Many institutional investors understandably favor funds that have already completed several cycles.
Accumulated experience conveys security, and predictability (or at least the perception of it) remains a decisive criterion when allocating capital to an asset class that is, by definition, risky. Even so, this preference, while intuitive, does not always reflect the reality of what generates the best opportunities.
First-time funds, first-quartile returns
Performance in venture capital does not follow a linear logic. Past success, although relevant, does not guarantee a repetition of results, especially in a market where technological, economic, and competitive conditions change rapidly.
Teams that enjoyed privileged access to certain opportunities in one cycle may face a completely different context in the next. New managers, meanwhile, often emerge better aligned with the current moment, closer to new entrepreneurs, and with an execution capability shaped by more recent realities.
Multiple studies document the pattern: the Kauffman Foundation found that first-time funds outperformed established venture capital firms by an average of 3.1 percentage points annually between 1997 and 2011.
A Preqin study reached a similar conclusion: emerging managers outperformed in 22 of the 28 vintages the firm assessed. Makena Capital Management, analyzing over 1,100 private funds across two decades, found that emerging managers achieved average returns approximately 250 basis points above their established counterparts.
What a first fund demands
Emerging managers assume a role that the market does not always recognize. A first fund often demands a level of focus and discipline that larger structures struggle to replicate.
A smaller size forces careful choices; incentive alignment tends to be more direct; and the need to prove value creates a culture of high standards that shows in how the team analyzes and supports its opportunities.
A human element rarely appears in the metrics, yet it weighs heavily on access to deal flow. Many of these managers remain deeply embedded in the ecosystems in which they operate.
They do not rely solely on brand recognition or formal processes to originate investments, but rather on relationships, constant presence, and credibility built within specific communities.
This proximity often allows them to identify talent and projects before they become consensus opportunities, precisely when the potential for value creation is greatest.
Capital needs new entrants
The very functioning of venture capital depends on renewal. Without new management teams, new theses, and new approaches, the sector would tend to concentrate capital in fewer hands and increasingly homogeneous strategies.
Innovation, the object of the investment itself, also requires innovation on the investor side.
Emerging managers contribute to this diversity by exploring underfunded sectors, geographies beyond the main hubs, and business models that the broader market has not yet validated.
The risk no one accounts for
Despite this, a gap persists between the relevance of these managers to the ecosystem and the ease with which they can raise capital. Part of this difficulty is structural.
For an institutional investor, the risk of backing a fund without a track record is visible and easy to explain; the risk of not investing (of missing access to a new generation of managers who may lead the market in the coming years) is more diffuse, harder to measure, and therefore seldom part of the conversation.
This is, to some extent, the paradox. By privileging only established funds, many investors end up entering larger vehicles with more competition for the best opportunities and less flexibility to invest at early stages.
The concentration is stark: in early 2024, just two firms accounted for 44% of all LP capital allocated to US venture, according to PitchBook.
Tighter markets reward conviction
At a time when venture capital is going through a period of greater discipline and selectivity, these dynamics become even more evident. Less exuberant markets tend to favor focused, agile investors with strong conviction in their theses, characteristics that describe emerging managers well.
Smaller teams adapt more quickly, make decisions with less inertia, and maintain closer proximity to founders and operating teams.
In the long term, supporting emerging managers is not merely a portfolio decision; it is a choice that influences the vitality of the entire ecosystem. These are the investors who test new ideas, challenge consensus, and often discover the companies that will define the next decade.
Ignoring them does not eliminate risk; it merely shifts it. And in a sector where value often emerges before anyone can measure it, that shift can be decisive.
