages over $1.5 billion in assets with 130 portfolio companies and 25 team members. (00:20) This demonstrates the scale Logan Allin has achieved since starting as a solo GP in 2018.
- The secondaries market has approximately $200 billion in dry powder on the sidelines. (02:12) This massive amount of capital specifically supports the trend of companies staying private longer.
- Every dollar raised over $400 million in venture funds has diminishing returns according to Kauffman Foundation research. (10:52) This statistic highlights why fund size constraints are critical for performance.
