Why I'm Really Into Emerging Managers

"I don’t always invest in VC funds, but when I do, I choose Emerging Managers." *

What is an emerging manager?

Broadly stated, Emerging Managers are investors who are early in their career of raising and running a venture fund. A tighter definition can include “smaller” fund sizes (less than $100M, for example) and only up to 2 or 3 fund vintages. For example, Heather Hartnett of Human Ventures said last year at All Raise Summit that an Emerging Manager is “… somebody who is raising or who has raised a sub-$200 million venture capital fund, and they’re generally in their vintage of fund one, two, or three.”

In an LP meeting last fall, Mike Cardamone at Forum Ventures said he’d heard somewhere that funds and their managers graduate from the “Emerging” category when they’ve returned more capital to their LP’s than they’ve raised, which is both succint and memorable. If it can take ~10 years for a fund invested into very early stage companies to reach it’s full return potential, I’d say it’s possible to dwell in this category for a while.

What draws me to Emerging Managers?

Emerging Managers are the “early stage” of VC. They are the top of the funnel for investor talent and skill. I’ve been investing in very early stage companies, projects, and funds for the last 10 years. My experience angel investing in 50+ companies and their founders has plenty of parallels to investing in new VC funds and their managers.

An important analog from angel investing is about people and relationships. Assessing founders, their relationships with their teams, and relationships to their customers and market at the very early stage of a company is a strong signal for angel investments. Investing is incredibly relationship driven, and new fund managers have to be great at building and managing relationships with their investors and their portfolio companies. It’s all about assessing the founders or fund managers for skills and traits necessary for getting the thing started and then growing.

Investors that are early in their VC careers are often coming to it with specific experience and a viewpoint that is different to established funds. They are working in a white space or gap in the market that their experience gives them the perspective to identify and the insight to tackle as an investor. For example:

An early career as an operator in medical devices and consumer goods, working with manufacturing, supply chain, and logistics, gave Amber Illig the formative experience that shaped her thesis for The Council Fund, focused on what what she calls Software’s Third Act: updating the super-complex foundational industries that are at the core of our economy.

These investors are also often rule-breakers, which is a great symptom of creativity. They’re doing many things for the first time as they raise and deploy their nascent funds. And they’re contending with a lot of constraints on resources - they have less money, small or non-existant (yet!) teams, smaller networks, more operational overhead on their plate, etc. Fresh perspective and the need to find solutions to a myriad of challenges pushes them to do things differently, simply to make things work. Different is often better because it’s optimized for an evolved set of circumstances. For example:

Mallun Yen leveraged her legal background to pull together a roster of incredible and extremely diverse growth-stage operators as strategic LPs in Operator Collective’s Collective Venture Model.

I’m an optimist. Investing is inherently an optimistic activity, looking out to a future where something will change for the better. I am curious about a lot of things and love learning and finding parallels and relationships between what I know and what I’m finding out. Emerging managers are doing new things at a higher rate, learning as they go.

Why not bigger or later stage funds?

I was in the right time and place, with the right interests and goals, to invest in emerging managers starting 10 years ago, when they were fewer and farther between. These days, there’s a lower barrier to entry into both starting companies and raising and deploying funds. The appeal and availablity of emerging manager funds is a bit more obvious now, and I have the advantage of having built a portfolio of funds and a practice around assessing managers and their strategies.

My thesis and investments as an angel investor focus on 1) leading edge AI and data technologies, 2) inclusive fund and business models, and 3) diverse experience and perspectives. That means my network is filled with people that are more likely to be taking the plunge to work on catalyzing change through investing.

I prefer the long game of starting at the very beginning. The potential for really big returns and major impact is motivating, and it takes time and learning to get there. I’m comfortable with the higher risk of starting early, Yes, failure rates are high. And we learn more from failure than success. The amount of time and work ahead of the funds that are going to be successful is enough runway to make systemic change possible, on top of economic gains.

What’s your take on Emerging Managers?

If you’re into investing (or just VC-curious), consider emerging managers and their unique traits as potential investment targets, investors for your startup, or partners. Emerging managers are a dynamic and diverse group that are the tip of an opportunity iceberg. If you know some great emerging managers, share something interesting that they do in the comments here or just generally with your network and raise awareness. If you are an emerging manager, share what you’re working on and what emerging manager traits you idenify with - I want to hear about it and so will the wider world of your extended network. And stay tuned for my next post.

Next up: What do I look for in an Emerging Manager?

* I find this call-back to those old Dos XX beer commercials extra delicious because I work hard to get women, with our XX chromosomes, into investing. I love a clever play on words. (TBC: I don’t agree with or condone every concept in this ad campaign.)