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 :

1. Why Small funds are mostly Emerging managers / First time Funds ? 
2. Do Small Funds - First time Funds deliver higher IRRs ? 
3. Why scaling beyond Fund IV kills alpha, and why the Power law rewards the Small Funds ? 
4. What this means for LPs investing in Indian VCs

Let’s dive right in

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 ?

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 : 

1. 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

2. 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.

Let’s recount. In Part 1 and Part 2, we established: 

1. Venture capital is a power-law asset class 

2. Capital is concentrated in Established Managers (>Fund IV)

3. Small funds are overwhelmingly Emerging Managers 

4. Emerging Managers consistently deliver higher IRRs

This leads to the deeper question:

If emerging managers outperform, why does this advantage decline over time? 

Because scaling a fund changes its structure.

1. Fund Size Expansion
   Larger pools of capital require broader deployment, reducing the ability to: 
   a) Concentrate capital   
   b) Back a small number of high-conviction ideas
   
   

2. Strategy Migration:
   As funds grow: 
   a) Early-stage investors move to later-stage investing 
   b) Entry valuations increase  c) Ownership levels decline
   The result: Lower return multiples.
   
   

3. Deployment Pressure
   Larger funds must deploy more capital within fixed timeframes. This often leads to:
   a) Faster decision cycles
   b) Inclusion of marginal opportunities
   
   

4. Ownership Dilution
   Competitive rounds and larger cheque sizes reduce ownership. In venture: Ownership drives outcomes.
   
   

5. Partnership and Incentive Drift
   The most under-discussed risk in venture capital isn’t market risk. It’s team drift. Over time, inside many firms:
   a) The partners who drove early outperformance ie Rainmakers, often exit
   b) Decision-making shifts from conviction-led individuals to consensus-led committees
   c) Economic incentives fragment across the partnership
   
   Nothing looks broken on the surface. The brand remains. The track record remains. The narrative remains.
   But something important has changed. Over time, this disconnect compounds.
   And it creates a subtle but critical gap: You think you are backing a proven track record and an old firm But you are actually underwriting a new team.
   
   In a power-law asset class, that gap is not incremental. It is decisive

Emerging managers are not smaller versions of established funds : 

• Smaller fund sizes force high-conviction investing
• Early-stage focus enables higher ownership and multiples
• Partners remain closer to decisions and outcomes
• Incentives are tightly aligned with LP outcomes

In a power-law asset class: This alignment is the edge. They are structurally aligned with how venture capital actually creates value.

In venture, we have shown how a few companies drive most returns. 

What is less understood is that a small number of funds - and even fewer individuals -consistently capture them. 

For LPs, this shifts the problem: From selecting funds to identifying who within them actually creates outliers

✳️ How do you find these repeat “Rainmakers”? 

That is what we explore in Part 4.

Its time for us to conclude the Series with some clear actionables that can make the difference between average to below benchmark returns to outlier returns. 

To remind, this series began with analysis of global data from over 1700 Funds and leading independent benchmarking firms 

In Parts 1-3, we established a structural contradiction :

1. Venture capital is a power-law asset class

2. Most returns per Vintage are concentrated in a small number of outlier companies

3. Capital is concentrated in Established Managers (> Fund IV)

4. Even though, Emerging Managers consistently outperform Established ones

5. A small number of individuals consistently identify and back these outliers - These are the Rainmakers

6. As funds scale > Fund IV and become larger & Established , structural dilution accompanied by the exit of key Rainmakers - erodes returns

This shifts the problem for LPs: From Funds to Individuals

From selecting funds to identifying the individuals behind these outliers

If returns are driven by individuals, why does capital concentrate at the firm level? 

Because: 

Track record is presented at thefirm level 

While outcomes are created at theindividual level 

Over time, this creates a disconnect: Capital follows brands. Returns follow decision-makers

In many cases, by choosing such Funds where Rainmakers have left, LPs are effectively: backing a historical track record with a different set of decision-makers 

Same Established VC firm. 

Different people today. 

Yet the same track record continues to be presented 

The Implication: 

if returns are driven by a few individuals, and those individuals are no longer in the firm, 

✳️ What exactly is an LP underwriting? 

In a power-law asset class, that gap is not incremental. 

It is decisive. Brand Logos don’t drive returns. Individuals who lead investments do.

This is where most diligence stops. LPs evaluate:

• Portfolio construction
• Vintage returns
• Firm-level performance

✳️ But rarely: Who actually created those outcomes? 

To bridge this gap, Investors need to move from: portfolio-level evaluation → deal-level attribution 

We refer to this as the #AttributionCheck 

The edge in venture does not sit with brands. It sits with those who repeatedly identify and back outliers - the Rainmakers. 

Which means: 

✳️ The real risk is not backing an emerging fund. It is backing a track record of an Established manager with a team that didn’t create it 

✳️ The question is no longer: “Which fund should I back?” 

It is: “Who consistently creates outliers - and where are they today?” 

We hope this series has been useful to many of you as you navigate the venture ecosystem - whether as a first-time LP, a maturing allocator, startup founder, an investment banker or a family office and especially those seeking careers in the industry

We will endeavour to keep sharing insights that you find valuable as this ecosystem evolves in India and globally 

Until later, 

Team BGV