The “Developing” VC Manager

Hundreds of years ago, major colonial powers described themselves as “developed” or “civilized” while speaking of the rest of the world — many who they exploited — as underdeveloped, uncivilized, or even barbaric. Looking back, it’s obvious that the worldview was wrong in many ways. If the powers at be had a better lens, they may have been better able to understand the current state of the outside world and more appropriately benefit from partnership.

I see some similarities in how some VC firms are designated by LPs. Sector focus notwithstanding, it’s baffling that one would categorize a $12M Fund I in Berlin, a $40M Fund III in NYC, and a $125M Fund II spin-out in LA all as “emerging managers.” This broad classification overlooks significant differences. Some may argue that the aforementioned new spin-out from a multi-billion AUM firm may be considered established and attract established LP capital, despite a GP track record mismatch to stated strategy / fund size. That $40M Fund III — may still be considered emerging just based on it being smaller, despite success in the same strategy over the prior two funds. While I don’t exactly equate LPs with old-school colonialists — that wouldn’t exactly be fair — it is clear that the thinking on what classifies an emerging manager needs to be evolved.

We see established firms increasingly attract the lion’s share of LP capital. As of May this year, GC and a16z alone captured 44% of US LP capital raised in 2024. Based on data it’s hard to believe continued consolidation will yield optimal allocation to startups. Some forward-thinking LPs know this and therefore pursue a “barbell approach” built up of a bench of emerging and established managers, but they are overlooking a key group. We propose a new category — developing managers. These are firms who have demonstrated the right to exist as well as early evidence of persistent returns which should get better as they reach their “end state” (more on that below).

Asking the right questions in any situation is crucial. In diligence before being assumptive on how big a new GP’s partnership or fund might grow, LPs should consider first asking the GP what they think an ideal fund looks like for the stated strategy. What is the right size, concentration, and liquidity strategy for the assets they plan to hold or the team they’ll have? Are they there now — or do they need to grow into it?

I have empathy for LPs in this diligence process, as VC firms may deviate or course correct from the initial plans. Markets do change. How often has a manager initially promised to stay consistent with a small, focused, early-stage partnership only to quickly evolve into a multi-stage firm due to readily available LP capital (perhaps resulting from some early quick wins in a peak vintage)? To underwrite appropriately, one should consider a multi-fund commitment and therefore should first inquire and measure change carefully, over time, to see if change is rightfully directional. Without this view, one might miss when an emerging manager graduates to strongly developing or even established, or perhaps when an established group ages out / decays into developing or emerging status (it happens…).

Let’s make it more real with an example. Consider a large VC ($500M Fund IV) with a $250M Fund III. Fund I and Fund II were 3.5X and 2.0X DPI respectively, with Fund III still too early to judge. These jumps over such a short window imply strategic change. This partnership, with some new GP hires, may begin investing in new categories like AI, crypto, or biotech. Or perhaps they’ll open an international office with a local deployment strategy to keep up with new peers. Despite reasonable success over the past 5 years, should we consider this manager established?

Manny Millan for Sports Illustrated

Some special folks can be multi-sport athletes. Think of Jim Thorpe or Bo Jackson. But personally, I’d rather make a bet on Michael Jordan playing basketball with the Chicago Bulls. That is the kind of development we should be looking for. Here are a few helpful guidelines and questions to assess VC managers in their sport:

Which fund is the GP deploying from (1, 2, 4, etc.)?

1. Has investment strategy across those funds been consistent, relatively (does the last one, or hopefully two prior, look like a sibling or rather distant cousins)?
2. If it doesn’t look similar, has management “done it” before (and recently — in the last 2–4 years before spinning out)?
3. If none of the above — is there quantifiable evidence the GP is moving toward the alleged “end state” i.e. increasingly hitting stage / ownership targets, seeing better win-rates, consistent founder NPS, etc.?

What changes in fund make-up or team would decay performance?

1. What would be too big or too small, or too fast?

Do stakeholders in the ecosystem refer on-brand investment opportunities?

1. Can respected peer GPs or LPs even describe an ideal startup for this manager? How about reputable founders?

What is the GP’s LP makeup (accredited vs. institutional)?

What is the historic LP make-up and re-up rate?

Consistency wins the race. In my eyes, Preface is a developing manager en route to becoming established. Embracing perpetual studenthood, we’ve progressed from walking to jogging and are now beginning to run.

In the first 10 years of my career at former VC firms, I primarily led institutional seed rounds and selectively followed on in A rounds with a 6% company hit rate from early stage to IPO. My personal strategy here was with a prepared mind, backing exited / successful founders wishing to go for a second or third bigger swing within the same industry (largely in enterprise). In 2015 with our pilot vehicle and first institutional fund in 2020, we narrowed our focus with statistical prowess to back startups — with the same team profile — in addition to 40+ other predictive variables to attack the enterprise infrastructure and applied AI market (one of the largest, high growth, and liquid spaces within tech). This evolution aligns with our intellectual curiosities, network, and top-decile performance expectations.

Assuming consistent construction and entry point, a larger fund correlates to more ownership. It is in line with pricing power, which is one of the most interesting and exciting components of what we do. Preface works to earn meaningful ownership (which correlates to high fund performance) in our companies while ensuring our founders still own a lot at exit. It may be the most important developmental feature in our firm toward becoming established, as our pre and post-investment work remains the same.

In our pilot Fund I, we followed a lead investor 100% of the time. In institutional Fund II, we priced rounds 28% of the time. In our current, larger Fund III, we have priced and / or led investments 90% of the time with a 90%+ win rate. We hope to consistently build and maintain double-digit ownership in our enduring companies while relying less on dilutive downstream partners. That’s home.

There are a lot of VC firms out there. But I hope LPs appreciate these nuances since there is so much to each story. I also hope GPs are honest about who they are and what they wish to become and in doing so, prospective LPs will secure slots in their soon-to-be oversubscribed funds.

Best,

Farooq Abbasi