📶 the case for (or against) emerging manager fund of funds

Good morning 👋

Investing into emerging managers sounds good until you realize how much works goes into running an emerging manager practice well.

I read this piece over the weekend, and it gave a great breakdown on how LPs should be thinking about investing into emerging managers.

Here are our thoughts on it …

As more returns have flowed to the best emerging managers, more LPs have developed an allocation strategy to back these new emerging managers.

The problem is that it has become a lot harder to find these managers before they become household names, so LPs are still trying to figure out the best way to do that in a cost-efficient way.

This piece by Samir Kaji from Allocate is great.

Here are our thoughts:

If you’re not laser-focused on venture capital as an asset class, you will suffer from adverse selection.

This principle applies across all asset classes, but it’s especially pronounced in venture, where the gap between "good" and "great" is massive. A "good" manager maybe creates the same returns as the S&P (more data on this below); a "great" manager can create returns that you can’t find in other asset classes.

All allocators want to be curators: they want access to the best companies, and in order to do this, they first need access to the best managers who are winning allocations into these companies. Savvy allocators take this approach so that they can front-load some of the work, rely on the judgement of others, increase their own top of funnel, and have the option to write larger checks into the breakout portfolio companies later.

All of this, of course, assumes that the people doing the curation of the companies (the fund managers) are doing their job of finding quality companies. The job of the allocator then becomes acting as a curator of the fund managers.

In other words, allocators are the guys picking the guys picking the guys. As you can imagine, this is a subjective practice and the craft of finding and assessing new managers is more of an art than a science.

Like anything else in life, it takes REPS to be able to assess a quality bar, and reps aren’t free.

To back up the point above, here is some data underscores just how critical manager selection is in emerging manager investing.

According to PitchBook data for small-cap funds (sub-$250M) from 2010 to 2020:

That’s a staggering 42.6 percentage point spread between the top and bottom deciles.

If you’re serious about backing truly great emerging managers, there are three main approaches to consider. Each comes with its own trade-offs, costs, and risks.

Option 1: Do It Yourself (DIY)

Going the DIY route means doing all of the work without a team.

To develop a sense of what "great" looks like, you’ll need to meet with at least 300 general partners (GPs) over the course of a year. This process is time-intensive and comes with a steep learning curve.

Option 2: Hire an in-house professional

Hiring a dedicated professional to manage your emerging manager investments can be appealing, but it’s not without challenges. The skillset required for this role is incredibly niche - combining deep venture expertise, network-building, and manager evaluation.

There’s also key-man risk to consider. If your in-house expert leaves, you’re back to square one. Over time, you’ll likely need to have conversations about aligning incentives, such as offering carried interest to retain top talent. This approach can work, but it requires careful planning and a long-term commitment.

Option 3: Become an LP in fund of funds manager

Partnering with a fund of funds (FoF) manager offers several advantages.

For a typical fee structure of 1% management fee and 5% carried interest, you gain access to better relationships, a robust referral network, enhanced credibility, and more predictable capital deployment.

FoFs are often better positioned to identify top-decile and top-quartile managers, thanks to their scale and expertise.

At the end of the day, execution risk is what you need to underwrite for. The question isn’t just about costs—it’s about which strategy gives you the highest probability of backing top-decile and top-quartile managers.

Ultimately, the right approach depends on your resources, timeline, and risk tolerance. But one thing is clear: in emerging manager investing, execution is everything. You can’t afford to get it wrong.

Read more: https://ventureunlocked.substack.com/p/do-emerging-manager-fund-of-fund

Good venture investors need to have:

That’s why we built this.

2,500 other investors from places like Bessemer, Insight, Accel, and Founders Fund already use it, and we think you should too.

🤔 An Opinionated Guide on Which AI Model to Use in 2025: Creator Economy offers a practical guide to choosing between ChatGPT, Claude, Gemini, Grok, and Perplexity

🎭 Good and Bad Growth Job Descriptions: Elena’s Growth Scoop gives examples of both red flags and good things to watch out for as job descriptions offer a glimpse into how companies thinks about growth, what they think it means, and what they think will make you successful

🔮 Future Self: What are you doing today that your future self will need to pay for, and/or, what present pain are you enduring that may not have that big payoff in the long run?

🧠 The World’s Hardest Test: A fascinating story of what London cabbies tell us about the human brain and artificial intelligence

☺️ A Field Guide for Introverts—How to Thrive at Work Without Changing Who You Are: A best-selling author shares practical tactics for introverts to be more successful at work and in life

Thanks for reading this far and giving us a little bit of your attention this week.

Feel free to unsubscribe whenever this stops becoming valuable to you.

- Clay