Defer to OP but that feels like bit lazy apologist framework for status quo.
A few (unsubstantiated) guesses at reasons to counter:
1 - Medium risk medium reward opportunities exist (a currently unprofitable but otherwise promising startup addressing a 25m niche can't get bank debt or venture funding)
2 - Could decrease risk holding reward (avg. multiple of investment) constant by having small funds with managers that have deep knowledge of particular niche deploy smaller checks in markets they are better at evaluating (v. large fund managers needing to cast net wider than their "lane")
3 - Size expectation can be correlated with risk. Can decrease risk holding reward (avg multiple of investment) constant by just having smaller funds writing smaller checks for smaller companies that be happy with smaller exits or alt. upside capture (v. forcing companies that could work with small exits into chasing big inflexible exits). Sure no 100x-ers but theoretically could see higher blended fund returns
4 - Opportunities generally continuous on risk and reward calling for equally diverse approaches to capitalization
> 1 - Medium risk medium reward opportunities exist (a currently unprofitable but otherwise promising startup addressing a 25m niche can't get bank debt or venture funding)
I think one of the main arguments in favor of a bimodal distribution of VC and Bank (or high and low risk) funding is that if you are in that middle "medium risk medium reward" zone it can be really difficult to defend your position for any stretch of time. You will be attacked from both bigger players to whom you've proven a market, and smaller players who are willing to take bigger risks to see if they can blow that market up (or bite off a smaller piece of it).
In order to maintain a medium risk medium reward business you need something approaching a monopoly, but also you need the market in which you have a monopoly to be growing and not attracting new players. Maybe some of these exist, but they are very rare and I suspect identifying them is not significantly easier than identifying startups with high growth potential.
So I think skrebbel's question is pretty fair, though I suspect OP has heard it a lot. I would predict that this fund passes on WAY more deals than even a standard VC fund, and will be required to determine the risk of the investment even more effectively. That's a tough problem, and I do really wish them luck!
A few (unsubstantiated) guesses at reasons to counter:
1 - Medium risk medium reward opportunities exist (a currently unprofitable but otherwise promising startup addressing a 25m niche can't get bank debt or venture funding)
2 - Could decrease risk holding reward (avg. multiple of investment) constant by having small funds with managers that have deep knowledge of particular niche deploy smaller checks in markets they are better at evaluating (v. large fund managers needing to cast net wider than their "lane")
3 - Size expectation can be correlated with risk. Can decrease risk holding reward (avg multiple of investment) constant by just having smaller funds writing smaller checks for smaller companies that be happy with smaller exits or alt. upside capture (v. forcing companies that could work with small exits into chasing big inflexible exits). Sure no 100x-ers but theoretically could see higher blended fund returns
4 - Opportunities generally continuous on risk and reward calling for equally diverse approaches to capitalization