Emerging VC Managers: A Family Office Perspective

Venture capital has long been a magnet for family offices, especially capturing the enthusiasm of younger generations. However, navigating this asset class is notoriously challenging. Direct investments in startups, aimed at achieving VC-like returns, put family offices in competition with dedicated professionals. Opting to back fund managers may reduce the volume of due diligence but not its complexity. Given the significant variation in returns, careful selection and strong access are essential to make the risk worthwhile.

Traditionally, family offices have only considered emerging VC managers when unable to access established, big-name VCs. Yet, there is a shift in interest. More sophisticated families are now intentionally allocating capital to emerging managers, even when they can invest in larger, well-known VCs.

One possible reason for this change is the evolution of established VCs into larger entities, which often results in returns more akin to private equity. This shift leaves a gap in portfolios for high-volatility, high-return potential investments—exactly the niche that emerging managers can fill.

At a CIO Forum we hosted earlier this year, which gathered family office representatives from 14 countries, it became clear that while established VCs are easier to vet and bring substantial brand leverage, emerging managers offer unique advantages. Their strong alignment of interests, driven by carry rather than management fees, their eagerness to prove themselves, and the potential for building strong, long-term relationships early on make them an attractive option for family offices considering venture.

The New Wave: Origins of Emerging VC Managers

Sourcing in venture capital remains highly network-driven, applying to both VC managers scouting startups and family offices seeking VC managers to diversify their portfolios. Staying connected to talented individuals and being immersed in the flow of opportunities is crucial. Opportunities often arise through other family offices, existing portfolio VC managers, or entrepreneurs. If you ask, many emerging managers will also openly disclose the other managers they respect the most, facilitating the mapping of key investors in the ecosystem.

One significant category of emerging managers is spin-offs from established funds. Principals or Partners leaving larger firms to start their own ventures bring a measure of reassurance to Limited Partners (LPs) through their track record. However, questions arise regarding the attribution of their past successes and the replicability of those results without the infrastructure, support, and brand of their previous firm. Additionally, challenges related to building a new firm, including administrative, entrepreneurial, and cultural hurdles, must be considered. To address attribution, LPs can leverage references and access records from previous funds. While sophisticated automation tools can mitigate some administrative risks, the entrepreneurial elements of firm-building cannot be outsourced.

Another notable category is the founder-turned-funder profile. Entrepreneurs who’ve gone through the fundraising process themselves, had some success in their ventures, often times an angel investing portfolio on the side and now want to take their investing activity to the next level. These individuals typically establish a strong rapport with founders due to shared experiences and possess valuable entrepreneurial skills for building new firms. The trend of VC funds started by angels who continue to position themselves as friendly angel funds has staying power. However, the transition from angel investing to institutional VC involves significant adjustments. Founders-turned-funders must secure larger allocations, maintain disciplined portfolio construction to achieve target venture fund returns, and diligently report all deals to build a credible track record.

Scientists and academics entering the investment space represent another key category, particularly in the growing deep tech sector. While some investing experience is still preferred, commercial savviness within the team can sometimes compensate for a lack of a clear track record. Family offices and other LPs often state, “We invest in first-time funds but not in first-time investors.”

Access to highly competitive deals is a hallmark of successful emerging VC managers, with each manager profile bringing a unique edge to securing their seat at the table. For instance, scientists and academics can identify technological potential early, often before it’s widely understood. The founder-turned-funder profile tends to build deeper connections faster as they relate more genuinely to the entrepreneurial journey. Meanwhile, the spin-off partners can leverage relationships with previous founders to spot opportunities ahead of the pack.

Regardless of profile, another key characteristic of successful emerging managers is their deep passion for venture capital. As one fund manager noted, there are three types of investors: those who like investing, those who love it and those who live it. Great investors probably have to be somewhere in between love it and live it. I think this applies even more acutely to emerging VC managers, they probably have to live it. This dedication resonates with family office principals, who often deeply understand the long-term commitment required to build large businesses from the ground up.

Performance Insights: on the Lookout for Venture Alpha

Family offices investing in VC funds are well-acquainted with the concept of 'venture alpha', as emerging VC fund managers have consistently demonstrated their ability to generate it, according to multiple data sets.

There is an important nuance to consider: emerging managers often oversee smaller funds, which tend to perform better given the valuation implication for fund returner winners. When also focused on pre-seed and seed investments they have an inherently different risk-return profile than a larger fund that focuses on Series A and beyond. A fair comparison must account for fund size and investment stage.

An abrupt increase in fund size can create GP-LP misalignment and increase deployment pressure—often forcing GPs to move away from their investment sweet spot or cut corners on diligence.

A study that has looked into persistence of returns highlights that manager experience does play a role—45% of managers with a previous fund in the top quartile are still in the top quartile in the following vintage.

The power law governs VC, emphasizing the importance for GPs to identify and back “big winners” early on to drive fund returns. Typically, around 5% of invested capital in a few “winning bets” drives most of the return, often exceeding 50%. The VC model relies on investing in early-stage companies, each with the potential to more than return the entire fund.

Family offices often face the dilemma of choosing between generalist and specialist venture capital funds. Many family offices invest in both generalists and specialists but agree that it is important for managers to have some framework as a forcing device even if not linked to a single sector or theme. They would want to get a sense of the GP-strategy fit, whether the managers are best aligning their skillset and edge with the core remit of the fund.

Data suggests that for smaller funds under $250 million, specialist funds now tend to outperform generalists. Specialist funds focus on specific sectors or themes, allowing them to develop deep expertise and networks. This targeted approach can lead to better identification of high-potential investments within their niche.

Generalist funds offer flexibility, particularly at the pre-seed and seed stages. These funds can back the most talented founders regardless of the sector they choose to pursue.

Generalist funds play an essential role in up-and-coming ecosystems, providing broad regional or local coverage and capitalizing on diverse opportunities. Specialist funds tend to be a sign of a maturing startup ecosystem.

Ultimately, VC outperforms if you know where to look, making the search for standout emerging managers akin to finding a needle in a haystack. The alignment between family offices and emerging VC managers lies in their shared understanding of the dedication required to achieve exceptional performance.

Innovation and Trends in VC

While the core VC model remains fundamentally unchanged—remarkable people investing early in other remarkable people—there have been notable innovations, particularly in sourcing and selection stages.

It all starts with sourcing—how do you find the best companies before everyone else? VCs are experimenting with some new ways of utilizing data and AI to discover promising entrepreneurs often even before they establish their companies. This proactive approach includes building relationships with potential founders well in advance. Additionally, innovative venture scouting models are emerging, utilizing networks as extended team members to enhance sourcing capabilities.

At the selection stage, data and AI play an increasingly supportive role. Smart benchmarks derived from large-scale data can aid decision-making without fully replacing the human element. The human touch remains crucial, particularly in nuanced tasks like securing allocation in sought-after rounds—a hard to disrupt art. Even if you know how to select them, will the best founders choose you back? Post-investment support continues to evolve and there are many approaches to enhancing the value-add provided to portfolio companies but no clear breakthrough innovation.

In terms of spaces where there's a lot of activity, there's a surge in interest and activity in AI and deep tech, especially at the intersection of hardware and software. Innovations in computer simulations are reducing capital expenditure by minimizing the need for early hardware development, which is particularly relevant for robotics and decarbonization efforts. Advances in AI and computational biology are also accelerating biotech developments, potentially leading to shorter timelines for significant breakthroughs.

When it comes to the profile of emerging managers, a category that seems to be here to stay is the Solo GP. While institutional investors typically worry about keyman risk and scalability challenges, many family offices view solo GPs more flexibly, especially those who have seen friction between GPs building a firm together for the first time. There is always a certain degree of people risk, regardless of the GP structure. A notable trend involves celebrities launching funds, which might initially seem dismissible but offers intriguing distribution and marketing advantages.

Historically, high-net-worth individuals (HNWIs) and families have been one of the primary backers of emerging managers, a trend that persists.

On the LP side, there is a growing trend toward syndication and collaboration among families, pooling capital and resources to conduct due diligence and access funds. Additionally, more fund of funds (FoFs) are focusing on emerging managers, offering diversification and better access through syndication and lower ticket sizes. If you pick the right partners, you should have an advantage in navigating this asset class.

With the growing number of emerging managers launching VC funds and family offices becoming more adept at mapping them, differentiation and a clear value proposition are more critical than ever. Achieving a solid GP-strategy fit becomes table stakes—are managers effectively aligning their unique skills and competitive edge with the fund’s core mandate?

What remains crystal clear is that VC will continue to sit at the forefront of innovation and provide a unique access point to category defining companies. It’s hard not to want a seat at the table.