Why We Care About Emerging VC, And You Should Too
by Welly Sculley and Winter Mead, originally published at https://oper8r.substack.com/p/why-we-care-about-emerging-vc-and
VC hasn’t stopped working. Companies and funds are still raising capital. Investors are still making money. Software continues to munch away at the world.
But VC should work better. As the world continues to grow in terms of size, diversity, and specialization, the VC market will need to adapt, or else miss out on the next generation of great innovators.
We want to highlight where we are focusing, and where the ecosystem needs your support.
The kind of change necessary to help VC scale doesn’t happen in isolation. It requires a concerted effort across the key stakeholders of the VC ecosystem:
Operators as the creators of value
LPs as the sources of capital to help realize that value
VCs as the investors that help decide where that capital goes
Platforms and service providers as the facilitators to smooth out the system
We are focusing on the stakeholder that we think deserves the most attention right now: VCs.
More specifically, emerging micro-VCs. These are the next generation of small (<$50M AUM) fund managers that want to enter the market, not only because they have the track record to indicate that they can generate outsize returns for LPs, but because they have a clear view of the types of companies and founders that should be in the market - but aren’t - and are willing to make that bet earlier than anyone else.
There are various types of emerging VCs, and motivations for them to enter the market:
‘Classic’ investors that ventured out to seek better returns elsewhere
Operators that turned angel investing into a full-time career
All-star syndicators that switched to managing a dedicated pool of capital
Celebrities that saw value in leveraging their brand to help startups
All are proven investors that are looking for long-term partnerships with LPs that will trust them… which is a critical challenge. Getting capital is hard.
Fundraising is always challenging, but is notoriously difficult for emerging micro-VCs.
And it’s getting even more difficult as more VCs continue to enter the market.
Not only do institutional LPs think of VC as a niche within alternative assets, which itself is a novelty to many LPs. They consider emerging VCs a sub-niche of that niche, and micro-VC a sub-niche of that sub-niche… In other words, few institutional LPs are racing to invest in emerging micro-VC.
So where does that leave the aspiring VC aiming to partner with LPs that are invested in and additive to their success?
For a small few, it means being an extremely visible and accomplished ‘celebrity’ investor, or drawing on a highly capitalized network of friends and family (OK, just kidding with this last one). For others, it may mean leveraging new platforms to connect with a new segment of LPs with a different set of priorities.
For the vast majority, it means spending a ton of time with a ton of prospective LPs, unraveling a tight-knit network of friends, family, and acquaintances to identify the families and individuals who are one or two degrees removed, and have the wealth and appetite to make a bet on a fund.
In other words, it’s a high barrier to entry that’s getting even higher, and that’s putting a severe constraint on the market’s ability to grow and adapt!
Many institutional LPs (Oper8r observes the Chatham House Rule, so we are forbidden from naming names!) want to support emerging VCs, but they are not incentivized to take the risk. How many institutions have told you - in private - ‘nobody gets fired for buying IBM’?
There are LPs that do invest in emerging micro-VCs, and so explicitly to the extent that the strategy becomes brand-defining. There are the industry pioneers like Ahoy, Cendana, Foundry, Greenspring, Industry, and many others. There are also new LPs and VC/LP hybrids like Plexo, Corigin, LSVP, Indie VC, and many many others that are innovating on this model.
The problem is that this market is getting too big too fast, which is resulting in fragmentation, which is causing many LPs that are well-positioned to invest in VCs (our lips are zipped!) to simply avoid investing in emerging micro-VCs because separating signal from noise is too expensive.
There’s also the matter of differentiation and product/market fit, but we’ll save that for later.
OK, so what are we doing about it?
To support our mission - to enable the next generation of great founders in VC by empowering the next generation of great emerging micro-VCs that fund them - we are studying, learning from, and applying lessons from models that worked in the past.
Specifically, emerging micro-VCs today look a lot like tech startups 15 years ago, when startup costs declined significantly and established tech companies spawned eager entrepreneurs, but the capital and resources necessary to get started were hard to come by unless you were an ‘obvious’ bet. Since then, the market has transformed for aspiring entrepreneurs, but looks very much the same to aspiring fund managers.
Looking back, it seems clear that simply writing a check wasn’t sufficient. It also required relevant expertise, community, capital network, and a platform to iterate on these so they continue to attract the best talent in the market.
Using the best resources at our disposable, we launched our first, 10-week summer cohort in June. It included a member-community of 24 amazing GPs running 18 outstanding emerging micro-VCs (out of ~125 firms that we screened), and an expert-network of over 50 industry-leading organizations (established VCs, institutional LPs, law firms, fund admins, tech platforms) - shout-out to AWS, FRB, and Frank Rimerman for making it possible! We’re incredibly grateful for their support in anchoring this effort.
One key lesson is that solving this problem doesn’t happen in isolation, and instead requires a coalition of individuals that care enough about the next generation of VC to come together and work for it.
So we are asking you to join this effort. Even if not in the context of Oper8r, show the industry you care by putting your time, expertise, and resources into a part of the world that needs it, and will amplify that energy many times over.