Why established venture firms should court emerging managers

Typically, institutional investors favor managers who’ve spun out of an established firm over those who’ve broken into venture from outside. Spin-outs are seen as a lower-risk, safer bet.

On the surface, that looks like a tried-and-true tack garnering much attention, appeal and capital. However, there’s an alternative path that deserves a spotlight: Spin-ins by emerging managers who have broken into VC by raising their own funds. The experiences of emerging managers, and even their personality traits, position them to be ready to scale within an established firm.

I’ve put together a few reasons I hold this view, based largely on my own experience. In 2015, I broke into VC by embarking on the fundraising process for my own fund. As a former aerospace person, I hate the term “building the airplane as you go,” because it’s just ridiculous, but I find it warmly applicable here. At the start, although I’d spent a decade launching satellites into space, I needed a serious crash course in venture capital. I vividly remember bringing on a partner and seeing the horrified look on their face when we shared our first “call for capital,” which we’d sent as email text. We were learning on the go.

Five years later, we’ve fully deployed MiLA Capital’s first fund, built an ecosystem for founders building tech you can touch, and invested in 22 companies. I can look back with reflection and gratitude on what I’ve learned.

Here are the top seven reasons emerging managers who built their own firms make great spin-in candidates:

  1. They’ve developed a personal brand and reputation that’s inherently theirs. They didn’t have to conform to a firm’s culture or pitch; they developed their own. Their thought leadership, their tweets, their way of working with founders — it’s proprietary. Authenticity enables them to both reach founders and win deals.
  2. They practice outbound recruitment as a way of life. A press release or call for submissions likely didn’t yield them torrential deal flow overnight, and so they’ve had to establish inroads with organizations, universities and other investors as a way to evolve their access to opportunities.
  3. They’ve hustled to get their portfolio to the next stage, because, survival. In order to jump over the valley of death that is the distance from fund one to fund two, the emerging manager had to show wins from their portfolio. This means that they were likely first in line to help a founder get over their hurdles and challenges, and that they know what it takes to act as a real partner to a startup.
  4. They’re used to spending time worrying about both the big and little things, and they’ll place a high value on your ability to reduce that cognitive load. Did we pay our taxes? Our internet bill? How can we scrape together the capital to hire an intern? Let me update our web page. Launching a firm brings incredible highs along with the pettiest of tasks. But it means that, much like founders, emerging managers are used to wearing dozens of hats and performing insane tasks, like unclogging the facility toilet and making a Costco run for air freshener.
  5. They built character through the fund development process. The emerging fund manager had to hit the road with an encyclopedia under their arm. They’ve practiced, learned and unlearned answers to “why now” and “why you” in their sleep. In 2019, according to First Republic Bank’s annual count, the number of micro VCs in the United States was approaching 1,000, up about 100 every year since 2015. Yet, the managers were able to differentiate themselves enough to win the opportunity to show proof of concept. This experience adds storytelling and grit to the toolbox.
  6. They likely sacrificed a lot for a career in venture. Building a fund takes time and doesn’t provide immediate pay in exchange for the work. Someone who accepts that reality and perseveres is embodying a long-term outlook (which is good for a VC) and commitment to this industry. There are a lot of sacrifices to make, often modulating an abundance mindset against the impact of the reality of their own life, and that says something about the manager’s character.
  7. Micro VCs attract a different, diverse pool of leaders. Emerging fund managers are driven by a desire to fill funding gaps. These are often related to gender and ethnicity. They are either outsiders inspired to deliver different outcomes, or insiders who become frustrated at their inability to execute where they see opportunity. This matters because founders have increasing choice and recognition of their power to counterselect investors, and this has become a critical crux, particularly in early-stage investing.

Consuelo Valverde (SV LatAm Capital), Christine Kenna (IGNIA), Jodi Sherman Jahic (Aligned Partners), Noramay Cadena (MiLA Capital), Lisa Feria (Stray Dog Capital), Miriam Rivera (Ulu Ventures), Ariel Jaduszliwer (Brainstorm Ventures) Jessica Straus (Carta). Image Credits: Noramay Cadena

I want to expand on this last idea, because diversity and access are increasingly the disruptors in venture. Today, 80% of investment partners at venture capital firms are white, compared with only 3% Latinx and 3% Black (NVCA). Latinx and Black-owned firms manage 1% of aggregate AUM in venture capital (Knight Foundation), even though, according to the NAIC, these types of diverse-owned firms can generate superior returns. Specifically, they achieve 15.2% median net IRR versus 3.7% for all PE firms in NAIC’s portfolio.

From experience, I’ve seen that diverse fund managers tend to be concentrated in micro VCs, with a few notable exceptions, including Miriam Rivera of Ulu Ventures. These micro VCs have been heads-down focused on building sustainable inroads and foundations, and on delivering on their visions to invest differently and with a gender and diversity lens.

In a VC ecosystem that has now looked up long enough to embrace the Black Lives Matter affirmation and the diversity conversations that have followed, firms are thinking creatively about how they access investment opportunities by underrepresented talent. Sidecar funds are being launched, pitch competitions are being promoted, VC job postings are being shared more widely, intros have been bypassed and processes are being streamlined and made more transparent.

That’s a great start. For sustainable change, firms interested in how they invest post-2020 should approach the journey top down and take a long hard look at spin-ins, as former emerging managers can catalyze their evolution toward a more representative, equitable and lasting venture capital firm.