Isn't the entire premise of venture capital that you only make money off the big winners? Assuming lifestyle businesses fail at similar rates as venture-backed companies, the way to maximize returns is to invest in the companies with the biggest potential upside.

In other words, how many $10/month SaaS companies would it take getting acquired to match the return of your average $300M VC-backed exit?

Don't say 37signals. 37signals is an outlier in the same way Instagram is an outlier. The existence of either of these proves nothing.

By definition a mid-growth business will NEVER generate the returns needed to sustain a venture fund.

I don't think it's fair or the most beneficial to society that VCs only invest in high-risk, high-potential businesses. But that's the only way the math could work. You can't argue with math. The only exception would be funds like YC that can invest very small amounts at very low valuations and make money from acqui-hires.