Volume #12 TL;DR:

• The problem that currently needs to be solved is to strengthen and establish frameworks of how to actually underwrite Emerging Managers.

• The inefficiencies and lack of frameworks of how to underwrite Emerging Managers significantly impact both the Managers and the Limited Partners.

• Few Emerging Managers possess the “magic”, but more could if they would refine and reflect upon themselves.

• Few Limited Partners have a formulated framework of what this “magic” looks like and how to diligence it. Many more could through reflection and honing their process.

Table of Contents

• Limited Partner Spotlight

• The Magic is the Beginning and End of Everything

• My Framework of this “Magic”

• How Other LPs Conceptualize the “Magic”

Limited Partner Spotlight

Allocator One

Allocator One anchors the best first-time Emerging Managers, and provides them with infrastructure and support. Emerging Managers not only get the unique opportunity to get anchored and get their first fund up and running, but Allocator One also provides them with access to their GP community, LP network, and support with all the paperwork and administrative tasks of setting up a fund.

And without incurring layered Fund-of-Funds fees, LPs get access to the top 3% of the global pool of Emerging Managers.

You can contact Michael, the founding partner of Allocator One, directly via email through the button below ⤵️

The Magic is the Beginning and End of Everything

Limited Partners who are actively investing in Emerging Managers typically speak with hundreds of funds within a year. And as with any deal sourcing effort in Venture, the “No” overshadows the “Yes”.

The reasons why LPs might pass vary of course and can be based upon misalignment in the industry focus, stage focus, or simply because the investment would not fit within the current portfolio of the LP.

But I would also argue, and I am being very honest here, that most of the Emerging Managers you come across as a Limited Partner, do not possess the “magic” you are looking for. If you talk with 250+ Emerging Managers a year, 1-5% of those will have the special something that will manifest itself to you within the first 5 minutes of your initial conversation.

Why is this my goal? Because I strongly believe that the problem and inefficiency that currently needs to be solved in the LP<>EM space is not anymore to raise awareness that Emerging Managers represent a unique opportunity for outlier returns in Venture. There is still work that needs to be done, but this truth has been somewhat established by now. The problem that currently needs to be solved is to strengthen and establish frameworks of how to actually underwrite Emerging Managers.

The inefficiencies and lack of frameworks of how to underwrite Emerging Managers significantly impact both the Managers and the Limited Partners.

Underwriting Emerging Managers is both science and art - it’s a craft. And how you perceive the “magic” in Emerging Managers is essentially the craft you are honing. And for Emerging Managers, their whole strategy, fundraising process, etc. is based upon their self-awareness of the “magic” they possess and how they can authentically carry it out into the world.

In Summary:

• Few Emerging Managers possess the “magic”, but more could if they would refine and reflect upon themselves.

• Few Limited Partners have a formulated framework of what this “magic” looks like and how to diligence it. Many more could through reflection and honing their process.

My Framework of this “Magic”

My concept of the “magic” I am talking about is written into the name of my newsletter: Emergence.

Emergence is the concept stating that the whole of the parts is greater than the mere parts by themselves. A complex entity has behaviors and abilities that the parts do not have when by themselves, but only when they interact with each other. Basically: 1+1=10, not 1+1=2.

I created this visual graphic below to visualize my framework of how I assess this “magic”:

The “magic” only few Emerging Managers possess is made up of two main elements: Humanness & Profession. Only when these two parts interact with each other, do they form a great whole than what the parts are by themselves.

I do not have to convince you that Venture Capital is a people business. I also do not have to convince you that most Emerging Managers invest at the earliest stages at which backing founders plays a significant role in the underwriting process. Humanness addresses exactly this crucial part of the ability of the EM to assess and underwrite people well. When you underwrite Emerging Managers, you underwrite people who underwrite people.

I would encourage Emerging Managers to have clear categories and frameworks of what they look for in people. Often when I ask this question, I hear answers like “grit”, “perseverance”, “passionate about problem-solving”, “humility”, etc. But when I ask the follow-up question of how they actually sort for i.e. humility, the quality of answers starts to thin out very quickly. These answers matter a lot, because they show that you have a clear idea of the people you are investing in - and the LP is investing in your ability to do this well.

Profession is self-explanatory. It’s the professional experience, the access, the perception within the industry of focus, etc. that the Emerging Managers possess. It is another crucial element to execute the given strategy of the fund well.

The argument of the concept, again, is that both elements need to align with each other and feed into each other. Only then do you develop the “magic”.

How Other LPs Conceptualize the “Magic”

I was talking about this “magic” with Michael from Allocator One, who is highlighted in this volume. And who better to get input from on this topic than somebody who back Emerging Managers before anybody else does. His investment approach requires a unique ability to see something special in Emerging Managers before other people do.

Here are a few notes I took from our conversation, but I recommend reaching out to him via the email button I included at the top!

The “magic” is composed of various factors, some of which include:

• When looking at the past 10 years of the Emerging Managers, it becomes evident why they are doing what they are doing now.

  • If you were to replace the EM with a different person, the strategy stops making sense.

• The more “magic” a GP possesses, the more commercially minded they are. Their mindset of building a business is directly correlated with how much “magic” they have. The ones with the magic are building a firm.

• Their follow-up is intense. After the initial point of contact they find your email, WhatsApp, whatever it may be, to follow-up with you and pursue a partnership.