Emerging managers are historically a great bet. As Heather Hartnett points out in her Forbes piece entitled “When Public Markets Experience Volatility, Experts Say To Invest In Emerging Managers” the data is clear:

Data from Cambridge Associates shows that new and developing firms are consistently among the top 10 performers in the asset class, accounting for 72% of the top returning firms between 2004–2016. (article source / data source).

So why is raising as an emerging manager so hard?

To get more insight on this topic,we spoke with three emerging managers who have first-hand experience raising funds over the past few years. First, some introductions:

Al Bsharah is the Managing Partner at Interlock Capital, a unique community-driven startup fund. After starting his career in Detroit's auto industry he set out for the San Diego startup scene in 1998. From there Al embarked on a 20+ year entrepreneurial journey, during which he founded three companies and invested in over 100 startups.

Carey Ransom is the Founder and President of Operate Studios, which focuses on building innovative companies from the earliest stages. Carey is also the Managing Director of BankTech Ventures, which invests in early-stage technology to transform community banking. With experience taking multiple startups from launch to exit as well as managing two funds, Carey knows quite a bit about what it takes to raise from both VCs and LPs.

Hem Suri is the Founder & Managing Partner of Spark Growth Ventures, where he’s democratizing access to venture investing through an innovative, community-driven model  Hem has two decades of experience across various industries as an entrepreneur, investor, board member, and executive leader. Hem's extensive career includes serving on over 20 boards, and executing 50+ venture and M&A transactions. 

Al, Carey, and Hem joined us for a live panel to discuss their experiences fundraising as emerging managers, during which they shared invaluable insight and tactics. Check out the live recording here, or read on for a rich summary of the conversation.

Winning LP Trust Is Key

By definition, emerging managers come with limited track records. Although a new manager may have some successful angel investments, they will not have a significant history of showing differentiated returns. When a manager goes out to raise their first fund, they are largely selling themselves to potential investors rather than their portfolio. Because of this, building trust with LPs is key.

This is not unlike the fundraising process for first-time founders. LPs are betting on the manager’s ability to source exciting investment opportunities in the same way a VC is betting on a founder’s ability to stand up a team, build a new product, and bring it to market. In both situations, there is limited data early on and the investment decision hinges on the confidence in an individual.

Trust Doesn’t Just Happen – It Takes Work

The managers we interviewed each had their own approach to building trust with LPs, but a couple of themes emerged:

1. Bring active and prospective LPs into your process. Share opportunities, discuss deals, and be collaborative. This gives you an opportunity to show prospective LPs how you think, which can help to build trust independently of demonstrated returns.

2. Leverage Special Purpose Vehicles (SPVs) as a tool to expand your network and create value for LPs. Give prospective LPs the opportunity to co-invest through SPVs so they can choose investments a-la-carte before they make the bigger decision to get involved in the fund. Use SPVs to give active LPs the chance to increase their exposure to companies that excite them the most.

You Can’t Rush Trust

Trust takes time and any attempt to rush the process is risky. All three of the managers we spoke to have spent decades building trust with LPs. This can be hard to hear as a prospective emerging manager who has the itch today, but is a great lesson in taking the long view –something that is required for any successful venture investor.

Differentiated Deal Flow

The last (and maybe most obvious) theme is that emerging managers need to have differentiated access to deals. You might be able to earn trust from LPs, but if you can’t get access to the best founders, it’s going to be hard to put that money to work. Showing off a unique ability to access the best opportunities is a key part of the process.

In summary, why is raising as an emerging manager so hard?

As you may have noted, three of the four sections in this article talk about building trust, while only one mentions the logistics of operating a fund. Trust is what makes raising as an emerging manager hard. If the best way to build trust is to have a track record of success, but you can’t have a track record without trust, where does that leave emerging managers?

On the LP side, the data tells a different story. For established funds, past performance is not a predictor of future success. Historically, almost three-fourths of top-returning funds are led by emerging managers. But, raising as an emerging manager is still hard. That’s because - ironically - most LPs aren’t making data-driven decisions. The decision to invest behind a manager is often more emotionally driven than one might imagine.

So what can you do?

First, recognize that the LP’s decision will be 75% emotional (trust) and 25% logical (data). Second, build a strategy around this reality. Third, execute consistently over time. 

As an emerging manager, the highest impact activities to build trust are: 

1. Build a community of investors around you and communicate with them regularly.

2. Give investors the opportunity to make smaller commitments to your deal flow by way of SPVs.

Raising as an emerging manager is hard, but if you can execute in line with the strategy above, you may just have LPs knocking down your door asking you to launch a fund.