Is the first time the charm?

First time fund managers tend to deliver stronger returns and be more aligned with founders.

📈 Performance: according to Pitchbook’s 2021 Benchmarks, 27% of first-time funds achieve top quartile returns (IRR) compared to ~20% of non-emerging funds. On the downside, emerging funds are also significantly less likely to underperform.

🫂 Alignment: Most emerging managers have spent years as angel investors or as hands-on operators in the technology ecosystem.This gives them a unique perspective to understand and support founders’ expectations. In 2023, founders’ top 3 considerations for investor selection are: alignment of purpose (36%), network access (28%) and chemistry with partners (28%). The next one is industry expertise (22%).

🔓 Access: despite lacking prior fund management experience, emerging managers have spent years building dealflow to prove out their thesis. Thanks to strong ties with founders and past operational experience, they know how to source and pick the best startups to invest in, and make them succeed. For new investments categories like venture buyouts, it significantly raised the odds of outsize return rates.

🧗‍♀️ Agility: in addition to being more “founder-friendly” and more likely to win the best deals, emerging funds have leaner management structures and can deploy capital faster. In the current environment, first-time funds are more agile, reducing the risk of investing at inflated valuations or in companies with unsustainable business models. They can offer founders more stability, ongoing alignment and greater upside potential.

🐣 Size: typically raising smaller funds, emerging managers focus on higher capital efficiency. Recent research shows that funds up to $50M have a much higher probability (by approximately 45-60%) to yield 5x+ returns compared to larger funds.

In short: with more to prove, emerging managers have a stronger incentive to allocate their funds wisely, outperforming their established counterparts. They also collaborate closely with founders to create success stories. Bridging the gap between VC and PE, venture buyouts funds can deliver higher risk-adjusted returns, reconfiguring startups with a proven business model and enhancing their efficiency and profitability. For emerging managers, their LPs and their portfolio companies, the first time can indeed be the charm.