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Emerging managers and emerging sectors: what does the next generation look like?

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"The next generation of successful investors will not look uniform, and that is a great thing.” 

Sapphire Partners’ Laura Thompson shares her thoughts with us on the different kinds of emerging technology are out there, what the next generation of managers could look like, and how to overcome the challenges in building investor relationships as an emerging manager. 

Q: How are ‘emerging managers’ and ‘emerging tech’ being defined today?

Everyone in the market has a slightly different definition of what constitutes an “emerging manager” but one definition I use is Funds I - III, or the first three institutional funds.

In regard to “emerging tech” as a category, it’s a really innovative time in the ecosystem. Similar to emerging managers, there are a lot of definitions of emerging tech. Exciting things are happening in frontier or deep tech areas like artificial intelligence, machine learning, robotics, drones, space, computational biology, etc… but there are also many other compelling strategies. For example, applying existing technology to legacy industries can disrupt incumbents.

A great example of this is Lemonade, which is changing the way people buy rental insurance and IPOed last year. There are also focused approaches. USV just announced their climate fund, and we’re excited to see how emerging technologies and innovative usage of established technologies can help address these types of systemic issues. Like I mentioned, it’s an exciting time!

Q: What will the next generation of investors look like?

The next generation of successful investors will not look uniform, and that is a great thing. Although I wish it happened more quickly, I love that diversity has come to the forefront of the industry in the last year. I truly believe that diverse teams are the best set-up to succeed, which means we will see great new investors that vary across race and gender, but also across geographies, experiences, ages and just about every dimension you can think of!

We were inspired by Women in VC’s recent report on the untapped potential of Women-led funds to conduct an audit of our own portfolio of GPs. While we still have work to do, it was very enlightening and we encourage all firms to start tracking this!

The pandemic has also contributed to this rising diversity of investors (and operators!), with remote work making it easier for people across the globe to both fundraise AND start companies. Sapphire Partners did a recent analysis on how COVID-19 impacted the geographic distribution of venture investing. Lo and behold, managers are looking beyond the Bay Area more than ever before.

Keep in mind, however, that to be successful, the next generation of managers must have a clear differentiation. There is a tremendous amount of capital in the market, as well as firms with very established brands, so new entrants need a way to stand out and effectively compete.

This could take the form of anything from a particular sourcing network, to an understanding of a specialized technology, to possessing a rare value-add that’s hard to come by. For example, Mike Smith, the COO of Stitch Fix, just announced a fund with Nikhil Basu Trivedi and very few have his level of experience scaling a company.

It’s a challenging time for emerging managers – how can they build investor relationships when travel is restricted, and LPs are keen for in-person interactions before allocating?

There are lots of reasons it’s a challenging time for new managers. The inability to spend time with LPs in person is certainly one reason, but there are other reasons such as reduced LP capacity for new managers. During the last few years, larger and faster rounds have required increased check sizes and reserves, leading to some GPs coming back to market faster. LPs prioritize existing relationships, so this can impact LP bandwidth and capacity for new relationships. These compressed fundraising cadences were another finding of our recent analysis of the 2020 venture market.

While it can be a challenging time for fundraising, it’s still very possible to build quality LP relationships. One important factor is GP mentality. Be prepared for more meetings and a longer time horizon for fundraising. Starting earlier can be helpful. LPs tend to form relationships and build trust over time, so even if an LP doesn’t invest in a current fund, it is time well spent for future funds.

Leverage people in your network that can vouch for your work by asking them to reach out on your behalf and share their experiences.

Remember that it is a two-way discussion. Don’t be afraid to ask LPs about their programs and diligence processes so you can tailor your conversations appropriately. It will save everyone time!

Also, references have always been important, but this is even more true now that LPs aren’t out in the ecosystem attending events or annual meetings. Leverage people in your network that can vouch for your work by asking them to reach out on your behalf and share their experiences. Hint - other managers, especially if they are partnered with your target LPs or founders, are often stronger references than other LPs.

Finally, be creative! You want good partners, whether that be individuals, family offices, or institutions. The most important thing is to have amassed a base of aligned and supportive people who understand venture. There are many ways to build a fund so reach your critical fund size and start investing. Once you demonstrate success with early funds, you will have your pick of LPs.

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Under the spotlight: Laura Thompson

Laura Thompson invests in technology-focused venture funds domestically and internationally. She is passionate about partnering with established and emerging firms to advance the thinking in the limited partner space. Laura is a frequent contributor to OpenLP.com in an effort to help increase transparency across the venture ecosystem. 

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