The Emerging Manager Extinction Test
A venture capital investor discusses how emerging fund managers are becoming more sophisticated and strategic in their hiring practices. Rather than bringing in equal-level partners for subsequent funds, successful managers are now hiring junior talent while maintaining control, and timing the addition of non-investment support based on fund size and strategy.
Summary
The speaker reflects on trends among emerging venture fund managers raising their second or third funds. A key observation is that managers today demonstrate greater understanding of fund operations, including knowledge of metrics like DPI and secondaries markets. This contrasts with managers from three years prior who planned to hire equal-level partners as their path to scaling. The current cohort of managers has shifted strategy: rather than diluting control through partner hires, they're bringing in more junior-level investment talent. The speaker identifies this as a maturation in thinking—managers now recognize that maintaining their firm's core identity and superpower is crucial. However, the speaker notes limitations with junior talent: while they may excel at sourcing deals and have strong instincts for finding companies, they often fall prey to FOMO and lack understanding of full investment cycles and what genuine excellence in venture requires, particularly the difficulty in recognizing exponential growth before the inflection point. Regarding non-investment talent, the speaker notes that timing varies based on strategy and fund size, acknowledging that a $15 million fund faces budget constraints. The response indicates that many fund one and two managers choose to outsource non-investment functions rather than hire them in-house.
Key Insights
- Emerging managers raising subsequent funds have shifted away from hiring equal-level partners—a strategy common three years ago—toward bringing in more junior-level talent while maintaining firm control and identity
- Contemporary fund managers demonstrate greater operational sophistication, including understanding of DPI, secondaries markets, and the need to build teams with complementary expertise rather than duplicate their own skillset
- Junior-level investment talent often possesses strong deal-sourcing instincts but lacks the ability to evaluate full investment cycles and tends toward FOMO-driven decision making rather than disciplined excellence
- The difficulty in venture investing lies in recognizing exponential growth curves before they inflect, which requires experience and understanding that junior talent often cannot yet possess
- The timing for hiring non-investment talent depends on fund size and strategy, with smaller funds like $15 million having limited budgets and many early-stage managers choosing to outsource these functions
Topics
Transcript
[0:00] going to be the 50x fund in the portfolio. That's really hard to know because it's so volatile that journey up until the end. But, I think any manager that's starting a fund right now seems to be a lot more serious and understands the implications of what it takes to to run a fund. And I've noticed a lot of the managers coming to the table have taken advantage of the innovation that's happening today and understand that I have to know about DPI. I have to talk [0:32] about secondaries, or I have to go find people around the table to help me understand how to manage this firm and hiring call it junior level talent where…
Full transcript available for MurmurCast members
Sign Up to AccessMore from How I Invest w/David Weisburd
The $3.4 Trillion Opportunity Nobody Sees
The private markets secondary sector, particularly in venture capital, represents a massive $3.4 trillion opportunity that remains severely undercapitalized. While buyout secondaries transact at 2.5-3% of NAV, venture secondaries represent less than 0.5% of the $3.4 trillion venture NAV, indicating significant untapped demand for secondary market investing.
The Compound Interest Nobody Talks About
The speaker emphasizes the power of compound growth in relationships and urges investors to resist chasing market trends. Instead, they advocate for staying focused on a specific market segment you're passionate about and deepening relationships with respected individuals in that space.
Why Investors Shouldn’t Box Themselves In
The speaker argues that investors should avoid self-imposed limitations on investment strategy types, as restricting to single approaches like fund investing, co-investing, or secondaries causes them to miss valuable opportunities. The optimal strategy is to pursue the greatest exposure to best-performing companies at attractive valuations with minimal fee drag.
Taxes: The Upstream Lever to Compounding
Taxes represent a significant drag on portfolio returns that wealth managers can actively minimize to keep more capital compounding over time. By focusing on tax-efficient strategies where outcomes are predictable, wealth managers can reduce the dispersion of potential results and improve client wealth outcomes.
The Governance Secret Behind Big Returns
A fund leader discusses how governance structures, particularly delegating investment authority to staff, drive returns in public funds. The speaker was attracted to modernizing a $100 billion fund with only 35 people by adopting a Canadian-style governance model and building internal asset management capabilities.