I don't what video format is being used by the AVI that Vegas is creating, but there are many, many options to choose from. AVI doesn't necessarily have to be large, it really depends on the codecs within the container. File extensions like AVI, MPG, MKV are just containers. Each container supports a combination of video and audio codecs that can be stuffed into them, within certain parameters and pairings, and get it to work. MKV is the most pliable, in that it supports almost everything. Have a look at
this for some detailed comparisons of each container.