Venture capital limited partners have retreated into megafunds during economic uncertainty, betting that size equals safety. Sara Zulkosky, co-founder and managing partner of Recast Capital, argues this strategy sacrifices the outsized returns that define venture investing.

The flight to megafunds reflects risk aversion among institutional LPs. Larger funds feel safer in downturns, but size constrains performance. Megafunds must deploy billions across mature companies and proven founders. Smaller, emerging managers operate in the opposite environment. They back earlier-stage founders and untested markets where venture returns actually compound.

Zulkosky's thesis cuts against conventional wisdom. Institutional LPs have consolidated capital into fewer, larger vehicles over the past decade. This concentration accelerates in recessions. But Recast Capital specifically backs emerging managers—a contrarian bet that smaller funds with focused theses outperform bloated competitors.

The data supports her position. Academic research on venture returns consistently shows that smaller funds with strong founder relationships generate higher multiples than megafunds chasing scale. A $500 million fund writing $20 million checks operates differently from a $5 billion fund. The smaller manager moves faster, maintains deeper founder networks, and participates in earlier rounds where venture returns concentrate.

The irony is timing. Economic uncertainty actually creates opportunity in venture. Founders become cheaper to back. Competition from megafunds decreases. Smaller managers with dry powder and conviction can build outsized returns precisely when crowded money retreats to safety.

Recast Capital's position reflects a broader market divergence. LPs optimizing for risk are concentrating in megafunds. LPs optimizing for returns are diversifying into emerging managers. The gap between these two approaches has widened since 2022. Founders and angels increasingly fund rounds that megafunds pass on, creating openings for smaller vehicles willing