PitchBook's report, "Establishing a Case for Emerging Managers,"
Shifting Dynamics and Opportunities: Insights from a Los Angeles-Based Emerging Manager
High-level article takeaways:
More than 25,000 GPs have successfully raised at least one private fund since 1990 with 10,000 open funds seeking LP commitments.
The share of US fund closures led by "emerging" managers—GPs with three or fewer successful fund launches—has dropped to 44.7% of total funds and 15.7% of total capital raised, down from 55.0% and 23.4%, respectively, for the decade ending in 2019.
As an emerging manager based in the vibrant ecosystem of Los Angeles, I find myself uniquely positioned to comment on the shifting dynamics and opportunities within the venture capital landscape, as highlighted in the PitchBook report: Establishing a Case for Emerging Managers. The narrative around emerging versus established managers is particularly resonant here in LA, where innovation meets legacy in the startup and investment environments.
The report brings to light several critical insights that align with my experiences and observations in the field. First and foremost, the notion that established managers benefit from accrued experience and a robust track record is undeniable. These advantages allow them to secure capital with relative ease and navigate through market cycles with proven strategies. However, this doesn't necessarily translate to better performance; in fact, it becomes improbable due to the sheer number of exits required for a sizable fund to even do reasonably well.
Emerging managers, like myself, often enter the scene with a fresh perspective and a hunger to prove ourselves. This drive is crucial in a landscape dominated by rapid technological shifts and evolving consumer behaviors. We might lack the extensive track record of our established counterparts, but we compensate with agility and a forward-looking investment thesis that is often more aligned with disruptive startups.
The report underscores the higher upside potential of emerging managers, particularly noted in the VC sector since the late 1990s. This resonates deeply with my approach and the strategies employed by many of my peers in LA. We thrive on identifying high-potential startups early in their journey, often in niche markets that are overlooked by larger funds. The ability to deliver substantial returns, albeit accompanied by higher volatility, is a trade-off many savvy investors are willing to make, especially when diversification strategies are in place.
Another point that strikes a chord is the emphasis on the size of the fund. Emerging managers typically manage smaller funds, which allows for more significant involvement and potentially higher impacts from successful investments. This granularity not only fosters a deeper understanding and connection with the portfolio companies but also aligns incentives more closely with investor outcomes, enhancing the potential for outsized returns.
Furthermore, the discussion about the cyclical nature of VC investments and the power law dynamics observed in venture returns highlights the critical need for LPs to selectively back managers who can consistently identify the 'unicorns'. As someone who operates at the ground level, the ability to act swiftly and capitalize on emerging trends is a distinct advantage of smaller, more nimble funds.
However, challenges remain, particularly in terms of fundraising. The shrinking share of capital going to emerging managers, as detailed in the report, reflects a cautious approach from LPs, likely exacerbated by a preference for the 'safer' bet on established names. Yet, this trend overlooks the potential for high returns and the strategic benefits of partnering with emerging managers who are more in tune with the current entrepreneurial climate.
The narrative of emerging managers needing to prove their value resonates deeply. In Los Angeles, a city known for its creative and entrepreneurial spirit, there's a robust argument to be made for betting on those who are not just part of the establishment but are actively shaping the future of industries through innovative venture strategies.
Moreover, the ability of emerging managers to provide differentiated returns by focusing on sectors such as technology, media, and green tech is particularly pertinent in LA. These sectors benefit from a localized understanding of the market dynamics and consumer trends, which are often best understood by those who are part of the ecosystem.
In conclusion, the insights from the PitchBook report not only validate the challenges faced by emerging managers like myself but also highlight the substantial opportunities we present to LPs looking for growth in a world driven by innovation. As the venture landscape continues to evolve, the agility, specialized knowledge, and innovative approaches of emerging managers will be critical in navigating the complexities of new markets and technologies. In LA, where creativity and entrepreneurship converge, the role of emerging managers will be pivotal in driving the next wave of economic growth and technological advancement.