The Business of Venture Capital, 3rd Edition

19Why LPs Seek First-Time Funds

“Our best investment ever was in a first-time fund.” This remark by Sergey Sheshuryak of Adams Street Partners, a fund of funds, could well be the saving grace and sales pitch for every first-time fund manager. For most institutional investors and limited partners, an emerging manager — or a practitioner who has yet to demonstrate superior returns in a consistent fashion — is a huge risk. But for others, it is a great opportunity. Take the example of Steven Lazarus, founder of ARCH Venture Partners. When Lazarus started to raise ARCH Venture Partners Fund I, investors would say, “Your track record is all ahead of you.”¹ Those investors threw Lazarus in the emerging manager box and dismissed him. ARCH Fund I celebrated four IPOs as well as four acquisitions and generated 22 percent internal rate of return (IRR).²

The changing industry offers new opportunities for investors to access investments outside the mainstream venture capital universe. For institutional investors, striking a balance between established fund managers and tilting (even slightly) in favor of emerging managers is increasingly becoming the norm. In building more mixed portfolios with funds managed by premier names, as well as funds managed by emerging managers, investors can build dynamic and diversified portfolios and ensure risk-adjusted returns over the long run. Eric Doppstadt, VP and CIO at Ford Foundation, says, “We rarely backed those who did not have a realized track ...