5 reasons LPs should reconsider their VC partners in a chaotic era (inspired by Netflix's '3 Body Problem') In the "3 Body Problem" book and Netflix series, an alien civilization fluctuates between two eras: stable and chaotic. Their planet, Trisolaris, is easily inhabitable in a Stable Era. During a Chaotic Era, however, their three suns orbit unpredictably, creating uninhabitable climates. We’ve been thrust into our own equivalent of a Chaotic Era while navigating the post-ZIRP aftermath and slowdown in M&A and public markets. Many institutional investors seek stability amid uncertain times like these. They often go with “established” #VC fund managers (=GPs with 4+ funds) over “emerging” ones (3 or fewer funds). It's the safer bet, but is it the smarter one? Conventional wisdom assumes that firms with more experience can better weather unfavorable investing climates. Yet new data from PitchBook turns that thinking on its head. Here are 5 reasons LPs should partner with up-and-coming VC firms: 1) SUSTAINED SUCCESS: “From 1997 onward, emerging managers have delivered a higher median IRR than established managers.” 2) TOP-END RETURNS: “For VC managers that deliver top-decile returns, the best-performing emerging managers have generated 15.9% in excess IRR, 3.6% higher than their established counterparts.” 3) GREATER UPSIDE: “Emerging managers tend to be smaller, which can increase the potential upside that a GP can achieve due to the diminishing returns of larger-scale firms.” (Note: The performance of emerging managers is also more volatile, so careful vetting is key.) 4) ALIGNED INCENTIVES: “Smaller size also means lower management fees in nominal terms, making performance incentives a bigger driver of smaller GPs’ economics, amplifying interest alignment with LPs.” 5) UNIQUE OPPORTUNITIES: “Emerging managers can provide attractive upside or exposure to niche strategies that are tough to replicate in other parts of an LP’s portfolio.” It’s clear that LPs that do not make room for emerging managers in their portfolios are doing their investors a disservice. #VentureCapital #Investing #SiliconValley #VC #privatemarkets #capitalallocation
Sunny Dhillon’s Post
More Relevant Posts
-
Series: Advanced Techniques in VC Fund Portfolio Management Strategic Adaptation to Market and Economic Changes: A Critical VC Insight Adapting to market trends and economic shifts necessitates a sophisticated approach to portfolio management that many VCs tend to overlook. This involves rigorous monitoring of macroeconomic indicators, sector-specific trends, and regulatory changes. For instance, during the COVID-19 pandemic, the ability to swiftly pivot strategies was vital. Many VC funds successfully increased their investments in digital health, remote work technologies, and e-commerce sectors by 35%, demonstrating the importance of agility. However, this level of responsiveness is not uniform across the industry. Advanced scenario planning and stress testing techniques are crucial yet often underutilized. Simulating a 20% market downturn, for example, provides valuable insights into potential vulnerabilities and opportunities within the portfolio. This proactive approach allows fund managers to reallocate resources effectively, support portfolio companies through economic uncertainties, and sustain performance. However, it is also critical to avoid basing strategies solely on short-lived market trends. While reacting to immediate changes can provide quick wins, a long-term perspective is essential for sustainable growth. Many VCs make the mistake of chasing fleeting trends, only to face setbacks when these trends fade. Despite the clear benefits, many VCs fail to integrate such dynamic and balanced strategies into their operations, resulting in missed opportunities and unmitigated risks. By embracing flexibility, foresight, and a long-term vision, VCs can significantly enhance their resilience and capitalize on enduring trends. #MarketAdaptation #ScenarioPlanning #VC #InvestmentStrategy #EconomicResilience #venturecapital #market #adaptability
-
Best performing VC strategies 1️⃣ Small VCs win 2️⃣ Emerging Managers win 3️⃣ Specialist VCs win 4️⃣ Larger, more diversified portfolios reduce risk dramatically → higher risk adjusted returns Why? 1️⃣ Small VCs → Smaller allocation → better access 2️⃣ Specialist VCs → differentiated value add → better access 3️⃣ Emerging Managers are like first time founders, they are putting everything on the line: their savings, their time, their reputation… 4️⃣ There is an element of randomness in start ups that gets mitigated via diversification Data? 1️⃣ Top decile Small VCs ($30M) produce 25% higher IRR than mid size VCs ($100M), 62% higher IRR than large VCs ($250M) and 100% higher IRR than really large VCs ($500M+) 2️⃣ Specialist VCs produce 30% higher IRR than generalists 3️⃣ Top quartile Emerging Managers have delivered a 7.5 percentage point IRR overperformance compared to non-Emerging Managers 4️⃣ A diversified portfolio of 70-90 investments reduces its risk of losing money to almost 0% Thanks Fabrice Grinda and FJ Labs for teaching me all of this early on.. #VentureCapital #PortfolioConstruction #FundStrategy #FundofFunds Credits to Megan Thorp, MBA and Jukka Alanen for this very data-driven report!
-
Rally Cap VC: ✅ , ✅ , and ✅ . 1️⃣ Small VCs → Smaller allocation → better access 2️⃣ Specialist VCs → differentiated value add → better access 3️⃣ Emerging Managers are like first time founders, they are putting everything on the line: their savings, their time, their reputation
Best performing VC strategies 1️⃣ Small VCs win 2️⃣ Emerging Managers win 3️⃣ Specialist VCs win 4️⃣ Larger, more diversified portfolios reduce risk dramatically → higher risk adjusted returns Why? 1️⃣ Small VCs → Smaller allocation → better access 2️⃣ Specialist VCs → differentiated value add → better access 3️⃣ Emerging Managers are like first time founders, they are putting everything on the line: their savings, their time, their reputation… 4️⃣ There is an element of randomness in start ups that gets mitigated via diversification Data? 1️⃣ Top decile Small VCs ($30M) produce 25% higher IRR than mid size VCs ($100M), 62% higher IRR than large VCs ($250M) and 100% higher IRR than really large VCs ($500M+) 2️⃣ Specialist VCs produce 30% higher IRR than generalists 3️⃣ Top quartile Emerging Managers have delivered a 7.5 percentage point IRR overperformance compared to non-Emerging Managers 4️⃣ A diversified portfolio of 70-90 investments reduces its risk of losing money to almost 0% Thanks Fabrice Grinda and FJ Labs for teaching me all of this early on.. #VentureCapital #PortfolioConstruction #FundStrategy #FundofFunds Credits to Megan Thorp, MBA and Jukka Alanen for this very data-driven report!
-
Principal at CO/STUDIOS (Inc5000, 2024) | Innovation & Brand Building Specialist | Business Transformation Leader |
Early-stage investing is a damn crazy rollercoaster. It brings a new set of risks. As I’ve been reintroducing CO/STUDIOS to the investor and capital provider network, one thing has become crystal clear: risk mitigation isn’t just something we do—it’s central to our value. Angels, VCs, private equity firms, and high-net-worth investors face the same challenge: how to back bold thinking while minimizing the inherent risks of the early stages. For us, that means focusing on the gaps that can make or break a venture—whether it’s fortifying foundations, operating support, or setting up systems that scale efficiently. It’s about building stability so that great companies don’t just survive—they grow into sustainable businesses. The truth is, early-stage investing will never be risk-free. But with the right approach, those risks can become smarter bets with much greater potential for reward.
-
10x founder, now early stage investor. Passioned about The Future Of Work. Building First Degree 🤹♀️
News alerts for founders (and investors too). This is a very insightful post, with some interesting reasons why smaller VCs are interesting. 👀⤵️ All credits to you, Borja Moreno de los Rios 👏🏽👏🏽 #firstdegree #founders #investors #whyrelationshipsmatter #buildingteams #sharingknowledge #alwaysbelearning
Best performing VC strategies 1️⃣ Small VCs win 2️⃣ Emerging Managers win 3️⃣ Specialist VCs win 4️⃣ Larger, more diversified portfolios reduce risk dramatically → higher risk adjusted returns Why? 1️⃣ Small VCs → Smaller allocation → better access 2️⃣ Specialist VCs → differentiated value add → better access 3️⃣ Emerging Managers are like first time founders, they are putting everything on the line: their savings, their time, their reputation… 4️⃣ There is an element of randomness in start ups that gets mitigated via diversification Data? 1️⃣ Top decile Small VCs ($30M) produce 25% higher IRR than mid size VCs ($100M), 62% higher IRR than large VCs ($250M) and 100% higher IRR than really large VCs ($500M+) 2️⃣ Specialist VCs produce 30% higher IRR than generalists 3️⃣ Top quartile Emerging Managers have delivered a 7.5 percentage point IRR overperformance compared to non-Emerging Managers 4️⃣ A diversified portfolio of 70-90 investments reduces its risk of losing money to almost 0% Thanks Fabrice Grinda and FJ Labs for teaching me all of this early on.. #VentureCapital #PortfolioConstruction #FundStrategy #FundofFunds Credits to Megan Thorp, MBA and Jukka Alanen for this very data-driven report!
-
Institutionalizing venture firms may seem difficult, particularly given the opacity of the asset class and the difficulty in accessing institutional investors early in an emerging manager (EM)'s journey. Here are a few things I am doing that I am getting positive feedback on: 1️⃣ Build trust from day 1, but know you are in for a long ride. You establish credibility from day 1 by being honest and always doing what you said you would do. In my experience, limited partners (LPs) can smell miles away if you dress up or change your narrative to fit their perceived interest. Stay true to your thesis, approach, and character - that works much better than trying to fit in. 2️⃣ Be data-room ready. This is something I heard from a VC a long time ago while coaching founders, and I apply this thinking to my own practice when engaging LPs. Know they will want to dig deep into your track record, firm operations, investment strategy (deal sourcing, due diligence, and portfolio support), and networks (via on- and off-book references). 3️⃣ Keep them updated and invite them to unique events. As you develop a relationship with an LP, you will get a feel for how frequently they will want to hear from you. If they request updates via a newsletter, make sure you subscribe them, but also provide high quality touch points by extending them an invitation to industry or networking events of relevance, for example. 4️⃣ Offer valuable insights and introductions. Sometimes the LP doesn't commit because they are not as knowledgeable in a particular sector/theme in your investment thesis. You can offer to share insights/education through your own resources and/or partnerships with organizations that can help the LP get up to speed. You should also always stand ready to make relevant introductions as you see fit. And, please, only make double-opt in intros! 5️⃣ If you have a solid footing with this LP, offer to catch up with them in person. I honestly believe that nothing replaces the in-person experience. It humanizes us all and it reminds the LP that you are ultimately building a long-term relationship that matters to you. What would you add that is working well for you as an EM building Fund I? #emergingmanagers #firsttimemanagers #institutionalinvestors
-
All true. What is needed post the consolidation/reationalization of the vc industry is more professionalism in the vc industry, as it remains an 'apprenticeship/guild' model...but there is NO requirement to having been actually trained by an experienced vc (that has already made the mistakes in learning what NOT to do). And why shouldn't there be some form of training/certification required? After all, GPs of funds are fiduciaries of other peoples' money. Shouldn't that alone require some form of professional standards? And if not, why not?
Frank Rotman penned a great piece a few days ago on X (link in comments), talking about the evolving landscape of emerging managers in VC. No sugarcoating - it's been bleak. While we did see a proliferation of new funds in the rah-rah ZIRP era, the long-term stats of success are not the most encouraging. To quote Frank "When we consider that only 17% of venture funds make it to fund 4, and that 44% of VC capital raised this year went to just two firms, it becomes clear that the industry is starting to consolidate." When I talk to emerging managers, I lay out these truths: 1) Raising capital is HARD. 2) Raising capital in VC in HARDER. 3) Raising capital in VC as an emerging manager is EVEN HARDER. 4) Raising capital in VC as an emerging manager in this market is STILL HARDER YET. There is usually another complexity (limited to no track record, very small fund, solo GP) that compounds the difficulty. So my ultimate question is: Given the steepness of this curve, why do this? This is the answer that I need to hear, strongly and with the highest conviction. The same passion and obsession most VCs want to see from their founders, I want (and NEED) to hear from emerging VCs. This is a hard road, so before you plunge into the deep end, be sure to spend meaningful time thinking through this question. All too often, I talk to emerging managers who either don't recognize the challenges ahead or seem to be going after without a clear understanding of their why. As Frank said in his piece, the VC ecosystem NEEDS emerging managers. I'm an eternal optimist, but I know we'll see some culling on the herd. For the next generation of EMs, be laser focused on why you are doing what you are doing and articulate it as clearly as possible. #venturecapital #emergingmanagers
-
Great stats = access is key
Best performing VC strategies 1️⃣ Small VCs win 2️⃣ Emerging Managers win 3️⃣ Specialist VCs win 4️⃣ Larger, more diversified portfolios reduce risk dramatically → higher risk adjusted returns Why? 1️⃣ Small VCs → Smaller allocation → better access 2️⃣ Specialist VCs → differentiated value add → better access 3️⃣ Emerging Managers are like first time founders, they are putting everything on the line: their savings, their time, their reputation… 4️⃣ There is an element of randomness in start ups that gets mitigated via diversification Data? 1️⃣ Top decile Small VCs ($30M) produce 25% higher IRR than mid size VCs ($100M), 62% higher IRR than large VCs ($250M) and 100% higher IRR than really large VCs ($500M+) 2️⃣ Specialist VCs produce 30% higher IRR than generalists 3️⃣ Top quartile Emerging Managers have delivered a 7.5 percentage point IRR overperformance compared to non-Emerging Managers 4️⃣ A diversified portfolio of 70-90 investments reduces its risk of losing money to almost 0% Thanks Fabrice Grinda and FJ Labs for teaching me all of this early on.. #VentureCapital #PortfolioConstruction #FundStrategy #FundofFunds Credits to Megan Thorp, MBA and Jukka Alanen for this very data-driven report!
-
Global Venture Capitalist with Fluent Ventures | Author of Out-Innovate
As the VC space becomes more crowded, the importance of focus, differentiation, and appropriate sizing becomes all the more important for return performance.
Best performing VC strategies 1️⃣ Small VCs win 2️⃣ Emerging Managers win 3️⃣ Specialist VCs win 4️⃣ Larger, more diversified portfolios reduce risk dramatically → higher risk adjusted returns Why? 1️⃣ Small VCs → Smaller allocation → better access 2️⃣ Specialist VCs → differentiated value add → better access 3️⃣ Emerging Managers are like first time founders, they are putting everything on the line: their savings, their time, their reputation… 4️⃣ There is an element of randomness in start ups that gets mitigated via diversification Data? 1️⃣ Top decile Small VCs ($30M) produce 25% higher IRR than mid size VCs ($100M), 62% higher IRR than large VCs ($250M) and 100% higher IRR than really large VCs ($500M+) 2️⃣ Specialist VCs produce 30% higher IRR than generalists 3️⃣ Top quartile Emerging Managers have delivered a 7.5 percentage point IRR overperformance compared to non-Emerging Managers 4️⃣ A diversified portfolio of 70-90 investments reduces its risk of losing money to almost 0% Thanks Fabrice Grinda and FJ Labs for teaching me all of this early on.. #VentureCapital #PortfolioConstruction #FundStrategy #FundofFunds Credits to Megan Thorp, MBA and Jukka Alanen for this very data-driven report!
Building a positive future with early stage frontier technology 🇺🇸
7moDEHYDRATE !