Not all emerging managers should receive institutional capital. In fact, an overwhelming majority shouldn’t.

This may not be a popular opening line in a market built on optimism, but it is the correct starting point for any LP. The case for emerging managers is compelling, but it demands more than surface-level enthusiasm.

Emerging managers are typically fund managers raising their first, second, or third institutional fund. Much like graduates trying to land their first job while facing “entry-level” roles that require five years of experience, emerging managers must establish credibility with LPs before they have the institutional track record many LPs expect.

They have long been framed as a “high-risk, high-reward” allocation, attractive for their alpha potential but treated as disproportionately risky because of limited track records and less mature infrastructure. The data, however, suggests that this perception may be too blunt. In many cases, the risk profile of early funds appears more nuanced and more attractive than the conventional narrative implies. 

An analysis from StepStone Group highlights that emerging managers, especially Fund I buyout funds, tend to outperform later-sequence funds on both absolute and relative performance. The common LP perception that first funds are disproportionately risky is only partly true. They do have wider dispersion, but the downside risk appears less severe than assumed, while the upside can be meaningfully stronger. 

For LPs, this is what makes emerging managers both the most frustrating and the most interesting part of venture capital. They are difficult to underwrite because they lack the realized track record that makes investment committees comfortable. But they also sit in a structurally different position than larger funds, and that position is the real source of their edge.

The best emerging managers often sit in narrow, defensible pockets of the market that other fund types struggle to access. With fewer portfolio companies than a massive fund, emerging managers can devote more time and resources to each investment, and smaller fund sizes let them pursue opportunities too small for larger vehicles, often in less crowded segments of the market. Lean teams and meaningful GP commitments create tighter alignment between manager incentives and LP outcomes than fee income at a large platform requires.

Still, from an LP perspective, the difference between the top quartile and the bottom quartile managers can become a difference between a career-defining allocation and an expensive lesson.

The underwriting question, then, is what a manager does with that position. Are they close enough to a source of mispriced founder talent to see opportunities before others do? And do they have the discipline to turn that access into a repeatable process, and eventually a durable institution?

Why the Opportunity Exists: Seed and Pre-seed Access is Fragmented

Recent investment trends suggest that seed-stage access is not monopolized by the largest brands, which leaves room for emerging managers to stand out. But only where their proximity to founders gives them access that larger platforms don’t naturally have.

A study by Defiance Capital of 845 unicorns and 2,018 unicorn founders across the U.S. and U.K. from 2013 to 2023 found that, outside of SV Angel (6.4%) and YC (10%), no other VC fund got into more than 2.8% (Sequoia) of unicorns. 

The study’s own author put it plainly: “Even the best funds, like Sequoia, only get into less than 3% of unicorns, and only 30 funds have a unicorn market share of 1% or more.” Even the best-known seed investors, in other words, were involved in only a small minority of future unicorns at the seed stage. 

Most future unicorns were backed somewhere else, such as other funds, angels, accelerators, and founder networks. As one analysis of the study concluded, the market to invest in a potential unicorn is completely fragmented at seed, meaning a lesser-known fund has as much chance as a well-known one to invest in a unicorn at the earliest stage.

The same study found that 70% of unicorns had underdog founders, such as immigrants, women, or people of color, yet only 21% of immigrant and female founders raised funds from a top-10 VC. Many category-defining founders are not initially financed through the most obvious institutional channels. If outlier founders are emerging outside those channels, emerging managers with genuine proximity to those networks can play a meaningful role in an LP portfolio.

This creates a real opening for emerging managers, because they aren’t actually competing with Sequoia or Andreessen Horowitz on brand. A great manager recognizes the opportunity to access a part of the market where strong founders are still being missed or underpriced.

But proximity alone doesn’t make a manager good. Plenty of managers sit near fragmented, underpriced corners of the market and still fail to convert that position into a fund worth backing. The opportunity only becomes real capital when a manager has the discipline to turn access into something repeatable.

The following are the traits LPs should pay close attention to:

Do They Have a Structural Edge?

“Proprietary deal flow” is easy to claim and hard to prove. 

Most managers can point to accelerators, angel syndicates, demo days, founder referrals, and operator networks, but a survey by Harvard Business Review found that around 60% of VC deals come from an investor’s network and referrals. I.e., almost every manager is fishing in the same network-shaped pond, and those are often shared pipes, not really “differentiated access.”

The real question for LPs is whether the manager has a repeatable reason to see strong companies before they become more obvious, and that reason should be specific. For example, a technical community where they are treated as an insider, a company network that repeatedly spins out founders, or a geography where trust is local.

This should show up in the evidence they present, and credentials alone are simply not enough. LPs should ask where the manager’s last 20 qualified opportunities came from, who referred them, and why those founders decided to engage early. They should also test whether the access depends on just one personal relationship or whether it is built into a repeatable channel. 

Can They See, Pick, and Win?

A useful framework for breaking down an emerging manager’s edge into underwritable components is whether they can see, pick, and win. The Side Letter, a platform that has evaluated thousands of emerging manager funds, argues that every fund must be assessed on three core edges – sourcing, picking, and winning – and that edges don’t work in isolation. 

Any great fund must spike in at least two of the three to have a chance of growing into an institution. One in isolation is not enough, and all three together are a higher bar than most pitch decks suggest.

1. Seeing is about access, and it is closely related to the previous section on structural edge. The more precise question here is whether the companies a GP sees are high quality or just high in quantity.
2. Picking is about judgment, and it is the hardest of the three to evaluate before there is a meaningful track record. Beezer Clarkson of Sapphire Partners stresses the importance of a repeatable and consistent investment process, involving rigorous underwriting standards with clear financial targets for different stages. An LP should be able to ask a manager to explain why a specific founder, market, or technology was mispriced at the time of investment. A manager who can also describe investments they passed on, and why, reveals more about their judgment than one who can only explain what they backed.
3. Winning is about founder conversion, and it is probably the most underweighted of the three in standard LP diligence. Founder pull, the ability to attract strong founders even in competitive rounds, is one of the mindset factors that experienced LPs report predicts outperformance before any track record data is available. This is also why founder references carry particular weight in emerging manager evaluation. A weak founder reference says “they were helpful.” A strong one says the founder would not have wanted to build the company without them.

If a manager can pass in at least two of these categories, that is the one worth the deeper diligence.

Is Their Value-add Specific Enough to Help Them Win?

Value-add is often one of the reasons an exceptional founder chooses an emerging manager despite the absence of a large brand.

But the term has been hollowed out by overuse. A 2021 survey found that 92% of VCs self-describe as value-add investors, while 61% of founders rated their value-add experience as below average. That gap is worth examining carefully.

The easiest approach is to check specificity. Can a manager walk through the last several companies they backed and name the exact help they provided beyond capital? Here, the  “we help with hiring and business development” is simply too vague. LPs should look for examples that go into details such as “here are three customer intros that closed a contract” or “we’ve rewritten the term sheet in 24 hours because it was an emergency”.

This is also why specificity correlates with outcomes, not just founder goodwill. Pitchbook data shows specialized emerging managers outperform established generalists, emerging generalists, and even established specialists, and founders are more likely to choose a specialist fund because its network and value-add appear more directly relevant to what they’re building.

Are They Non-consensus Without Being Undisciplined?

The best emerging managers are usually non-consensus in some way. They back a founder type, geography, sector, behavior, or technology before it becomes too mainstream.

In fact, non-consensus investments generate three-to-five-times higher returns than consensus deals, and roughly 40% of top-performing venture investments were initially dismissed as contrarian or unlikely to succeed. By the time a thesis is consensus, the prices have already adjusted to reflect it. 

But “non-consensus” is also the easiest thing for a manager to claim and the hardest thing for an LP to underwrite, because the same label covers two very different behaviors. One is a manager who has identified a specific, durable mispricing, and the other is a manager who is simply drawn to whatever is currently unloved, with no fixed criteria, chasing the next contrarian story.

Being contrarian is fundamentally oppositional, as it frames the manager’s behavior in opposition to the status quo for its own sake. An undisciplined manager reaches for “contrarian” as a personality, rather than a method, which is usually the tell.

Real discipline inside non-consensus investing has conviction that holds under pressure. The goal is to be proven right, which means decisions have to come from something rigorous. That rigor is what lets a manager sit with an unpopular position for years without the position transitioning into something else.

The practical test for an LP, then, is to check whether the manager can articulate the precise criteria that make something on-thesis, and whether the portfolio they’ve actually built reflects those criteria, even years down the road.

Do They Understand Power-law Math?

Every VC fund operates on the same premise that most investments fail, and the handful that work have to carry everyone else.

In a typical fund, the top one or two investments account for more than 80% of total returns, and the rest of the portfolio is mostly a structural cost of finding those one or two. Almost no fund outperforms without one.

The test for an emerging manager is whether their fund construction is built to satisfy the math. For example, a $200 million fund needs to return at least $400 million to its limited partners, which means a single fund-returning company at 10% ownership has to reach a $2 billion exit valuation. If a manager’s stated ownership target and stated check size don’t produce a plausible fund-returner at a realistic exit valuation for their sector and stage, the math doesn’t work, no matter how good the individual investment decisions turn out to be.

The best managers will therefore understand and can present a map showing that the target ownership percentage, combined with the fund’s typical entry valuation and realistic reserve strategy, will produce a plausible path to a fund-returning outcome that is actually achievable in the manager’s sector and stage.

Do They Survive Their Own Absence?

Every emerging manager is, in some sense, a bet on one person. Key person clauses identify one or more individuals, often the founders or managing partners, whose continued involvement is considered essential to the fund’s success, and emerging managers may designate only one or two such individuals, whereas established firms often name several.

The legal mechanics make this explicit, which is exactly why it’s worth taking seriously. If a named key individual leaves or steps back from day-to-day operations, the clause typically triggers a suspension of new deal sourcing and capital calls until a qualified replacement is approved by LPs. In most fund agreements, once a key person event is triggered, the fund can only continue making investments with LP advisory committee approval or for follow-ons and reserved matters.

The question to ask here is whether the manager has done anything to make that risk survivable. Allocators specifically look for succession depth, with an investment committee, defined decision rights, and an organizational structure that exists beyond the GP alone. Either the answer already exists, or it doesn’t, and the manager is hearing the question for the first time, which is itself the answer.

The best emerging managers treat their own indispensability as a risk to be managed.

The Opportunity Hiding in the Herd

Right now, capital is consolidating hard toward managers who already have it. Nearly 80% of dollars committed to U.S. venture funds in 2024 went to LPs already backing the same managers, and many allocators have simply stopped looking at new ones. 

This is the same mispricing that the rest of this piece has been describing all along, just one level up.

Earlier sections discussed how the best founders are routinely missed by the most obvious institutional channels, which is exactly why an emerging manager with real proximity to those founders can outperform. The same logic applies to the managers themselves. The market’s current preference for brand over edge is not evidence that brand is where the returns are. Rather, it seems that most allocators are optimizing for comfort, in a category where the data has already shown that comfort and performance frequently point in different directions.

In a way, the opportunity here is to find the next decade’s defining managers while the market is still mispricing them as a category. To find the manager whose edge is structural, whose conviction is disciplined, whose math works, and whose firm will outlast them. Like a diamond in the metaphorical rough.

Back them while everyone else is still asking why anyone would.

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Emerging managers represent one of the most mispriced opportunities in venture capital right now. At Arcanum Ventures we are building the kind of firm this article describes. If you want to follow how we think, tune into The Forum or The BOOM ROOM. And if you want to go deeper, reach out directly at investing@arcanum.ventures.