Last year showed an abundance of interest in emerging managers. In a recent survey of more than 50 institutional investors, 62 percent responded that the risk and return profile for EMs is attractive relative to established firms.
Still, it remains an uphill battle for many EMs to raise funds, even with a glut of capital targeting venture. Today’s pool of top-tier EMs is growing rapidly, and it can be hard to be seen by LPs.
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At Recast Capital, the question we are most often asked by new fund managers is “how can I stand out?”
The good news: we have lots of suggestions.
Differentiation is key
LPs want to invest in GPs that are approaching new and different markets with new and different perspectives. GPs or teams that have different lived experiences also typically have differentiated networks, and LPs are increasingly catching on to the fact that these differences enable contrarian investments with high potential upside.
Venture capital has always been a tool to invest in the future of innovation, and LPs are looking for bets on that future, not what feels safe and understood today.
Sector-specific or operational expertise in an exciting market
As an emerging manager, showcase how your relevant expertise in an under-tapped market aligns with the industry in which you’re investing.
LPs typically look to avoid overfished ponds and over-played deal channels, so you should make a compelling case for why they should follow you off the beaten path.
The best EMs have a unique perspective within their area of focus. The prospective LPs you’re targeting need to agree that the approach and space you’re betting on is an exciting place to spend time.
The potential in your portfolio
LPs also look for evidence of sound investment judgment. This may be clear in your track record of attributable investments or consulting or advisory work.
LPs backing EMs are typically ready to dig in and analyze a nascent or unrealized track record. It’s on you to be clear about what companies in your track record are applicable to the investment strategy of your fund and why they matter.
Today, everyone’s portfolio looks strong—markups are pervasive. With that in mind, it’s the quality of the deals and the risks you weren’t or were willing to take that will get LPs excited.
It’s important to note that if your track record includes modestly sized investments in comparison with the allocation strategy of your new fund, you should help potential LPs get comfortable that you can win a larger portion of a round. The best reference for this is the entrepreneurs you’ve supported in the past.
A wide range of voices and approaches have the potential to succeed in the venture industry.
The question to ask yourself is this: does your approach align with your investment thesis? Let’s say you’re a pre-seed investor not typically leading rounds, but participating as a friendly member of a syndicate, and you provide a lot of post-investment value add. This is a role that requires a decisively collaborative approach to winning allocation in a deal.
Conversely, the investor trying to lead a seed round may need to have “sharper elbows” to claim their spot at the table.
The flywheel factor
At the end of the day, LPs look for evidence that an emerging manager can, and will, identify the best companies in their area of focus, and be able to win those deals based on their approach, skills and expertise. The best early-stage VCs bring tremendous value to their portfolio, creating a flywheel of entrepreneur referrals which in turn, fosters that GPs’ success, so they can build the next industry-leading franchise.
Courtney McCrea and Sara Zulkosky are co-founders and managing partners at Recast Capital, a 100 percent women-owned platform investing in and supporting emerging managers in venture, with a focus on diverse partnerships.
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