Why Emerging Venture Capital Managers Outperform Established Ones
Across global venture capital markets, a consistent empirical pattern has emerged that is usually never spoken about : emerging ( incl spin-out ) venture capital managers generate disproportionately higher upsides than established, large-scale GPs.
Global data suggests that while established funds tend to deliver more predictable, beta-like returns, emerging managers dominate the right tail of the return distribution, where venture capital actually creates value. This isn't a matter of opinion or narrative framing; it's a pattern that holds across institutional datasets : PitchBook, Preqin, Cambridge Associates, Carta, and StepStone datasets confirm it.
So, at BlueGreen, we decided to synthesize global evidence with India-specific case studies to answer four questions :
- Why Small funds are mostly Emerging managers / First time Funds ?
- Do Small Funds - First time Funds deliver higher IRRs ?
- Why scaling beyond Fund IV kills alpha, and why the Power law rewards the Small Funds ?
- What this means for LPs investing in Indian VCs
- Why Small funds are mostly Emerging managers / First time Funds ?
- Do Small Funds - First time Funds deliver higher IRRs ?
- Why scaling beyond Fund IV kills alpha, and why the Power law rewards the Small Funds ?
- What this means for LPs investing in Indian VCs
Let’s dive right in
A. Capital Concentration vs Alpha Generation
India's venture ecosystem has scaled rapidly over the last decade, producing a deep pipeline of high-growth startups and global-scale outcomes.
At the same time, venture fundraising, especially from institutions, has become increasingly concentrated among a small number of large, established platforms, a trend mirrored globally as LPs gravitate towards brand familiarity during periods of constrained liquidity. Ironically, many of these liquidity constraints originate from established managers themselves
However, we tend to forget that venture capital defies mean-reversion logic.
Venture returns follow a power-law distribution, where a small number of funds and an even smaller number of companies account for the majority of value creation. In such a system, minimising variance cannot be the primary objective; instead, accessing extreme positive outliers should be the goal when choosing the right GP, isn’t it ?
Who are these extreme outliers ?
B. Are Small Funds Mostly Emerging Managers and Not Established Ones ?
Before comparing performance, it is critical to establish a foundational point: small venture funds are overwhelmingly managed by emerging or early-vintage GPs, not by mature, established franchises.
This is not anecdotal; it is factual.
StepStone's analysis (cited by Chronograph) reveals that since 2018 over 3,000 US-based VC funds have been raised, with fund sizes below $300 Mn.
38% of these funds were under $25 Mn. 53% were under $50 Mn.
Critically, few managers maintain small fund sizes once they reach Fund IV or later.
Once a GP becomes established, capital scale almost always increases, because larger funds become easier to raise - “ No one got fired for hiring an IBM” kicks in as larger LPs like Fund of Funds or even sovereign Funds, gravitate towards brands that are familiar. It feels “safer”.
Established GPs have little incentive to shrink as well when they can garner more fees and expand their teams with “Titular Partners” to satisfy that team question if asked.
This leads to a clear analytical conclusion :
- Small venture funds are, mostly, early-vintage or first-time funds.
- Small venture funds are, mostly, early-vintage or first-time funds.
Thus, if small funds were to outperform, it is effectively emerging managers who are outperforming, not the large ones
Let's see in Part 2 whether small funds and first-time funds actually outperform the larger ones. Stay tuned.
Part 2
We continue with the series we started last week. We asked around and most felt it was something they had no idea about. In fact, they held beliefs to the contrary
Lets recount - In Part 1 of the series we examined :
The divergence between capital concentration in Established Managers and the power-law nature of venture returns around few companies that deliver most of the returns in a certain Vintage
How Small Funds are mostly, Emerging Managers and not Established Managers
The divergence between capital concentration in Established Managers and the power-law nature of venture returns around few companies that deliver most of the returns in a certain Vintage
How Small Funds are mostly, Emerging Managers and not Established Managers
Part 2 - deals with the next logical question: Do Small Funds - Emerging Managers deliver higher IRRs ? The answer is Yes.
Small Funds- Emerging Managers Deliver Higher IRRs
Multiple independent institutional datasets confirm that first-time and early-vintage VC funds materially outperform established funds on IRR. All figures below are in USD.
- Preqin (2017) reports:
- Median net IRR for first-time VC funds(2006 – 2014 vintages): ~12.9%.
- Median net IRR forestablished VC funds: ~9.9%.
PitchBook (2019) finds (5):
First-time VC funds (2012–2014 vintages): 17.1% median IRR.
Follow-on funds raised by the same managers: 10.8% median IRR
- Median net IRR for first-time VC funds(2006 – 2014 vintages): ~12.9%.
- Median net IRR forestablished VC funds: ~9.9%.
PitchBook (2019) finds (5):
First-time VC funds (2012–2014 vintages): 17.1% median IRR.
Follow-on funds raised by the same managers: 10.8% median IRR
Cambridge Associates documents:
- New and developing venture funds (Funds I – IV) consistently account for
a large share of top-performing funds across vintage years. - Established managersappear less frequently among the highest-performing funds.
Cambridge Associates documents:
- New and developing venture funds (Funds I – IV) consistently account for
a large share of top-performing funds across vintage years. - Established managersappear less frequently among the highest-performing funds.
Carta Fund Admin Analysis (234 US Venture Funds) finds:
- Performance advantage is strongest when managers are early in the fund lifecycle, and this is consistent across vintages and market cycles
- Smaller funds (<$25M and <$100M) demonstrate stronger top-decile and top-quartile outcomes relative to larger funds (over $100M).
- Median returns are closer across size buckets, but right-tail dispersion favours smaller vehicles.
Carta Fund Admin Analysis (234 US Venture Funds) finds:
- Performance advantage is strongest when managers are early in the fund lifecycle, and this is consistent across vintages and market cycles
- Smaller funds (<$25M and <$100M) demonstrate stronger top-decile and top-quartile outcomes relative to larger funds (over $100M).
- Median returns are closer across size buckets, but right-tail dispersion favours smaller vehicles.
B. The Impact of Outperformance Over 8/10/12yrs
Seemingly small - Single digit differences in IRRs between Emerging Managers vs Established Managers may appear modest at first glance.
However, for LPs, the implications over a full fund lifecycle are far from incremental. Even small variances in IRR compound meaningfully over 8–12 year holding periods, translating into significant differences in total value created.
To illustrate this, we present a simple visualisation below :
Thus, in a power-law asset class, differences between top-quartile and median performance may appear small in IRR % terms, but translate into dramatically different outcomes over time.
For family offices, HNIs and institutional allocators,this raises an important question : are current portfolios positioned to access these outliers basis a Top quartile Track Record - or primarily allocated to familiarity and perceived safety ?
So, at the end of Part 1 and 2, we have the following conclusionse end of Part 1 and 2, we have the following conclusions :
- There is adivergencebetween capital concentration in Established Managers and the Power-law nature of venture returns
- How Small Funds are mostly Emerging Managers and not Established Managers
- Small Funds - Emerging Managers Outperform Larger Established Managers resulting in outsized returns to LP
- There is adivergencebetween capital concentration in Established Managers and the Power-law nature of venture returns
- How Small Funds are mostly Emerging Managers and not Established Managers
- Small Funds - Emerging Managers Outperform Larger Established Managers resulting in outsized returns to LP
